EFFECTSOFGOVERNMENTLEGISLATIONANDREGULATIONOFPAYDAYLOANS

INCANADA:

ANECONOMICANALYSIS

By

WilliamB.Kluska

ThesissubmittedinpartialfulfillmentoftherequirementsfortheDegreeof

BachelorofArtswith

HonoursinEconomics

AcadiaUniversity

April,2017

©CopyrightbyWilliamB.Kluska2017

ii

iii

ThisthesisbyWilliamB.Kluska

isacceptedinthepresentformbythe

DepartmentofEconomics

assatisfyingthethesisrequirementsforthedegreeof

BachelorofArtswithHonours

ApprovedbytheThesisSupervisor

____________________________________________________________________

Dr.AndrewDavis Date

ApprovedbytheHeadoftheDepartment

____________________________________________________________________

Dr.BurcKayahan Date

ApprovedbytheHonoursCommittee

____________________________________________________________________

Dr.JunYang Date

iv

v

I,WILLIAMB.KLUSKA,grantpermissiontotheUniversityLibrarianatAcadia

Universitytoreproduce,loanordistributecopiesofmythesisinmicroform,paper,

orelectronicformatsonanon-profitbasis.I,however,retainthecopyrightinmy

thesis.

_________________________________________________

SignatureofAuthor

______________________

Date

vi

vii

Acknowledgements

Iwouldliketothankanumberofindividualswhohaveassistedmethroughthe

processofwritingthispaper:Dr.AndrewDavisandDr.BurcKayahanforoffering

guidanceandsupport,LauraO’HearnfromServiceNovaScotiaforprovidingme

withaggregatedatafromtheprovince,andRonGauthierfromThomsonReutersfor

hisassistanceinprovidingbusinessregistrydatafromprovincesthatdidnotoffer

theinformationIneededwithouthighfeesormonthlysubscriptions.

viii

ix

TableofContents

Acknowledgements.................................................................................................................................viiListofTables................................................................................................................................................xiListoffigures.............................................................................................................................................xiiiAbstract........................................................................................................................................................xv1.IntroductionandLiterature...............................................................................................................12.PaydayLoansMarketinCanada......................................................................................................93.Legislation..............................................................................................................................................194.MethodologyandResults.................................................................................................................274.1DataandMethodology...............................................................................................................274.2IssueswithDataAvailability...................................................................................................294.3VariableSelectionofFirstSpecification............................................................................314.4RegressionAnalysisofFirstSpecification........................................................................374.5VariableSelectionoftheSecondSpecification...............................................................494.6RegressionAnalysisoftheSecondSpecification...........................................................554.7CombinedSpecificationAnalysis..........................................................................................65

5.Conclusion..............................................................................................................................................676.Appendix.................................................................................................................................................697.References..............................................................................................................................................73

x

xi

ListofTables

Table1:VariableSelectionReasoning(1stSpecification)......................................................33Table2:CharacteristicsofaPaydayLoanBorrower(1stSpecification)..........................39Table3:VariableExplanation(1stSpecification).......................................................................41Table4:IndependentVariableSelectionReasoning(2ndSpecification).........................50Table5:EffectofWeightedInterestRateCapsonHouseholdBankruptcyRates(2ndSpecification).............................................................................................................................................56Table6:VariableResultsExplanation(2ndSpecification).....................................................59

xii

xiii

Listoffigures

Figure1:PaydayLoanOperationDevelopment.........................................................................12Figure2:ProvincialShareofTotalPaydayLoanOperations...............................................13Figure3:PercentageofRepeatLoansinNovaScotia(2010–2016)...............................15Figure4:NovaScotiaPaydayDefaultRatev.NationalNon-MortgageDefaultRate..16

xiv

xv

Abstract

Almosteveryonehasunexpectedpersonalfinancialdifficultiesattimes.Lowincome

orhighcreditriskindividualsmaybelimitedintheiravailableoptionstosmooth

outandmanagetheimpactsoftheseshocks.Manysuchhouseholdshavelimited

accesstotraditionalformsofcredit,suchascreditcardsandlinesofcredit,orhave

maxedoutthesealternatives.Thepaydayloansmarketisoneoptiontomitigatethe

adverseeffectsoftheseshocks.However,theinterestratesattachedtotheseloans

aresignificantlyhigherthantraditionalformsoflending.Thecostsofpaydayloans

haveraisedquestionsaboutwhetheraccesstothisformofcreditisbeneficialfor

consumers.Ilooktoanswerwhetheraccesstopaydayloansiswelfareenhancingor

detrimentalwithintheCanadianmarket.

xvi

1

1.IntroductionandLiterature

A growing body of economic literature looks to analyze the net benefit of

payday loansbycomparing theoptionvalueattached toaccess topayday loans to

the high cost associated with these loans. There is no unambiguous answer to

whetherthebenefitofincreasedaccesstocreditoutweighsthecost(Meltzer2011).

The reasons for use of a payday loan can be simplified into two main

categories. The first reason is that borrowers simply do not have enough savings

available to handle a personal financial shock (Stegman 2007). This can be

somethingassimpleasanecessarycarrepairrequiredtomaintainemployment,or

as dire and complex as requiring additional funds in order to prevent eviction or

foreclosure.Secondly,aborrowermaybeforcedtouseapaydayloanfromalackof

alternativeformsofcredit.Notallconsumershaveaccesstoacreditcardorother

formsof lendingvehicles.Also, credit informationaboutborrowershas increased,

whichhasincreasedtheselectivenessoflendinginstitutions(DavisandKim2017).

Alackofsavingscanbedividedintothreesubcategories.First,manypayday

loanborrowersareconsideredtobeoflowormoderateincome;hencetheysimply

may not have the ability to save (Stegman 2007). Their regular income may be

stretchedacrossallexpenses,suchthatasmallchangeintheirpersonalfinancescan

have serious effects. Second, their lack of savings can also be attributed to poor

financialliteracy(Stegman2007),andalackofunderstandingofhowtosaveforthe

futureandpreparesomeformofcushiontohandleanunexpectedshock(Ausubel

2

1991). Finally their lack of savings can be due to myopic time preferences. The

borrower can have a time discounting rate that puts their preference for higher

consumption in the current period at a level that is unsustainable (Jones and

Mahajan2015).Insimpleterms,theindividualislivingbeyondtheirmeans.

The secondmain reason for the low income individual to require apayday

loan is based on a lack of solid alternative forms of credit. Most low income

individualswill not go to apayday loan as their first source for credit borrowing;

rather they look to a payday loan as a last resort. The lack of a reasonable credit

alternativecanbeattributedtoavarietyofdifferentfactors.DavisandKimexplain

thatrecentchangesinaccesstoinformationaboutborrowershaspushedmanylow-

income borrowers out of the credit card market entirely as the risk profile

associatedwithsomeoftheseborrowersishigherthancreditinstitutionsarewilling

toaccept(DavisandKim2017).Additionally,theissueofmyopictimepreferences

canalsoaffectaborrower’saccesstoalternativecreditoptionsasmanypaydayloan

borrowershavemaxedoutallofthesealternatives.

Given the variety of factors impacting borrowers’ decisions to use payday

loans,theeconomicliteraturehasstruggledtoreachaconsensusintheirassessment

ofthebenefitsandcostsassociatedwithpaydayloans,asbothareconsideredtobe

very subjective and ambiguous in magnitude (Morse 2011). Difficulty also arises

from the lack of information on how borrowers use these funds, as well as the

factorscausingthemtoengageintheseborrowingactivities.

Instead of looking at measures of the direct impact of payday loans and

whethertheirusagedirectlyimprovestheaverageborrower,manyauthorslookto

3

measure the impacts associated with simple access to these loans and whether

improvingaccesstranslatesintowelfare-enhancingeffects.

Meltzerusesproximitytopaydayloanfacilitiestoevaluatetheimpactonfive

hardshipmeasures,specificallydelays inneededhealthcare,difficultypayingrent,

mortgageandutilitybills,householdfoodinsecurity, lackoftelephoneservice,and

moving out of one’s home due to financial difficulties (Meltzer 2011). His paper

concludesthatimprovedaccesstocreditcaneaseimmediatefinancialdistress,but

can exacerbate hardship among individuals with forecasting or self-control

problems,whoborrowtoincreasecurrentconsumption,butsufferinthefuturedue

toalargedebtserviceburden.1

Kurban’s analysis focuses on lower income communities in the southern

UnitedStates(Kurban2014).Heidentifiespaydayloanaccessbenefitsrelatedtothe

easeandspeedassociatedwithborrowingrelativelysmallamountswhencompared

toborrowingorattemptingtoborrowfromtraditionalsources.However,overallhe

findsthattheeaseofborrowingtranslatedtorepeatborrowing.Heconcludesthat

thehighinterestraterevenuefromtherepeatborrowingadverselyimpactsboththe

borrowers and the community. He observes that the profits generated are

transferredoutof the community to thebenefit of shareholders elsewhere, rather

thanbeingreinvestedinthecommunity’seconomy.

Morse found that the availability of payday loans arewelfare enhancing in

California following a natural disaster, but counters this benefit with the concern

1HisconclusionalsocoincideswiththatofO’DonoghueandRabin2006.

4

that “… the availability of cash from payday loans may tempt individuals to

overconsume.”(Morse2011)

Although there is no consensus in the literature, there is more robust

evidencesupportinganegativeimpactofaccesstopaydayloans.2Asthepreceding

examplesdemonstrate,acommonrecurringthemewithinalltheliteraturereviewed

is that borrowers may be myopic. While most authors discuss this issue from a

qualitative perspective, Jones and Mahajan crafted an experiment in a “natural”

setting,attemptingtoquantifytheaveragetime-discountingpreferenceamonglow-

incomehouseholds.Theypresentasampleoftaxfilerstheoptiontosavetheirtax

refunds in an approved, liquid, savings vehicle. If they agree, they receive an

incentivebonus.Iftheyfollowthroughwithsavingtherefundforninemonths,they

receiveanadditionalincentive.Asecondgroupoftaxfilerswerepresentedwiththe

optiontosavetheirrefundsinanapproved,butbindingorilliquid,savingsvehicle.

Basedontheresultsoftheirresearch,JonesandMahajanconcludethattheaverage

annualdiscounting rate is164%among low-incomeearners. Inotherwords,until

youoffereda164%annualrateofreturnforsavingforoneyear,theaveragelow-

incomeearnerwouldchoosetospendthemoney,ratherthansaveit.

2TakenfromMeltzer2011“Twostudiesdetectnegativeeffects:(SkibaandTobacman2008)findgreaterratesofchapter13bankruptcyfilingsamongpaydayborrowers,and(CarrellandZinman2008)finddeclinesinjobperformanceandreadinessamongAirForcepersonnelstationednearpaydaylenders.Threestudiesfindbenefitsofpaydayloanavailability:(Morse2011)findslowerforeclosuresfollowingnaturaldisasters;(MorganandStrain2008)findlowerratesofbouncedchecksinGeorgiaandNorthCarolinabeforepaydayloanbans;and(Zinman2010)identifiesdeteriorationinsubjectiveassessmentsoffinancialwell-beingafterOregonrestrictspaydaylending.InafieldexperimentinsouthAfrica,(KarlanandZinman2010)alsofindthatimprovedcreditaccessincreasesratesofemploymentandimprovesfoodsecurity.”

5

Thiscanweakenthenegativecorrelationbetweenwelfare-enhancementand

increased access to credit as it becomes difficult to determine if the high interest

ratesarecausingexacerbatinghardshiporifitismyopicspendingthatpushesthem

furtherintofinancialtrouble.

