Financial regulators struggle with online sites

In the 17 years since Maryland made payday loans nominally illegal across the entire state, other jurisdictions around the world have been waging their own war against the controversial high-interest loans.  Maryland chose to cap interest rates at 33% per year, which more or less eliminated any storefront lender from operating, with a rate just slightly higher than a typical credit card could charge.

Overseas, different tactics have prevailed.  In the UK, high-interest rates remain legal however the FCA introduced a range of requirements on qualifying borrowers’ ability to repay the loans.  The resulting retroactive fines for non-compliance ultimately ended up bankrupting the high profile lenders Wonga and QuickQuid, with QuickQuid throwing in the towel just last month.

In Australia, the government recently released a report recommending that the Australian Financial Security Authority greatly expand its oversight role and close several loopholes that allow lenders to continue to offer loans that exceed the limits set out in the National Consumer Credit Protection Act.  Whether the regulator heeds that advice or not will probably be determined in early 2020.

The commonality for many jurisdictions is they take a country-wide approach.  In contrast, regulations in Canada are more similar to the United States, as for the most part regulatory authority is delegated to the provinces in the same way that individual states have the final say on interest rates, except for the regulation for loans to active service military personnel which limits annual interest rates to 36%.

In the province of Ontario, lawmakers are taking a novel approach to regulation at the municipal level where many cities contend that the provincial authorities are not taking a firm enough stand against payday loans.  Toronto lawmakers are all too familiar with the shifting popular opinions on storefront payday lenders. Deciding how to handle the influx of storefront payday lenders has been a difficult task for years. In 2017, there were more than 800 storefronts operating in the province of Ontario. Today, more than 200 storefront payday lenders are in the city of Toronto alone.

In October 2019, Toronto lawmakers decided that they will no longer issue new lending licenses, effectively capping the number of storefront payday lenders at 212. All current operators must maintain their licenses to continue offering payday loans (which will cost $309 to renew each year). 

And Toronto isn’t alone, either. Other Canadian cities such as Hamilton and Ottawa have been considering their own regulation on the number of storefront payday lenders and how those businesses should be allowed to operate. 

The most significant change for storefront payday lenders in Toronto is that the city will no longer issue new licenses—but there are also new rules in place for the 212 storefronts that remain. In a unanimous vote, Toronto lawmakers put into effect the following rules for payday loan storefronts: 

Payday loan storefronts (including pawn shops and cash for gold vendors) are prohibited from advertising on property belonging to the city of Toronto. This means that they cannot advertise on city-specific agencies, Boards, or Commissions.

All storefront payday lenders in Toronto must provide their borrowers with city-approved information on credit counseling services and disclose all financial support available to promote better financial management.

Toronto lawmakers have also sent additional recommendations to the provincial government of Ontario, requesting that they:

Limit annual interest rates for storefront payday lenders at 30 percent or less.

Require chartered banks to set up brick-and-mortar locations in low-income neighborhoods (and offer low-income residents the same financial products and rates that other customers receive).

Cap all payday loan fees to $15 per $100 borrowed.

Lower the maximum interest rate as determined by the Criminal Code of Canada to 30 percent (currently, the criminal rate is 60 percent).

Work side by side with credit unions to develop more affordable and accessible financial products for low-income borrowers.

The city is also considering limiting the distance between payday loan storefronts in certain neighborhoods, a decision that may not come to fruition until 2020.

For the industry, this municipal approach raises a number of questions.  It may mean that some existing payday loan storefronts will need to permanently close their doors (though much is yet to be determined as the provincial government decides how to handle additional requests from the city of Toronto).

Another worry is that capping the number of payday loan storefronts will create a mini monopoly of sorts: with fewer storefronts to compete with, the existing storefronts will have less of a need to offer competitive rates and financial products to their borrowers. And fewer physical locations available means that convenient access to cash simply may not exist for some borrowers.

Perhaps the most important concern, however, is that reducing the number of storefront payday lenders does not alleviate the underlying need for quick, accessible loans themselves. Perhaps Tony Irwin, CEO of the Canadian Consumer Finance Association, said it best: “What does that mean for the single mother who works two jobs but has a shortfall of income in a particular month and needs help?… Where will she go? The need doesn’t go away.”

Ultimately, these municipal level regulations fall short in the same way that Maryland’s state-level regulations have failed to encompass the online markets.  Just as Mark Kaufman, commissioner of Maryland’s division of financial regulation found in 2013, online sites have no barrier to trading across state and provincial boundaries.  Like borrowers in Baltimore, borrowers in Toronto and Ottawa have found no issue getting online payday loans from lenders such as My Canada Payday who are based in other provinces or even other cities that have no similar restrictions. Maryland also faces lenders operating in gray market areas such as tribal lenders and offshore lenders who simply ignore all American law.

What lies ahead for Maryland residents depends on the rapidly evolving landscape of federal regulation.  Although federal regulations have had only minimal uptake so far, the government’s power to regulate interstate commerce may yet be applied to the industry.  While the Trump administration has repeatedly pushed back the implementation of the upcoming Consumer Financial Protection Bureau’s sweeping multi-part regulation that was finalized in 2017, five members of Congress have taken an even sharper approach as they introduced federal legislation this week aiming to limit all interest rates for the entire nation to 36%, mimicking the rate cap imposed by the 2006 Military Lending Act.  Whether this will survive the Republican-controlled Senate, or even make it out of the house, remains to be seen but this bill is perhaps the first of its kind to have bipartisan support.