Thispaperlookstoaddtothecurrentbodyofeconomicresearchbyfocusing

on the changes in government legislation and regulation and its specific impact

withintheCanadianmarket. InthispaperIconductamultipleregressionanalysis,

utilizingdatafromanumberofCanadianhouseholdsurveysandadministrativedata

on the nature of the payday loans industry. I estimate whether access to payday

loansaffectshouseholdbankruptcyrates,and investigatewhat typesofborrowers

use payday loans. My identification strategy for estimating the effect of access to

payday loans is based on exploiting political discontinuities in payday loans

regulation across provinces. I use data from the Consumer Financial Capability

Survey to estimate the effects on bankruptcy rates and the Survey of Financial

Securitytooutlinethecharacteristicsofpaydayloanborrowers.

In comparing interest rate restrictions across Canada, I find that relaxing

interestratecapsexhibitpositivecorrelationwithpaydayloanusage,indicatingthat

creditrationingisasignificantfactorasinterestratecapsarerestricted.Thismeans

thatas interest rates increasemoreborrowersusepayday loanservices. I suggest

thisisduetoanincreasedsupplyofpaydayloanswhentheinterestrateisrelaxed.

This allows more individuals with higher credit risks to use a payday loan. One

suggestiontocombatthehighcostofpaydayloansistoenforceusurylawsandcap

the interestratesatanannualrateof60%.Stegmansuggests thatenforcingusury

6

lawsmayforcehigh-riskborrowerswhoareunabletoobtainaloanatthatrate,into

theillegalorundergroundlendingmarket(Mayer2012).

I believe this correlation also reflects the desperation of somepayday loan

borrowers. Individualswho have no alternatives to borrowmay look to a payday

loanasanalternativesourceofcreditregardlessoftheinterestrate.However,when

interest rates are relaxed and the supply of payday loans is increased, more

aggressiveadvertisingpracticescantakeplace,whichcanalsocontributetoahigher

correlationbetweenrelaxedinterestratecapsandpaydayloanusage.

I also find evidence that relaxing interest rate caps among provinces is

positivelycorrelatedwithhouseholdbankruptcyrates.Bycombiningtheresultsof

my two specifications I suggest that the probability that a household declares

bankruptcy,giventhattheyuseapaydayloan,ispositivelycorrelatedwithrelaxed

interestrates.

Theissueofcontinuousborrowingandoverborrowingexacerbateshardship

among borrowers further. The capacity of a borrower to acquire a loan amount

aboveafeasiblelevelforthemtorepayontimecanforcethemintoadebtburden

cyclethatisextremelydifficulttorecoverfrom(O’DonoghueandRabin2006).This

canleadtoanissueofcontinuousborrowingwhereaborrowerisforcedtorelyon

regular loans to cover the previous loans and debt service costs. This has led to

various regulations to curb the problem of over borrowing and repetitive loans. I

findthatborrowerswhoengageinrepetitiveloansare9.85%morelikelytodeclare

bankruptcy,thanindividualswhodonotenterthepaydayloansmarket.However,

solving the issues of over borrowing and continuous borrowing is difficult.

7

Implementing percentage of income caps can push borrowers out of the market

entirely and move them to underground and illegal sources (Stegman 2007).

Percentageofincomecapsarerestrictionsontheamountinwhichaborrowercan

borrowgiventheirincome.Forexample,inBritishColumbiaaborrowercannottake

out a loan that exceeds 50% of their net pay per paycheck. Additionally, forcing

lenders to stop offering loans to repeat borrowers can put borrowers into a

financiallyworsepositionthanbeforetheytookouttheloan(Meltzer2011).

Therestofthispaperisdividedintothefollowingsections.First,Ireviewthe

payday loans market within Canada, outlining the history and structure of the

market. I highlight current statistics using personally collected data along with

aggregategovernmentdata. I identifyareas thatmaybeof concernbothcurrently

andinthefuture.Next,IreviewtheCanadianlegislationpertainingtopaydayloans

and its evolution over the last 30 years. I explore the differences in provincial

legislation and the impact that these discontinuities have on the market. Third, I

present the details of the estimation methodology and results of the analysis.

Finally, I concludewithpolicy recommendations to assist in shaping legislation to

reduceopportunitiesformarketfailurestodominate,whichmeansthatthemarket

initscurrentformmayhavesolutionsavailablethatwouldmakeborrowersbetter

offwithoutmakinganyoneelseworseoff.

8

9

2.PaydayLoansMarketinCanada

Apaydayloanisaloanbetween$100and$1,500thatistobepaidbackatthe

timeoftheborrower’snextpaycheck.Itisdesignedasanemergencybridgeloanto

allowtheborrowertopaysomeimmediatecosttopreventsomedireconsequence.

PaydayloansfirstcameintoCanadaintheearly1990’s.Theyareavariationfroma

practice called “salarybuying”which firstbecamepopular in the late19th century

(Birkhead1941).SalaryBuyingwasaprocess inwhicha lenderwouldpurchasea

futuresalaryofaborroweratadiscountinordertoprovidetheborrowerwiththe

fundsimmediately.Theprocessofsalarybuyingbecameillegalinthe1970’swhen

the majority of the loans were offered through criminal organizations and loan

sharks.Additionally the interestchargesassociatedwithsalarybuyingwereabove

the legal limitof60%annually.Payday loansaredifferent fromsalarybuying ina

fewdifferentways,whichwillbefurtherdiscussedinthelegislationsectionofthis

paper.However,thetwoprimarydifferencesarethatapaydayloanhasarestriction

of how much can be borrowed relative to the borrower’s earnings, and the fee

associatedwith the loan is to bepaid at the timeof payment.With salarybuying,

therewasnorestrictionontheamountofthesalarythatcouldbeborrowed,andthe

interestwasdeductedfromtheamountlentimmediately.

Fromthe1990’s to2006payday loansremainedrelativelyunregulatedand

not legislated.Theusury lawofCanadaand itsambiguous interpretation isoneof

the main reasons why payday loans have been able to maneuver outside the

restriction of 60% annual interest (Antle 1994).Where the payday loans are of a

10

small amount and for a short term they have been able to avoid these laws and

operatemorefreely.In2006theCriminalCodeofCanadawasamendedwithBillC-

26 to specifically include payday lending operations and create a base set of

restrictionstobeimposedontheirpractices.Theserestrictionsdidnotenforcethe

traditionalusurylaws,butrathersetrestrictionsonamountsthatcanbeloaned,and

amaximumloanperiodbasedupontheborrower’spayschedule.Theamendment

also left it open for each province to impose individual regulation and legislation

basedupontheirprovincialrequirements.

Since 2006, the payday loan industry has drastically increased operations

withinCanada.Basedonpersonal research into thebusiness registrationsof each

enterpriseineachprovincialregistry,Ideterminedthattherearecurrentlyover150

distinctpayday-lendingoperationswithinCanadawithover1,400 locationsacross

the country. Based on a scan of legislation in each province, all provinces have

created some form of customized legislation and regulation of the payday loans

industry–exceptforNewfoundland.

In addition to the expansion of physical locations of payday lending

operations, onlinepayday lendinghasbecomea significantly largerportionof the

industrysince2009,whichhasforcedmanyprovincestoamendtheirlegislationto

includeonlinelendingpractices.Basedonmyreviewofnewbusinessregistrations,

ineachprovince,thenumberofpaydaylendingstart-upoperationshasgrowneach

yearsince1995withfewexceptions.

In2005,concernsregardingpendinglegislationrestrictionslikelyactedasa

deterrent formany start-ups as indicated in the Figure 1: Payday LoanOperation

11

Development. 2009was themost active year for payday loan operation start-ups.

Thiswasmainlyduetotheincreaseofonlinepaydaylendingoperationsandthelack

of legislation regarding online lending. After 2009, the payday lending operations

began to amalgamate. Economies of scale became apparent as national brands

emerged.

Currently there are only 2 payday lending organizations present in every

province: Money Mart and Cash Advance. Each company has taken an opposite

approach to expansion. Based on a review of business registrations, I identified a

significantnumberofcompaniesthatwereacquiredbyMoneyMart,butdidnotsee

the same pattern with Cash Advance. Cash Advance appears to have built its

organization through construction and expansion of its own storeswith relatively

minimal mergers and acquisitions. Money Mart appears to have focused

predominately on acquiring payday lending operations that are successful in

provincesandlocationsthattheyhaveminimalornopreviouspresence.

12

Figure1:PaydayLoanOperationDevelopment

Source:Personallycollecteddatafromprovincialbusinessregistries

Muchof theeconomic literaturehasexplored thesignificanceof locationof

payday lending operations. The issue of added convenience within low-income

communities has beendifficult to quantify, as these individuals are the onesmost

likely to be in need of additional access to credit. One might expect that the

provinceswiththehighestpopulationswouldhavethegreatestnumberofpayday

loan operations, however, looking at personally collected data on the number of

operationswithineachprovince,BritishColumbiaandNovaScotiaseemtohavethe

highest number of payday lending operations per capita. This is likely due to the

probabilityoflowerincomeindividualsinNovaScotiaandthehighercostofliving

associatedwithBritishColumbia.

0

2

4

6

8

10

12

14

Num

berofnew

operations

PaydayLoanOperationDevelopment

13

Figure2:ProvincialShareofTotalPaydayLoanOperations

Source:Personallycollecteddatabasedonactive2016provincialbusinessregistries.

The marketing practices of the payday lending operations within Canada

havebeenfocusedheavilyaroundindividualswhomayhavepoorbudgetingorlack

needed credit to maintain consumption habits. The main emphasis of payday

lendingmarketing is getting cash immediately regardless of the reason. They also

focusontheuseofanadministrativefeeratherthanarateofinterest,stating$15-

$25per$100lent(dependingontheprovince).

AB,11.41%

BC,24.16%

MB,5.37%

SK,6.04%

ONT,25.50%

OUE,5.37%

NB,5.37%

NS,8.72%

NFLD,5.37%PEI,2.68%

ProvincialShareofTotalCanadianPaydayLoanOperations

14

Thefact that thesecorporations focustheiradvertisingonthosewhomight

be considered to have myopic time preferences3, rather than true emergencies,

mightbeconstruedtobeencouragingborrowingthatisnotwelfare-enhancing.

A large concern regarding payday-lending operations in Canada is the

propensity for payday loan borrowers to engage in continuous or repetitive

borrowing.Mostprovincesdonottracktheborrowinghabitsofpaydayloanusers.

Infact,onlyNovaScotiahasmandatedthatallpayday-lendingoperationswithinthe

provincemust be tracked and data sent to the provincial government for further

analysis.Albertahas implementedlegislationtoenforcesimilartrackingtostart in

2017.

From the aggregate data available from Service Nova Scotia (Figure 3:

Percentage of Repeat Loans in Nova Scotia (2010 – 2016)), it is apparent that

concerns about habitual lending expressed in other papers, are justified in Nova

Scotia, despite the specific legislation in place to prevent continuous or habitual

lending practices. Since 2014, there has been an increase of as much as 20% in

repeatloansoverfirsttimeloans.Additionally,29.65%ofallrepeatloanswereloans

grantedtoborrowerswhohaveusedpaydayloans8ormoretimeswithintheyear

ofrecording.

3“Myopictimepreferences”referstoindividualswhowilllookforanyreasontoincreaseconsumptiontoday,evenifthecostofservicingthedebtisextremelyhigh.Theyprefertoconsumesignificantlymoretodayandmaynotconsiderthelackofconsumptionwithwhichtheywouldbefacedinthefuture.

15

Figure3:PercentageofRepeatLoansinNovaScotia(2010–2016)

Source:ServiceNovaScotiaPaydayLoanAggregates

The tendencyofhabitual lendingadds to the concern that theseborrowers

have fallen intoadifficult financialcycle,where the initial loanmayhavebeen for

some form of financial or consumption shock, but the continuous nature of their

borrowinghabitsmayindicateahigherchanceofdefault.

24.39%

13.35%

9.79%7.61% 6.92%

4.71% 4.21%

29.65%

0%

5%

10%

15%

20%

25%

30%

35%

1Repeat 2Repeat 3Repeat 4Repeat 5Repeat 6Repeat 7Repeat 8ormore

PercentageofRepeatLoansinNovaScotia2010-2016

16

Figure4:NovaScotiaPaydayDefaultRatev.NationalNon-MortgageDefaultRate

Sources:Aggregatedefault rate fromServiceNovaScotia andDefault rateofnationalnon-

mortgagedebtprovidedbyTransUnionCanada

Again usingNova Scotia aggregate data, Figure 4 shows the default rate of

payday loans is almost three times larger than the default rate of any other non-

mortgagedebtwithinCanada.Thoughthiscomparisonisnotrobust,itdoesindicate

alargeconcernregardingpaydayloanborrowers’abilitytorepaytheloanswithout

requiringadditionalpaydayloanstocoverregularexpenses.4

The average amount borrowed is approximately $436. An interesting

question thatarises from theaverageamountborrowed iswhatproportionof the

borrowers is borrowing at the maximum allowed amount based on income4Thiscomparisonlacksrobustness,asnon-mortgagedefaultratesforjustNovaScotiawerenotavailable.Paydayloandefaultratesfromotherprovinceswerenotavailableeither.

8.19%7.14% 6.83% 7.08%

7.79%

2.71% 2.66% 2.72% 2.63% 2.64%0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

2010-2011 2011-2012 2012-2013 2013-2014 2015-2016

NovaScotiaPaydayDefaultRatev.NationalNon-MortgageDefaultRate

NovaScotiaPaydayDefaultRate

NationalDefaultRate(non-mortgage)

17

percentageallowances.Unfortunatelythisquestioncannotbeansweredatthetime

ofthispaperasthisdataisnotcollectedatanationallevel.NovaScotiaistheonly

province,whichmandatesthecollectionofthisdata.

Payday lending operations are traditionally not managed within the

community in which they are operating. Most owners and managers of payday

lendingoperations tend to live outsideof the area inwhich theyoperate (Kurban

2014).Thisleadstoanotherconcernofcapitalflightwhereincomeisshiftedoutof

theprovinceorcountry,whichcreatesadditionalnegative impact for theprovince

and community. InNova Scotia in 2015, the estimated amount of fees on granted

payday loans was approximately $20.68 million dollars. If these loans were not

madewithinNova Scotia it is possible that these fundswould have been spent in

some other fashion locally and resulted in more economic stimulus within the

province.

18

19

3.Legislation

Previous to 2006, payday loans were mainly unregulated and had no

legislation that specifically stipulated interest rate restrictions or to whom

operations could lend. As stated previously payday loans are a variation of a

practice called “salary buying” where individuals with irregular income could

purchasefuturesalarypaymentsatadiscountedrate.Theseservicesstartedinitially

toserveasanalternativetobankswhowouldnotoffersmallloansforshortperiods

oftime.

However,salary-buyingoperationsquicklybecameapopularlendingoption

of criminal organizations and loan sharks. In the years of the Great Depression

almost all of the salary-buying practices were offered through loan sharks and

criminalorganization(Talai2014).

Theconcernsofsalary-buyingoperationsweresimilartothoseexistingtoday

withpaydayloans,inthatitiseasyforborrowerstoenterintoacycleofdebtthatis

extremelydifficulttoexit,andthatthecostofservicingthedebtobtained,outweighs

theactualloanborrowed.

Thepressuretoimplementusurylawswasmoreheavilyweightedontherisk

ofphysicalharmthatborrowershadfromlackofpayment.Ifaborrowercouldnot

payat the time inwhich the loanwasdue, thecriminaloperationwould threaten,

harm or even kill the delinquent borrowers. The act of salary-buying and loan

sharkingdidnotbecomeillegal inCanadauntil the1970’s(GovernmentofCanada

Department of Justice 2015). This criminal offensewas implemented through the

20

usury laws indicating amaximum lending rate of 60%. This continued as the law

untiltheCriminalCodeofCanadawasamendedin1989toincludeS347whereitis

acriminaloffensetoenterintoanagreementorarrangementtoreceiveinterestata

criminalrate,aswellasacriminaloffensetoreceivepaymentorpartialpaymentof

interestatacriminalrate(Antle1994).

Theprocessofchequecashingstartedtobecomepopularinthe1980’sasa

wayaroundtheseusurylaws.Theprocessofchequecashingwasaservicewherea

customerwould present a post-dated cheque and an organizationwould cash the

cheque immediately for a fee. Thiswas seen as a different typeof operation from

salary-buyingorloansharkingasthetermswerenotdiscussedininterestbutrather

inadministrativefees.

In the early 1990’s, this process transformed into payday lending services,

where borrowers would present employment records, to gain access to a future

paycheque immediately, for the cost of an administrative fee. This remained the

processofpaydaylendinguntilitgainedextremepopularityintheearly2000’s.The

federalgovernmentwascalledupontoamendtheCriminalCodetoincludepayday-

lendingoperationsintotheexistingusurylaws.

In 2006, the federal government introducedBill C-26, anAct to amend the

Criminal Code. The Bill defined a payday loan as “An advancement of money in

exchange forapost-datedcheque,apre-authorizeddebitora futurepaymentofa

similarnaturebutnot foranyguarantee,suretyship(formof insurance),overdraft

protection,orsecurityonpropertyandnotthroughamarginloan,pawnbroking,a

lineofcreditorcreditcard.”Thegovernmentset limitationson thedollaramount

21

restrictionsaswellastimehorizonsofthepaydaylendingoperations,specificallya

limitof$1,500perloanatamaximumtimeof62days.

The legislation also explicitly allowed each province the autonomy to

implement personalized regulation as they saw fit. TheBillmade no indication of

limitations of interest on the loans or enforcement of the 60% annual rate as

mentioned from previous sections of the law. Inmy opinion the Billwas left in a

stateofambiguitythatmakesitdifficulttoestablishfirmrestrictionsforthepayday

lendingoperationswithinCanada.

There is an easy interpretation that prevents current financial institutions

fromenteringthismarket,astheywouldbesubjectedtothe60%annualrate,while

non-depositoryinstitutionscouldavoidsuchregulation.Additionally,nomentionof

continuous or over-borrowing restrictions existed within the legislation, which

allowsborrowerstheopportunitytoenterintoaworrisomecycleofdebt.

In2007,bothManitobaandSaskatchewan implemented the firstprovincial

legislationregardingpayday-lendingoperationswithintheirprovinces.Thefocusof

their legislationwas centered on education, and creating a time frame towhich a

borrowercouldexittheloanwithoutpenaltyorbeingchargedafee.

In Saskatchewan, restrictions were placed on continuous borrowing,

preventingborrowers fromentering into a roll-over loan immediately.A roll-over

loan was defined as “…the extension or renewal of a payday loan that imposes

additional amounts, fees, rates, penalties or other charges on the borrower, other

thantheinterestmentionedinclause14.2.a,andincludesanadvancementundera

newpaydayloanagreementtopayoutanexistingpaydayloan.”Instead,borrowers

22

had towait one business day from the time of payment of the preceding loan, in

ordertoapplyforanother.

No restrictions were initially placed on interest rates or the proportion of

their incometheywereallowed toborrow.Thisopenedupborrowers to issuesof

over-borrowingandpunitiveinterestrates.Itwasnotuntil2012thatrestrictionson

interestandborrowingpercentageswereimplemented.Saskatchewanimplemented

aninterestratecapof$23per$100borrowedandproportionrestrictionsof50%of

theborrowersnetpay.

Alargerconcernisalsoraisedwiththerestrictionsofinformationrequiredto

gainaccesstoapaydayloaninSaskatchewan;lendersarenotallowedtorunacredit

checkontheborrowertoapproveordenytheloan;aswellastheyarenotallowed

toviewbanking informationof theborrowerother than tosetupapreauthorized

payment.Therestrictionsofthisclauseunderminetheabilityforthepaydaylender

toobserveifacoincidingloanisinexistencefortheborrowerandallowsborrowers

toengageinmultiplepaydayloansatthesametime.

Manitobafocusedonimplementingboth interestraterestrictionsaswellas

proportionofincomerestrictionsin2007.Theysettheinterestratecapat$17per

$100borrowedandthepercentageofincomecouldnotbegreaterthan30%ofthe

borrower’snetpay.However,theyallowedforrolloverloanstobeavailableintheir

province,settingacapatanadditional5%or$22per$100borrowed.Restrictions

on information gathering of borrowers were also existent within the legislation,

however, more in the way of preventing credit checks to be done. Lenders were

allowedtoseebankstatementsinordertomitigatesimultaneousborrowing.Inmy

23

opinion,thelegislationofthisProvinceisalsoambiguous.Therearenomentioned

penaltiesifthelenderallowsforsimultaneousborrowingunlesstheyareattempting

totakeoutmultipleloansfromthesamelender.

Fromtheeducationstandard,bothprovincesmandatedspecificinformation

beincludedineachloanapplication,highlightingtheannualpercentagerateofthe

loan (APR) as well information regarding effective budgeting and a warning that

paydayloansarehighinterestloans.Therearepagesoflegislationhighlightingthe

sizeandrequirementsofsignsindicatingthesewarningsfromplacementwithinthe

storeandonline,torequiringinitialsandsignaturesonapplicationshighlightingan

understandingoftheattachedinterestrate.Theseeducationrequirementswerethe

mostconsistentacrossallprovinces.

OntarioandNewBrunswickwerethenextprovincestoofferregulationand

legislationofpaydaylending.AsseeninManitobaandSaskatchewan,thefocusagain

wasoneducationandforcedmarketingofinterestratestandards.BothOntarioand

NewBrunswickimplementedaninterestraterestrictionof$21per$100borrowed,

but New Brunswick indicated that the rates can be changed, and would be

monitoredbytheUtilityandReviewboard.Bothprovincesrestrictedrolloverloans

frombeingavailable,andset“cooloff”periodsbetween loans(1-2businessdays).

Ontarioalsosetanallowanceof2businessdaystocanceltheloanwithoutpenalty

orarequirementtogivereasoningforcancellation.

NovaScotia,BritishColumbiaandAlbertaimplementedregulationsin2009,

but Nova Scotia has been the most active province in continuously updating and

amending payday-lending regulation. Nova Scotia set a mandate within their

24

regulation that utility and review board was to meet every 2-4 years to review

payday-lending operations and make changes as needed, without requiring bill

proposals and amendments to provincial legislation. Nova Scotia has used this

mandatetomodify interestrates imposedonpaydaylendingoperationsaswellas

make changes as themarket has changed. In 2009 interest rates on payday loans

werecappedat$31per$100borrowed,butchangedto$25per$100borrowedin

2011,and$22per$100borrowedin2015.Additionally, in2011NovaScotiaused

thismandate toallow them to implementadditional restrictionsononlinepayday

lendingoperations, requiring themtoregister forapermitofoperationwithin the

provinceinordertooperatelegally.

Nova Scotia is also the only province currently to require payday-lending

operations to send data regarding their loans to the provincial government for

furtheranalysis.Thedata-sharingrequirementisasfollows:“Totalvalueofpayday

loansprovidedinNovaScotia,thenumberofpaydayloanagreementsenteredinto,

thenumberofrepeatloanagreementsenteredinto,theaveragesizeandtermlength

ofpaydayloans,andthetotalvalueofpaydayloansthathavegoneintodefaultand

havebeenwrittenoff.”However,NovaScotia is still lacking legislationonrollover

loansaswellasproportionallendingrestrictions.

BritishColumbiahasamaximuminterestrateof$23per$100borrowedand

has a restrictiononproportionof incomeof 50%of net pay.However, oneof the

largest differentiating factors forBritishColumbia is the allowance for continuous

borrowers an opportunity to pay back the third subsequent loan over three pay

periods(iftheyarepaidbi-weekly,semimonthly,oramorefrequentbasis)ortwo

25

payperiods (if theyarepaidmonthlyor less frequently).This restrictioncouldbe

extremelyhelpfulineliminatingthemajorissueofcontinuouslending.

Prince Edward Island is themost recent province to implement legislation

and regulation of payday loans. PEI implemented restrictions in 2015. Prince

Edward Island has a similar broad approach tomany of the other provinces. The

include educational requirements for lending operation and specify sign size and

marketing requirements for ensuring the APR is posted effectively, as well as

restrictionsonroll-overloansandcoolingoffperiods.Theirinterestraterestriction

iscappedat$25per$100borrowed.

Manyprovinceshaveupdatedregulationssincetheirinitialimplementation.

Specifically in 2009 and again in 2011, most provinces included some form of

additional regulation for online payday lending operations. Alberta has been the

most recent province to implement additional payday-lending regulation. In 2016

they updated regulations, taking into consideration all other provincial legislation

that has previously been implemented. The biggest change in the most recent

legislationisthemandatethatpayday-lendingdatabetrackedandsharedwiththe

provinceforfurtheranalysis.Theyhaveimplementedthestrictestinterestratecap

of$15per$100borrowed(previously$23per$100borrowed).Theyhaveexplicitly

restricted roll-over loans, but allow for continuous borrowing after a mandated

coolingoffperiod.However, theyhave implementedan interestrestrictionof60%

annuallyonall loans,whicheffectivelycapsthenumberofcontinuous loansthata

borrower can engage in. They have also mandated education requirements to

providinginformationtoborrowers.

26

QuebecandNewfoundlandaretheonlyremainingprovincesthatdonothave

paydaylendingregulationorlegislation,butforoppositereasons.Quebecdoesnot

have payday lending regulations because they have stricter provincial usury laws

that cap any loan interest at 35% annually. This effectively eliminates payday-

lending operations within Quebec. However, Quebec still has payday lending

operations locatedwithin theprovince,but theyare locatedon thebordersof the

provinceandcanonlylendtoQuebecresidentsoutsideoftheprovince.

Newfoundland has simply not implemented any form of regulation of

payday loans and allows the federal restrictions to guide operations within the

province.Themostlikelybenefitforalackofoverwhelmingpaydayusagewithinthe

province is the sprawl across the province. Almost half of the residents of

NewfoundlanddonotliveinthelargerareasofCornerBrookandSt.John’s,which

meansthatthemarketsinthoseareasarelikelytheonlyareasofinterestforpayday

lendingoperations. TheeffectivemarketrateofinterestforNewfoundlandpayday

lendingoperationsis$25per$100borrowed.(Basedonpersonallycollecteddata)

27

4.MethodologyandResults

4.1DataandMethodology

I utilized information from two separate household surveys to analyze the

effects of government legislation on payday loans.5The first survey usedwas the

Survey for Financial Security, (SFS), which was conducted in three waves by

Statistics Canada. Only the data sets from 2005 and 2012 were used in the

specification,asthesurveydidnotmeasurepaydayloans inthe1999dataset.The

intentionoftheSFSwas“…tocollectinformationfromasampleofCanadianfamilies

on their assets, debts, employment, income and education. This helps in

understanding how families’ finances change because of economic pressures.” In

total there were 12,003 observations in the survey data during these collection

periods.Thesurveywasdesignedforcrosssectionalsamplingofthedataandwas

conductedviatelephone.Thissurveypassestherequirementofrelevancyenoughto

be used within my specifications as it allows for a greater description of the

characteristics of a payday loan borrower and how changes within price caps of

interestratescanaffectindividualswithrelevantcharacteristics.

ThesecondsurveyusedwastheCanadianFinancialCapabilitySurvey,which

wasconductedin2008andagainin2014.ItwasconductedbyStatisticsCanada,and

5Twoothersurveyswerealsoconsidered;TheSurveyofConsumerFinances,andtheSurveyofLabourandIncomeDynamics.Bothwerediscountedasunusablerelativetomeasuringpaydayloanimpacts.TheSurveyofConsumerFinancesendeditscollectionin1999andhadnomentionofpaydaylendingorcashadvanceusage.TheSurveyofLabourandIncomeDynamicswasfocusedonemploymentstatisticsanddidnottouchondebtoraccesstocreditinanymanner

28

wasintended“…tocollectinformationthatwillilluminatethedegreeofknowledge

that Canadians have concerning financial decision-making. In other words, how

Canadians understand their financial situation, the financial services available to

them and their plans for the future.” The survey had a combined 22,204

observationsduringthecollectionperiods.Thesurveywasconductedviatelephone

andwasdesignedforcrosssectionalsamplingofthedata. Thissurveyalsopasses

the requirement of relevancy as declaring bankruptcy can be considered a weak

welfaremeasurement and the independent variables used allow for a reasonable

discussionofeffectsofbankruptcyrates.

29

4.2IssueswithDataAvailability

Itcanbedifficulttoempiricallyquantifytheeffectsofpaydaylendingwithin

Canada. Data that is relevant and useful can be scarce and various endogeneity

concerns cannotbe addressed completely,meaning that unobservedvariables can

change thedynamicof any specificationandmake itdifficult to establisha robust

relationship between the independent and dependent variables. One example of

suchanendogeneityproblemisreasoningforusingapaydayloan.Thisvariable is

unobserved but can dramatically change the dynamic of any specification used to

measuretheimpactsofpaydayloans.

A large impediment to analyzing the effects of government legislation on

payday lending is the lackof information collected to assessborrowingusageand

intent.As statedpreviously,NovaScotia is currently theonlyprovince that tracks

payday lending operations within the province, but the data is not sufficient to

determine if the payday loan is used to satisfy the borrowers’ time discount

preference,or if theborrowersare forced into thismarketdue toa lackofproper

substitutes,andwouldotherwisebehaverationally.

My intention to cleanly identify the effects of government legislation of

paydaylendingonthewelfareofborrowerswithinthismarketisimpededbyalack

ofinformationonborrowing.Borrowingintentionscanbedifficulttoquantifyeven

if observed because the data itself may be biased by self-reporting problems.

Instead measurements of welfare would be a reasonable substitute under the

assumptionofrationalborrowers.Ifasurveywasconductedthataskedrespondents

30

if theywerewithout basicwelfare needs andwhether payday loanswereused to

satisfy these requirements, itwould create amore robust picture of the effects of

payday loans onborrowers.Additionally, questions related to spending intentions

couldbe tracked inorder toestablish timepreferencesofborrowers.Forexample

askingwhy a borrower is looking to use a payday loan. The combinationof these

variableswouldallowfurtheranalysisofpaydayloansandtheirbenefits.

31

4.3VariableSelectionofFirstSpecification

Inmyfirstspecification,IusetheSurveyforFinancialSecurityinanattempt

toanalyzethetypeofborrowerthatwouldengageinpaydaylendingactivities.The

surveyincludesmorequestionsrelatingtothepersonalcharacteristicsandincome

dynamicsthanarepresentedintheCanadianFinancialCapabilitySurvey.However,

therearenowelfaremeasureswithintheSFSthatwouldallowforitsindependent

analysisasthemainspecification.Insteadthepurposeofthisspecificationistosee

why a consumer might choose to enter into the payday loans market. I look to

combinetheresultsofthisspecificationwithmysecondspecificationtotellamore

dynamicstoryofborrowerswithinthepaydayloansmarket.

Thedependentvariableofthisspecificationisabinaryvariablethattakesthe

valueof1ifarespondentusedapaydayloaninthepastthreeyearsand0otherwise.

Selection of independent variables was based on three distinct characteristic

categoriesandeachvariable’sinclusionisexplainedinTable1.First,categoriesthat

assisted in the determination of personal attributes were selected such as age,

education,totalnon-mortgagedebt,6andmainsourceofincome.Secondly,variables

that illustrated financial challenges of potential borrowerswere included, such as

number of credit cards the respondent has, whether they pay their credit card

balanceattheendofeverymonth,whethertheyhaveanRRSPsavingsvehicle,and

6Theinclusionoftotalnon-mortgagedebtwasusedasasubstituteforincome,astheyarehighlycorrelated.Onaverage,youcannotobtainhigherlevelsofdebtwithouthigherlevelsofincome.After-Taxincomewasconsidered,butwasdeterminedtobestatisticallyinsignificant.

32

whethertheyhaveamonthlybudget.Finally,variablesrelatedtodirectdecisionsof

useofapaydayloanareconsideredsuchas:whethertherespondentbeenrefuseda

creditcard,andtheinterestratecapoftheloanintheirprovince.

33

Table1:VariableSelectionReasoning(1stSpecification)

Variable ExplanationforInclusioninModel

AgeofMajorIncomeEarner

Agewasincludedinthespecificationasacontrolfor

individualsfacingdifferentfinancialissuesatdifferentpoints

inthelifecycle.Itisacontinuousvariablethatcanonlybe

positive.

NumberofCreditCards

Thenumberofcreditcardswasincludedasitindicates

individualswithmultiplealternativeformsofcreditto

paydayloans.Ifeconomicexpectationshold,thenindividuals

withmorealternativesforcreditwillbelesslikelyusepayday

loans.Itisacontinuousvariablethatcanhaveanyvalue

including0

EducationLevel

Educationwasincludedtohelpestablishthepersonal

characteristicsofthepotentialborrowerbutalsocanactasa

proxyforfinancialliteracy.Individualswhoaremore

educatedtendtohavebetterfinancialliteracyonaverage.It

measureseducationinyearsandisacontinuousvariable.

34

PaysCreditCardBalanceEach

Month

Payingcreditcardbalancesoffeachmonthwasincludedasit

controlsforincomeeffectsofcreditaccess.Itisadummy

variablewherethebasegroupisthataborrowerdoesnot

payofftheircreditcardbalanceeachmonth.

HasBeenRefusedaCredit

Card

Havingbeenrefusedacreditcardwasincludedtoidentify

individualswhoarewithoutasubstitutetopaydayloans.Itis

adummyvariablewherethebasegrouphasnotbeen

refusedacreditcard.

HasanRRSP

HavinganRRSPwasincludedasitisexpectedthatindividuals

whocanaffordtohaveanRRSPlikelyareofahigherincome

orengageinsomeformofrationalsavings,whichmay

preventpaydayloanusage.Itisadummyvariablewherethe

basegroupdoesnothaveanRRSP

MaintainsaRegularMonthly

Budget

Maintainsaregularmonthlybudgetwasincludedasa

variablethatprovidesinsightintothesavingshabitsof

potentialborrowers.Borrowerswhomaintainaregular

monthlybudgetmaybeforcedintothepaydayloansmarket

duetostructuralfinancialproblemsratherthanmyopic

consumptionhabitsthatcausethemtobemorerisky.Itisa

dummyvariablewherethebasegroupdoesnotmaintaina

regularmonthlybudget

35

TotalNon-MortgageDebt

Totalnon-mortgagedebtwasincludedbothasaproxyfor

incomeasincreasesindebtarehighlycorrelatedwith

increasesinincome.Butalsoasanindicatoroflimited

alternativeformsofcredittopaydayloans.Itisacontinuous

variablethatcanhaveanypositivevalue.

TotalNon-MortgageDebt

Squared

Includingaquadraticfunctionoftotalnon-mortgagedebt

wasincludedasitestablishesthelinearnatureofpayday

loanusageamongdifferentincomegroups.Itisacontinuous

variable.

MainSourceofIncome:

GovernmentTransfers

Mainsourceofincomeasagovernmenttransferwas

includedtocontrolforusageofpaydayloansamong

extremelylow-incomegroups.Thisgroupcontains

individualswhodonotworkandarenotretired,wheretheir

mainsourceofincomeissomeformofgovernmentsubsidy

ortransferpayment.Itisadummyvariablewherethebase

groupisindividualswhosemainsourceofincomeisnot

obtainedthroughgovernmenttransfers.

InterestRateCap

Theinterestratecapwasincludedtocontrolforprice

restrictionsofpaydayloans.Thisisacontinuousvariablethat

isdeterminedbyprovincialregulation.

36

Alberta

ProvincialDummyVariables.

BCisusedasthebasegroup.Cantakethevalueof0or1

Saskatchewan

Manitoba

Ontario

Quebec

NewBrunswick

NovaScotia

PrinceEdwardIsland

Newfoundland

37

4.4RegressionAnalysisofFirstSpecification

𝑃𝑎𝑦𝑑𝑎𝑦! = 𝛽! + 𝛽!𝐴𝑔𝑒! + 𝛽!𝐴𝑔𝑒!! + 𝛽!𝑁𝑢𝑚𝑏𝑒𝑟𝑜𝑓𝐶𝐶𝑠! + 𝛽!𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛!

+ 𝛽!𝑃𝑎𝑦𝑠𝐶𝐶𝐵𝑎𝑙𝑎𝑛𝑐𝑒! + 𝛽!𝑅𝑒𝑓𝑢𝑠𝑒𝑑𝐶𝐶! + 𝛽!𝐻𝑎𝑠𝑅𝑅𝑆𝑃!

+ 𝛽!𝐻𝑎𝑠𝐵𝑢𝑑𝑔𝑒𝑡! + 𝛽!𝑇𝑜𝑡𝑎𝑙𝐷𝑒𝑏𝑡! + 𝛽!"𝑇𝑜𝑡𝑎𝑙𝐷𝑒𝑏𝑡!! + 𝛽!!𝑀𝑆𝐼𝑁𝐶𝐺𝑜𝑣!

+ 𝛽!"𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝐶𝑎𝑝! ∗ 𝑅𝑒𝑓𝑢𝑠𝑒𝑑𝐶𝐶! + 𝛽!"𝑆𝑎𝑠𝑘𝑎𝑡𝑐ℎ𝑒𝑤𝑎𝑛!

+ 𝛽!"𝑀𝑎𝑛𝑖𝑡𝑜𝑏𝑎! + 𝛽!"𝑂𝑛𝑡𝑎𝑟𝑖𝑜! + 𝛽!"𝑄𝑢𝑒𝑏𝑒𝑐! + 𝛽!"𝑃𝐸𝐼!

+ 𝛽!"𝑁𝑜𝑣𝑎𝑆𝑐𝑜𝑡𝑖𝑎! + 𝛽!"𝑁𝑒𝑤𝐵𝑟𝑢𝑛𝑠𝑤𝑖𝑐𝑘! + 𝛽!"𝑁𝑒𝑤𝑓𝑜𝑢𝑛𝑑𝑙𝑎𝑛𝑑! + 𝜀!

I utilized a linear probabilitymodel for this regression, as Iwas looking to

explainthestrengthoftherelationshipbetweentheindependentvariablesandthe

probability that an individual would use a payday loan. 7 The results of this

specificationarepresentedinTable2.Theyindicatethatasinterestratesincrease,

theprobabilitythatsomeonewhohasbeenrefusedacreditcardusesapaydayloan

alsoincreases.Ispeculatethatthisisduetoarelaxingofrestrictionsofthepayday

lendingoperationsrelatedtowhoqualifiesforapaydayloan.Aspermissibleinterest

ratesincreasespaydaylendingoperationsarewillingtolendtoriskerborrowers.

Thisdistinctionincludesbothindividualswithmyopicconsumptionhabitsas

well as individualswith incomesbelow the traditional acceptance rate forpayday

7IusedWhite’scorrectionofstandarderrorstocorrectforheteroscedasticityautomaticallypresentwithintheregression.Iexpectedheteroscedasticitytobepresentas𝑉𝑎𝑟 𝑈! 𝐼𝑛𝑐𝑜𝑚𝑒! ≠ 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡.

38

lendinginstitutions.8Theseresultsindicatethatcreditrationingtakesplacewithin

thepaydaylendingmarket.Thoughthepotentialsupplyforpaydayloans isnearly

infinite, lending institutionswill ration based upon the riskiness of the borrower.

UsingEquation4.19andholdingallothervariablesconstant,atthenationalpayday

loaninterestrateaverageof19%aborrowerwhohasbeenrefusedacreditcardis

12.89%morelikelytouseapaydayloanthansomeonewithanalternativesourceof

credit.WhereasaborrowerwhohasbeenrefusedacreditcardthatlivesinAlberta

withaninterestrateof15%is8.77%morelikelytouseapaydayloanthansomeone

with an alternative source of credit. These results support the credit-rationing

hypothesisfromtheincreasedprobabilityofpaydayloanusagethroughincreasesin

interestrates.

𝑃𝑎𝑦𝑑𝑎𝑦! = 1.0304 ∗ 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑅𝑎𝑡𝑒𝐶𝑎𝑝! ∗ 𝑅𝑒𝑓𝑢𝑠𝑒𝑑𝐶𝐶𝑎𝑟𝑑! − 0.0669

∗ 𝑅𝑒𝑓𝑢𝑠𝑒𝑑𝐶𝐶𝑎𝑟𝑑!

Equation4.1

Provincialdummyvariablesareincludedwithinthespecificationtoaccount

for regional differences not accounted for by other variables. This can include

legislative differences that are difficult to quantify such as borrowing totals as a

percentageofincome.However,interestraterestrictionsarethehighestcorrelating

variablefordeterminingpaydayloanusageamongprovinces.

8Informationontheseincomelimitswasnotavailableandisbaseduponinternalcreditofferingguidelinesateachpaydayloaninstitution.Theonlylimitationsthatareknownaretheloanamountasapercentageofincomerestrictionimplementedwithinvariousprovinces.Thisrestrictioncouldnotbeeffectivelyappliedtothespecificationtodrawanymeaningfulconclusionabouttheseborrowers.9Equation4.1comesfromtheresultsofthefirstspecification.

39

Table2:CharacteristicsofaPaydayLoanBorrower(1stSpecification)

DependantVariable: BinaryUsageofPaydayLoansin

Past3YearsObservations:12,003

(1)

AgeofMajorIncomeEarner -0.001

(0.0002)

NumberofCreditCards -0.005

(0.002)

EducationLevel -0.005

(0.001)

PaysCreditCardBalanceEachMonth -0.027

(0.004)

HasBeenRefusedaCreditCard -0.067

(0.017)

HasanRRSP -0.0174

(0.004)

MaintainsaRegularMonthlyBudget 0.001

(0.003)

TotalNon-MortgageDebt -8.83E-08

(1.37E-08)

TotalNon-MortgageDebtSquared 4.11E-14

(8.45E-15)

MainSourceofIncome:GovernmentTransfers -0.011

40

(0.005)

InterestRateCap*RefusedCreditCard 1.030

(0.155)

Alberta 0.006

(0.006)

Saskatchewan -0.024

(0.007)

Manitoba 0.001

(0.008)

Ontario -0.005

(0.005)

Quebec -0.027

(0.004)

PrinceEdwardIsland -0.022

(0.010)

NovaScotia -0.018

(0.008)

NewBrunswick -0.028

(0.007)

Newfoundland -0.025

(0.008)

White'sStandardErrorCorrectionApplied Y

Note:This table reportsOLSestimation results fora linearprobabilitymodel regressionofvariouscharacteristicsthatmayeffectaborrowersdecisiontouseapaydayloan.Interestratecapsareusedasanexogenousvariable.Inclusionofcertainvariablesthatarestatisticallyinsignificantisbasedoneconomicvalueassociatedwiththevariable.StandardErrorsareinparentheses.

41

Table 3 outlines the results each independent variable and their impact on

thedependentvariable.

Table3:VariableExplanation(1stSpecification)

AgeofMajorIncomeEarner

Theageofthemajorincomeearnerwasstatisticallysignificant

atthe5%levelofsignificance.Itshowsanegativecorrelation

betweenageandtheprobabilityofpaydayloanusage.Thisis

tobeexpectedasolderindividualslikelyhavesomeformof

accumulationofwealthandtherelianceonpaydaylendingis

less.

NumberofCreditCards

Thenumberofcreditcardsthatanindividualhasisnegatively

correlatedwithpaydayloanusageandisstatisticallysignificant

atthe5%levelofsignificance.Thisvariableishighlycorrelated

withincomeasindividualswithmoreincome,traditionallyhave

morealternativesofcreditavailabletothem.Withmore

alternativesofcreditavailable,therelianceonthepaydayloans

marketreasonablywouldshrink,whichisrepresentedinthe

results.

42

EducationLevel

Educationleveloftherespondentwasfoundtobenegatively

correlatedandstatisticallysignificantatthe5%levelof

significance.Thisvariableiseconomicallyimportantaswecan

assumethatindividualswithhigherlevelsofeducationwould

alsoshowhigherlevelsoffinancialliteracyonaverage.This

wouldindicatethathighereducatedindividualswouldnot

enterthepaydayloansmarketduetotheextremelyhighfees

attachedtotheloans.

PaysCreditCardBalanceEach

Month

Payingcreditcardbalancesoffeachmonthwasnegatively

correlatedandstatisticallysignificantatthe5%levelof

significance.Thisvariableishighlycorrelatedwithincomeas

individualswithhigherlevelsofincomecanaffordtopayoff

thebalanceeachmonth.Thisvariableisstillimportant

economicallyasitcanindicateadesireofborrowerstonot

holdontodebtforlongerthantheyneedto.

HasBeenRefusedaCredit

Card

Havingbeenrefusedacreditcardiscorrelatedwiththe

probabilityofusingapaydayloanandisstatisticallysignificant

atthe5%levelofsignificance.Thisvariableshowsanegative

correlationduetotheinvolvementofaninteractiontermwith

interestrates.

43

HasanRRSP

HavinganRRSPsavingsvehicleisnegativelycorrelatedwiththe

probabilityofusingapaydayloanandisstatisticallysignificant

atthe5%levelofsignificance.Thisvariableindicatesthat

individualswhomaintainaRRSParelikelyabletoafford

personalfinancialshocksthroughtheirsavingdecisions.Aswell

itislikelythatindividualswithhigherlevelsofincomearemore

likelytohaveaRRSPsothisvariabledoeshaveacorrelationto

incomeaswell.

MaintainsaRegularMonthly

Budget

Maintainingaregularmonthlybudgetispositivelycorrelated

withpaydayloanusagebutisstatisticallyinsignificantatall

levelsofsignificance.Thisindicateseconomicallythat

individualstowhichmaintainabudgetaboveacertainincome

thresholdarenotlikelytouseapaydayloanastheyalsolikely

havealternativeformsofcredit.Aswellindividualsbelowa

certainthresholdthatmaintainamonthlybudgetsimply

cannotaffordtocoverpersonalfinancialshocksastheylikely

donothavealternativeformsofcreditandthusareforcedinto

thepaydayloansmarketthroughdesperation.

44

TotalNon-MortgageDebt

Totalnon-mortgagedebtisnegativelycorrelatedand

statisticallysignificantatthe5%levelofsignificance.However,

theimpactisincrediblysmall,indicatingthatlargeswingsin

consumerdebtwouldberequiredtoittoaffectaborrowers

decisiontouseapaydayloanservice.Thedebtvariableisalso

highlycorrelatedwithincomeandthereforetakesaquadratic

distributionshape.

TotalNon-MortgageDebt

Squared

Thequadraticfunctionoftotalnon-mortgagedebtispositively

correlatedandstatisticallysignificantatthe5%levelof

significance.Thisvariableisinlinewitheconomicexpectations,

asindividualswithaccesstoalternativeformsofcreditwilluse

thoseuntiltheyhavebeenmaxedout.Oncetheyhavebeen

maxedoutweseetheprobabilityofusingapaydayloan

increase.However,thisisonlyrepresentativeofindividuals

withincertainincomegroupsashigherincomegroupshavea

significantlylowerprobabilityofusingapaydayloan,whereas

incomegroupsofextremelypoorindividualscannotget

approvedforanycreditincludingpaydayloans.

45

MainSourceofIncome:

GovernmentTransfers

Anindividualwhosemainsourceofincomeisthrough

Governmenttransfersisnegativelycorrelatedandstatistically

significantatthe5%levelofsignificance.Thisisanindication

thatindividualswhosemainsourceofincomeisthrough

governmenttransfersdonotmeettheincomerequirementsto

qualifyforpaydayloansonaverage.

InterestRateCap*Refused

CreditCard

Theinteractiontermofinterestratecapandrefusedcredit

cardispositivelycorrelatedwithpaydayloanusageandis

statisticallysignificantatthe5%levelofsignificance.Thisis

likelyanindicationthatastheinterestratesincrease,the

supplyofcreditavailablealsoincreasesasthepaydaylending

institutionsaremorelikelytolendtoindividualswithhigher

creditriskprofiles.

Alberta

Albertaispositivelycorrelatedwithpaydayloanusagebutis

statisticallyinsignificantatalllevelsofsignificance.This

indicatesthatprovincialdifferencesbetweenBritishColumbia

andAlbertaarenotsignificantforpaydayloanusage.

Saskatchewan

Saskatchewanisnegativelycorrelatedwithpaydayloanusage

andisstatisticallysignificantatthe5%levelofsignificance.This

indicatesthatresidentsofSaskatchewanarelesslikelytousea

paydayloanthanaresidentofBritishColumbia.

46

Manitoba

Manitobaispositivelycorrelatedwithpaydayloanusagebutis

statisticallyinsignificantatalllevelsofsignificance.This

indicatesthatprovincialdifferencesbetweenBritishColumbia

andManitobaarenotsignificantforpaydayloanusage.

Ontario

Ontarioisnegativelycorrelatedwithpaydayloanusagebutis

statisticallyinsignificantatalllevelsofsignificance.This

indicatesthatprovincialdifferencesbetweenBritishColumbia

andOntarioarenotsignificantforpaydayloanusage.

Quebec

Quebecisnegativelycorrelatedwithpaydayloanusageandis

statisticallysignificantatthe5%levelofsignificance.This

indicatesthatresidentsofQuebecaresignificantlylesslikelyto

useapaydayloanthanBritishColumbia.

NewBrunswick

NewBrunswickisnegativelycorrelatedwithpaydayloanusage

andisstatisticallysignificantatthe5%levelofsignificance.This

indicatesthatresidentsofNewBrunswickarelesslikelytouse

apaydayloanservicethanresidentsofBritishColumbia.

NovaScotia

NovaScotiaisnegativelycorrelatedwithpaydayloanusageand

isstatisticallysignificantatthe5%levelofsignificance.This

indicatesthatresidentsofNovaScotiaarelesslikelytousea

paydayloanservicethanresidentsofBritishColumbia.

47

PrinceEdwardIsland

PrinceEdwardIslandisnegativelycorrelatedwithpaydayloan

usageandisstatisticallysignificantatthe5%levelof

significance.ThisindicatesthatresidentsofPrinceEdward

Islandarelesslikelytouseapaydayloanservicethanresidents

ofBritishColumbia.

Newfoundland

Newfoundlandisnegativelycorrelatedwithpaydayloanusage

andisstatisticallysignificantatthe5%levelofsignificance.This

indicatesthatresidentsofNewfoundlandarelesslikelytouse

paydayloansthanresidentsofBritishColumbia.

48

49

4.5VariableSelectionoftheSecondSpecification

Inmysecondspecification,IusetheCanadianFinancialCapabilitysurveyin

an attempt to analyze the probability of declaring bankruptcy for payday loan

borrowers. The dependent variable of this regression was a binary variable that

takesthevalueof1iftherespondenthaseverdeclaredbankruptcyotherwise0.

Iusedindependentexplanatoryvariablesthatfellintothreecategories.First,

I selected variables of personal attributes such as age brackets and education

dummy variables. These variables were important in isolating the impact caused

through financial literacy and changes in spending and savings habits through

differentagecategories.Second,Iselectedvariablesoffinancialchallenges,suchas

whether the respondent had difficulty maintaining a monthly budget, or if the

respondent had one or more bills to which they had a late fee, and whether the

respondenthadaccesstoacreditcard.Thesevariableswereimportantinisolating

other causes of potential bankruptcy available within the specification. Finally, I

selectedvariablesthatpertainedtopaydayloanusagesuchasiftherespondenthad

usedapayday loanonce inthepast threeyearsor if theyhadengagedinmultiple

payday loans. Additionally, I added population weighted interest rate caps as an

exogenousvariable indicatingpoliticaldiscontinuitiesbetweenprovinces.Meaning

thatinterestratescanactasanimposedpricerestrictionthatcandetermineifusage

ofpayday loanatdifferentratesof interest impacts theprobabilityofahousehold

declaring bankruptcy. The interest rate caps are weighted due to the data set

includingregionspecificdataandnotprovincial,thisweakenstherobustnessofthe

50

specificationbutnot enough toprevent itsusage.Eachvariable is explained in its

inclusionwithinthespecificationwithinTable4.

Table4:IndependentVariableSelectionReasoning(2ndSpecification)

AnnualincomeIsbetween32kand

55k(INC32to55)

Annualincomebracketswereincludedinthe

specificationasacontrolforimpactsondifferent

incomelevels.Individualsineachbracketmayface

completelydifferentfinancialshocksthatwoulddrive

themtodeclarebankruptcy.Eachvariableisadummy

variablethattakesthevalueof1whenapplicable

otherwise0.Thebasegroupisincomebelow$32,000

annually.

AnnualIncomeisbetween56kand

80k(INC56to80)

AnnualIncomeisbetween80kand

119k(INC81to119)

AnnualIncomeisabove120k

(INC120up)

Agebetween25and34

(AGE25to34)

Agebracketswereincludedinthespecificationasa

controlforindividualsfacingdifferencefinancialissues

atdifferentpointsinthelifecycle.Eachbracketisa

dummyvariablethattakesthevalueof1when

applicableotherwise0.Thebasegroupisindividuals

betweentheageof18and24.

Agebetween35and44

(AGE35to44)

Agebetween45and54

(AGE45to54)

Agebetween55and59

(AGE55to59)

Agebetween60and64

(AGE60to64)

Agebetween65and69

(AGE65to69)

Ageabove70(AGE70up)

51

HasCollegeDiploma(COLLEGE)

Educationlevelbracketswereincludedtohelpestablish

thepersonalcharacteristicsofindividualsbutalsoactas

aproxyforfinancialliteracy.Individualswhoaremore

educatedtendtohavebetterfinancialliteracyon

average.Eachvariableisadummyvariablethattakes

thevalueof1whenapplicableotherwise0.Thebase

groupisindividualswithlessthanacollegediploma

(Includingsomecollege,completionofhighschooland

somehighschool)Basegroupvariableswerealso

testedindividuallybutwerefoundtobetoohighly

correlatedwitheachother,hencewhytheywere

includedintoonegroup.

HasUniversityDegree(UNIDeg)

HasGraduateDegree(Grad)

HasaCreditCard(CCard)

HasaCreditCardwasincludedintothespecificationto

indicatealternativeformsofcreditaccessforthe

borrowerItisadummyvariablethattakesthevalueof

1ifapplicableotherwise0.

HasStruggledToMaintainaBudget

(BUDSTRG)

HasStruggledToMaintainaBudgetwasincludedto

controlforindividualswhomayhavestructuralfinancial

issuesormyopictimepreferences.Itisadummy

variablethattakesthevalueof1ifapplicableotherwise

0.

52

HasaLateFeeonOneBill

(LateFee1)

HasaLateFeeonOneBillwasincludedtocontrolfor

individualswhomayhavefinancialbudgetingissues

anddifficultiespayingallbills.Itisadummyvariable

thattakesthevalue1ifapplicableotherwise0.

HasaLateFeeonMorethanOne

Bill(LateFee2)

HasaLateFeeonMorethanOneBillwasincludedto

controlforindividualswhomayhaveseriousissueswith

payingallbillsandcanaccountforpossiblemyopictime

preferences.Itisadummyvariablethattakesthevalue

1ifapplicableotherwise0.

TotalDebtLessthan50k

(DEBTLESS50) Totaldebtbracketswereincludedasanindicatorof

limitedalternativeformsofcredittopaydayloans.As

debtamountsincreaseitwouldbeexpectedthat

borrowersmaystrugglewiththeincreaseddebtservice

burdensandturntoalternativeformsofcreditandbe

morelikelytodeclarebankruptcy.Eachvariableis

binaryandtakesthevalue1ifapplicableotherwise0.

TotalDebtbetween50kand99k

(DEBT50to99)

TotalDebtbetween100kand149k

(DEBT100to149)

TotalDebtbetween150kand199k

(DEBT150to199)

TotalDebtbetween200kand249k

(DEBT200to249)

TotalDebtabove250k(DEBT250up)

HasusedaPaydayLoanserviceonce

inthepast12months(Payday1)

HasusedaPaydayLoanserviceonceinthepast12

monthswasincludedtoindicatethecorrelation

betweenpaydayloansandbankruptcyprobabilities.It

isadummyvariablethattakesthevalueof1if

applicableotherwise0.

53

HasUsedaPaydayLoanService

morethanonceinthePast12

months(ReppDay)

HasUsedaPaydayLoanServicemorethanonceinthe

Past12monthswasincludedasanindicatorofthe

possiblecorrelationbetweencontinuousborrowingand

theprobabilityofbankruptcy.Itisadummyvariable

thattakesthevalueof1ifapplicableotherwise0.

Log(PopulationWeightedInterest

RateCaps)(Log(WLEGCAP))

LogofPopulationWeightedInterestRateCapswas

includedasapricevariableofpaydayloans.Alog

functionwasusedtocapturethenon-linear

relationshipbetweeninterestratesandpaydayloan

usage,asborrowersatthemarginsarelesslikelytouse

apaydayloanatahigherprice.Itispopulation

weighted,asthedatasamplewasnotsortedby

province,ratherbyregion.Itisacontinuousvariable.

54

55

4.6RegressionAnalysisoftheSecondSpecification

𝐵𝑎𝑛𝑘𝑟𝑢𝑝𝑡𝑐𝑦! = 𝛽! + 𝛽!𝐼𝑁𝐶32𝑇𝑂55! + 𝛽!𝐼𝑁𝐶56𝑇𝑂80! + 𝛽!𝐼𝑁𝐶81𝑇𝑂119!

+ 𝛽!𝐼𝑁𝐶120𝑈𝑃! + 𝛽!𝐴𝐺𝐸25𝑡𝑜34! + 𝛽!𝑈𝐴𝐺𝐸35𝑡𝑜44! + 𝛽!𝐴𝐺𝐸45𝑡𝑜54!

+ 𝛽!𝐴𝐺𝐸55𝑡𝑜59! + 𝛽!𝐴𝐺𝐸60𝑡𝑜64! + 𝛽!𝐴𝐺𝐸65𝑡𝑜69! + 𝛽!"𝐴𝐺𝐸70𝑈𝑃!

+ 𝛽!!𝐶𝑜𝑙𝑙𝑒𝑔𝑒! + 𝛽!"𝑈𝑛𝑖𝑣𝑒𝑟𝑠𝑖𝑡𝑦! + 𝛽!"𝐺𝑟𝑎𝑑𝑢𝑎𝑡𝑒𝐷𝑒𝑔! + 𝛽!"𝐶𝐶𝑎𝑟𝑑!

+ 𝛽!"𝐵𝑢𝑑𝑠𝑡𝑟𝑔! + 𝛽!"𝐿𝑎𝑡𝑒𝑓𝑒𝑒1! + 𝛽!"𝐿𝑎𝑡𝑒𝑓𝑒𝑒2! + 𝛽!"𝐷𝑒𝑏𝑡𝑙𝑒𝑠𝑠50!

+ 𝛽!"𝐷𝑒𝑏𝑡50𝑡𝑜99! + 𝛽!"𝐷𝑒𝑏𝑡100𝑡𝑜149! + 𝛽!"𝐷𝑒𝑏𝑡150𝑡𝑜199!

+ 𝛽!!𝐷𝑒𝑏𝑡200𝑡𝑜249! + 𝛽!"𝐷𝑒𝑏𝑡250𝑢𝑝! + 𝛽!"𝑃𝑎𝑦𝑑𝑎𝑦1!

+ 𝛽!"𝑅𝑒𝑝𝑝𝑑𝑎𝑦! + 𝛽!"𝐿𝑜𝑔 𝑊𝐿𝑒𝑔𝐶𝑎𝑝! + 𝜀!

Iutilizeda linearprobabilitymodel for this regression.10The resultsof this

specificationarepresentedinTable5.Theyindicatethatholdingallothervariables

constant, the probability of declaring bankruptcy dramatically increases once a

borrowerusesapayday loan. I speculate that thereare twopartialeffectsatplay,

which can be explained by the results of the specification. First, borrowers at the

margin are deterred from entering the payday loans market when interest rates

increase, as it is more costly to obtain a payday loan with higher interest rates.

Secondly,thesupplyofloansislikelytoincreaseduetotheallowanceofhigherrisk

individuals into the payday loansmarket. This increase of higher risk individuals

likelyinflatestheprobabilityofdeclaringbankruptcyforpaydayloanusers,asthese

10IusedWhite’scorrectionofstandarderrorstocorrectforheteroscedasticityautomaticallypresentwithintheregression.Iexpectedheteroscedasticitytobepresentas𝑉𝑎𝑟 𝑈! 𝐼𝑛𝑐𝑜𝑚𝑒! ≠ 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡.

56

borrowersaremoredesperate.Iattemptedtointeractthesetermstoconfirmthese

speculations, the results were statistically insignificant but the relationship was

positively correlated with bankruptcy rates. Additionally, a lack of other

independent variables availablewithin the surveyprevented the ability to control

for all possible financial characteristics that might strengthen the relationship

betweeninterestratecapsinteractedwithpaydayloanusageandtheprobabilityof

bankruptcy.InsteadIrelyontheresultsofthefirstspecificationtocommentonthe

relationshipsbetweenpayday loanusageandbankruptcyprobabilitiesoutlined in

thesecondspecification.

Table5:EffectofWeightedInterestRateCapsonHouseholdBankruptcyRates(2ndSpecification)

DependantVariable:BinaryHouseholdDeclaringBankruptcy

Observations:22,204

(1)

AnnualincomeIsbetween32kand55k 0.0105

(0.0059)

AnnualIncomeisbetween55kand80k 0.008

(0.006)

AnnualIncomeisbetween80kand119k -0.0197

(0.0059)

AnnualIncomeisabove120k -0.0147

(0.0061)

Agebetween25and34 0.030

(0.0071)

Agebetween35and44 0.0539

(0.0070)

57

Agebetween45and54 0.0715

(0.007)

Agebetween55and59 0.069

(0.008)

Agebetween60and64 0.0523

(0.0078)

Agebetween65and69 0.042

(0.0078)

Ageabove70 0.0167

(0.0062)

HasCollegeDiploma 0.0158

(0.0055)

HasUniversityDegree -0.0007

(0.0004)

HasGraduateDegree -0.0258

(0.004)

HasaCreditCard -0.0794

(0.007)

HasStruggledToMaintainaBudget 0.0524

(0.0047)

HasaLateFeeonOneBill 0.0607

(0.009)

HasaLateFeeonMorethanOneBill 0.1077

(0.0214)

TotalDebtLessthan50k 0.0368

(0.0048)

TotalDebtbetween50kand99k 0.0356

(0.0079)

TotalDebtbetween100kand149k 0.037

(0.0087)

TotalDebtbetween150kand199k 0.0272

(0.009)

58

TotalDebtbetween200kand249k 0.024

(0.0098)

TotalDebtabove250k 0.028

(0.008)

HasusedaPaydayLoanserviceonceinthepast12months 0.2105

(0.0407)

HasUsedaPaydayLoanServicemorethanonceinthePast

12months 0.0985

(0.0217)

Log(PopulationWeightedInterestRateCaps) -0.0053

(0.0017)

White'sStandardErrorsCorrectionApplied Y

Note:This table reportsOLSestimation results fora linearprobabilitymodel regressionofvariouscharacteristics that may affect the probability of an individual declaring bankruptcy. Populationweightedinterestratecapsareusedasanexogenousvariable.Inclusionofcertainvariablesthatarestatisticallyinsignificantisbasedoneconomicvalueassociatedwiththevariable.StandardErrorsareinparentheses.

Therelationshipofeachindependentvariabletothedependentvariablewas

in line with previous economic expectations, such as increasing education was

negatively correlated with bankruptcy rates. Financial challenge independent

variableswerealsoinlinewitheconomicexpectations,ashavingaccesstoacredit

cardwas negatively correlatedwith bankruptcy rates aswell as variables dealing

with financial struggleswere positively correlated. Repeat payday borrowingwas

also positively correlated with bankruptcy rates indicating that individuals who

enterintocyclesofdebtcanfinditdifficulttoexit.Theimpactofrepeatborrowing

wassmallerthanborrowingonlyonce.Thislikelyindicatesthatindividualswhoare

unabletopaybacktheinitialpaydayloanareforcedoutofthepaydayloanmarket

towhichtheyaremorelikelytodeclarebankruptcy.Thefeesattachedtotherepeat

59

paydayloansaresignificantlyhigherbutthedifferencebetweenthesevariablesmay

indicate borrowers who are not at the extreme level of credit risk who pay the

higher fees. Each independent variables impact on the dependent variable is

explainedinfurtherdetailwithinTable6.

Table6:VariableResultsExplanation(2ndSpecification)

AnnualincomeIsbetween32k

and55k(INC32to55)

Incomebetween$32,000and$55,000ispositively

correlatedwiththeprobabilityofdeclaringbankruptcybutis

onlystatisticallysignificantatthe10%levelofsignificance.

Thiscanpossiblybecausedbyalackofcreditalternativesfor

individualswithinthisincomebracket.

AnnualIncomeisbetween56k

and80k(INC56to80)

Incomebetween$56,000and$80,000ispositively

correlatedwiththeprobabilityofdeclaringbankruptcybutis

statisticallyinsignificantatalllevelsofsignificance.

AnnualIncomeisbetween80k

and119k(INC81to119)

Incomebetween$80,000and$119,000isnegatively

correlatedwiththeprobabilityofdeclaringbankruptcyandis

statisticallysignificantatthe5%levelofsignificance.This

suggeststhatcontrollingforotherfactorssuchaseducation,

onceanindividual'sincomereachesacertainpointtheyare

lesslikelytodeclarebankruptcyastheylikelyhaveenough

incometolivewithintheirmeans.

AnnualIncomeisabove120k Incomeabove$120,000isnegativelycorrelatedwiththe

60

(INC120up) probabilityofdeclaringbankruptcyatthe5%levelof

significance.

Agebetween25and34

(AGE25to34)

Allagebracketsarepositivelycorrelatedwithbankruptcy

ratesatthe5%levelofsignificance.However,thehighest

positivecorrelationoccurswithintheagebracketof45to54.

Thislikelyindicatesaquadraticrelationshipbetweenageand

bankruptcyrates.

Agebetween35and44

(AGE35to44)

Agebetween45and54

(AGE45to54)

Agebetween55and59

(AGE55to59)

Agebetween60and64

(AGE60to64)

Agebetween65and69

(AGE65to69)

Ageabove70(AGE70up)

HasCollegeDiploma(COLLEGE)

Havingacollegediplomaispositivelycorrelatedwith

declaringbankruptcyatthe5%levelofsignificance.This

indicatesthatindividualswithonlyacollegeeducationlikely

stilllackenoughproperfinancialliteracytomanagetheir

financesappropriately.Additionallythiscanmeanthatitmay

bemoredifficultfortheseindividualstoobtainhigherlevels

ofemployment,whichwouldprovidehigherlevelsof

income.

61

HasUniversityDegree(UNIDeg)

Havingauniversitydegreeisnegativelycorrelatedwith

declaringbankruptcybutisstatisticallyinsignificantatall

levelsofsignificance.Thisindicatesthatindividualswitha

universitylikelycentreatthemarginfortheprobabilityof

declaringbankruptcy.

HasGraduateDegree(Grad)

Havingagraduatedegreeisnegativelycorrelatedwith

declaringbankruptcyandisstatisticallysignificantatthe5%

levelofsignificance.

HasaCreditCard(CCard)

Havingacreditcardisnegativelycorrelatedwithdeclaring

bankruptcyandisstatisticallysignificantatthe5%levelof

significance.Thisindicatesthatindividualswhohaveaccess

toanotherformofcreditfrompaydayloansdonothaveto

enterthismarket.

HasStruggledToMaintaina

Budget(BUDSTRG)

Strugglingtomaintainabudgetispositivelycorrelatedwith

declaringbankruptcyandisstatisticallysignificantatthe5%

levelofsignificance.Thisindicatesthatindividualswhomay

sufferfromforecastingproblemsandmyopictime

preferencesaremorelikelytodeclarebankruptcy.

62

HasaLateFeeonOneBill

(LateFee1)

Havingalatefeeononebillispositivelycorrelatedwith

declaringbankruptcyandisstatisticallysignificantatthe5%

levelofsignificance.Thisindicatesthatindividualswhoallow

onebilltobecomepastduearemorelikelytodeclare

bankruptcy.

HasaLateFeeonMorethan

OneBill(LateFee2)

Havingalatefeeonmorethanonebillispositively

correlatedwithdeclaringbankruptcyandisstatistically

significantatthe5%levelofsignificance.Thisindicatesthat

individualswhoallowmultiplebillstobecomepastdueare

morelikelytodeclarebankruptcy.

TotalDebtLessthan50k

(DEBTLESS50)

Alltotaldebtbracketsarepositivelycorrelatedwith

declaringbankruptcyandarestatisticallysignificantatthe

5%levelofsignificance.Thevariablewiththehighest

correlationtotheprobabilityofdeclaringbankruptcywas

totaldebtbetween$100,000and$149,000.

TotalDebtbetween50kand99k

(DEBT50to99)

TotalDebtbetween100kand

149k(DEBT100to149)

TotalDebtbetween150kand

199k(DEBT150to199)

TotalDebtbetween200kand

249k(DEBT200to249)

TotalDebtabove250k

(DEBT250up)

63

HasusedaPaydayLoanservice

onceinthepast12months

(Payday1)

Havingusedapaydayloanserviceispositivelycorrelated

withtheprobabilityofdeclaringbankruptcyatthe5%level

ofsignificance.Thisindicatesthatindividualswhoparticipate

withinthepaydayloansmarketaremorelikelytodeclare

bankruptcy.

HasUsedaPaydayLoanService

morethanonceinthePast12

months(ReppDay)

Havingusedapaydayloanservicemultipletimesispositively

correlatedwiththeprobabilityofdeclaringbankruptcyatthe

5%levelofsignificance.

Log(PopulationWeighted

InterestRateCaps)

(Log(WLEGCAP))

Populationweightedinterestratecapsarenegatively

correlatedwiththeprobabilityofdeclaringbankruptcyatthe

5%levelofsignificance.Thisindicatesthatindividualsatthe

marginarelesslikelytoenterthepaydayloansmarketwhen

pricesincrease.However,desperateborrowerswillstill

sufferthehigherprobabilityofbankruptcy,astheyhaveno

alternatives.

64

65

4.7CombinedSpecificationAnalysis

From the combination of the two specifications, I find no evidence that

increasedaccess topayday loans isbeneficial forborrowers.My first specification

indicates that as interest rates increase the supply of payday loans increases to

include higher risk borrowers. Combined with the conclusions from the second

specification that usage of payday loans increases the probability of declaring

bankruptcy it ishard todistinctivelyestablishanypositivebenefit.However, from

thedatathatisavailable,lackofaccesstocreditisalsounabletobedeterminedto

be a better option for these borrowers. Many borrowers would rather pay

significantlyhigherfeesandruntheriskofdeclaringbankruptcythanexperiencea

numberofnegativeeffectsfromlackofaccesstocredit.Theprobabilityofdeclaring

bankruptcy from increased access to credit is positively correlated but rational

borrowers may still prefer the added risk of bankruptcy to the negative welfare

effectofhavingavehiclerepossessedorfaceeviction.

66

67

5.Conclusion

Utilizing political differences in payday loan regulation and legislation I

investigate whether low or moderate-income individuals benefit from increased

access to credit. The market for payday loans within Canada is one that is of

particular interest,because formanyof theseborrowers this is theonly sourceof

credit available. Changes in legislative policy have a direct effect on a borrower’s

access to credit, which can translate into positive or negative economic effects. It

showsanegativeeconomiceffectthroughthehighcostsassociatedwiththeseloans

andthetendenciesfortheseborrowerstoengageinhabitualborrowing.Itshowsa

positiveeconomiceffectthroughincreasedaccesstocredit,whichcanprovidesome

borrowerscreditthattheypreviouslydidnothaveaccessto.

Measuringtheoverallwelfarecontributionofpaydayloanaccessisdifficult;

instead I investigate a specific measure of welfare: the probability of declaring

bankruptcy. This is partly due to a lack of data available tomeasure payday loan

effects in Canada. I combine the results of this investigationwith an investigation

intothecharacteristicsofpaydayloanborrowers.CombiningthetwospecificationsI

amabletocommentonchangesinsupplyofborrowersbasedonchangesinaccess

topaydayloansaswellasthepotentialwelfareeffectsthatthesechangescanhave.

From this analysis, I believe there are recommendations for policy to possibly

improveoverallwelfareofborrowers.

Twopolicyrecommendationsflowoutofmyanalysis.First,toimprove

measurementsoftheimpactsofpaydaylendingwithinCanada,eachprovince

68

shouldimplementpolicytotrackandsharepaydaylendingusagedata.Thiswould

allowprovincialgovernmentstoquantifytheeffectsofpaydaylendingoperations

betterandcreatemoreeffectivepolicy.Second,duetothehighprobabilityofpayday

loanborrowersrelyingonregularpaydayloanstomanagerequiredexpenses,

changestocontinuousborrowingpoliciesarerecommended,specificallyallowance

oflongerpaymentschedulestopayoffthepaydayloans.Iflegislationincreases

restrictionsoninterestrates,thatmaybecounter-productivebecauseitwillleadto

increasedcreditrationing,meaningmoreborrowerswillbeexcludedfromthe

market,andunabletoobtainneededfunds.Iflegislationreducesthepercentageof

take-homepaythatpaydayoperationsarepermittedtolend,thatmaynotprovide

borrowerswithsufficientfundsneededtoaddressafinancialshock.Asaresult,this

stillpushespeopleoutofthesolutionofferedbypaydayoperations.Athirdpolicy

optionistoimposeapaymentschedulethatrequirespaydayloanstoberepaid

evenlyovertwoormorepayperiods,therebymakingtheloanrepaymentmore

affordable.Thisshouldreducethenumberofrepeatloansrequiredtomeetroutine

expenses.

69

6.Appendix

ThisisthedatausagelicenseIobtainedinordertoaccessthevarioushouseholdsurveysusedformyspecifications.Allofthisdatawasusedforthepurposeofmythesisandnotforfinancialgain.

70

71

72

73

7.References

1. Agarwal,Sumit,PaigeM.Skiba,andJeremyTobacman.Paydayloansandcredit

cards:Newliquidityandcreditscoringpuzzles?.No.w14659.NationalBureauof

EconomicResearch,2009.

2. Antle,Stephen."APracticalGuidetoSection347oftheCriminalCode-Criminal

RatesofInterest."Can.Bus.LJ23(1994):323.

3. Ausubel,LawrenceM."Thefailureofcompetitioninthecreditcardmarket."The

AmericanEconomicReview(1991):50-81.

4. Benmelech,Efraim,andTobiasJ.Moskowitz."Thepoliticaleconomyoffinancial

regulation:evidencefromUSstateusurylawsinthe19thcentury."TheJournal

ofFinance65,no.3(2010):1029-1073.

5. Bird,EdwardJ.,PaulA.Hagstrom,andRobertWild."Creditcarddebtsofthe

poor:Highandrising."JournalofPolicyAnalysisandManagement(1999):125-

133.

6. Birkhead,JoeB."CollectionTacticsofIllegalLenders."LawandContemporary

Problems8,no.1(1941):78-87.

7. Bond,Philip,DavidK.Musto,andBilgeYilmaz."Predatorymortgagelending."

JournalofFinancialEconomics94,no.3(2009):412-427.

8. Campbell,JohnY."Householdfinance."TheJournalofFinance61,no.4(2006):

1553-1604.

74

9. Campbell,JohnY.,andJohnH.Cochrane."TheFragileBenefitsofEndowment

Destruction."JournalofPoliticalEconomy123,no.5(2015):1214-1226.

10. Canada.Parliament.HouseofCommons.“AnActtoAmendtheCriminalCode:

CriminalInterestRate)”BillC-26.PreparedbyKitching,Andrew,SheenaStarky

andPhilippeBergevin.November22,2006.

11. Canada’sSystemofJustice:ATypologyofProfitDrivenCrimes,Departmentof

Justice.http://www.justice.gc.ca/eng/rp-pr/csj-sjc/crime/rr02_3/p34.html.

Updated2015.AccessedDec,2016.

12. Carrell,Scott,andJonathanZinman."Inharm'sway?Paydayloanaccessand

militarypersonnelperformance."ReviewofFinancialStudies27,no.9(2014):

2805-2840.

13. Davis,Andrew,andJiseobKim."ExplainingchangesintheUScreditcard

market:Lendersareusingmoreinformation."EconomicModelling61(2017):

76-92.

14. Fantauzzi,Joe.“PredatoryLending:ASurveyofHighInterestAlternative

FinancialServiceUsers,”CanadianCentreforPolicyAlternatives2016:1-24.

15. Jones,Damon,andAprajitMahajan.“Time-InconsistencyandSaving:

ExperimentalEvidencefromLow-IncomeTaxFilers.”No.w21272.National

BureauofEconomicResearch,2015.

16. Karlan,Dean,andJonathanZinman."Expandingcreditaccess:Usingrandomized

supplydecisionstoestimatetheimpacts."ReviewofFinancialstudies(2009):

hhp092.

75

17. Kurban,Haydar,AdjiFatouDiagne,andCharlotteOtabor.“TheEconomicImpact

ofPaydayLendinginEconomicallyVulnerableCommunities.”(2014).

18. Mayer,Robert."Loansharks,interest-ratecaps,andderegulation."Wash.&Lee

L.Rev.69(2012):807.

19. Melzer,BrianT."Therealcostsofcreditaccess:Evidencefromthepayday

lendingmarket."TheQuarterlyJournalofEconomics126,no.1(2011):517-555.

20. Morgan,DonaldP.,andMichaelR.Strain."Paydayholiday:Howhouseholdsfare

afterpaydaycreditbans."(2008).

21. Morse,Adair."Paydaylenders:Heroesorvillains?."JournalofFinancial

Economics102,no.1(2011):28-44.

22. ProvinceofAlberta.FairTradingAct:PaydayLoansRegulation.Alberta

Regulation157/2009.Edmonton:Queen’sPrinterofAlberta2009.

23. ProvinceofAlberta.Bill15:AnActtoEndPredatoryLending.2016

24. ProvinceofBritishColumbia.BusinessPracticesandConsumerProtectionAct:

PaydayloansRegulation.B.C.Reg.57/2009.Victoria:Queen’sPrinterofBritish

Columbia2009.

25. ProvinceofManitoba.TheConsumerProtectionAct:PaydayLoansRegulation.

C.C.S.M.c.C200.Reg99/2007.Queen’sPrinterofManitoba2007.

26. ProvinceofNewBrunswick.Bill4:AnActRespectingPaydayLoans.Queen’s

PrinterofNewBrunswick2008.

27. ProvinceofNovaScotia.PaydayLendersRegulationsmadeunderSection18Uof

theConsumerProtectionAct.O.I.C2009-324,N.S.Reg248/2009.Queen’sPrinter

ofNovaScotia2009.

76

28. ProvinceofOntario.PaydayLoansAct,2008,S.O.2008,c.9.Queen’sPrinterof

Ontario2008.

29. ProvinceofPrinceEdwardIsland.PaydayLoansAct,2015.LegislativeCouncil

Printer2015.

30. Stegman,MichaelA."Paydaylending."TheJournalofEconomicPerspectives21,

no.1(2007):169-190.

31. Talai,Aiden."ABehavioralEconomicAnalysisofPaydayLendingRegulationin

Canada."PhDdiss.,2014.

32. Zinman,Jonathan."Restrictingconsumercreditaccess:Householdsurvey

evidenceoneffectsaroundtheOregonratecap."Journalofbanking&finance34,

no.3(2010):546-556.

77