Talai_Aiden_201411_LLM

A Behavioral Economic Analysis of Payday Lending

Regulation in Canada

Aiden Talai, B.A. (Hons), LL.B., B.C.L.

A thesis submitted in conformity with the requirements

for the degree of Master of Law

Faculty of Law

University of Toronto

ii!

A Behavioural Economic Analysis of Payday Lending

Regulation in Canada

Aiden Talai

Master of Laws

Faculty of Law

University of Toronto

2014

Abstract

Payday lending regulation in Canada assumes that if borrowers are provided the

statistical determinants of a prospective loan, they will make efficient borrowing

decisions. This paper argues this disclosure framework is misguided. Specifically, it rests

on the notion that consumer-decision makers are inherently rational actors. However,

behavioral economics helps demonstrate that most borrowing decisions are guided by

cognitive biases that cloud people’s ability to make informed decisions. In turn, payday

borrowers routinely incur unexpected additional costs, often resulting in financial

paralysis. Moreover, payday lenders, keenly aware of consumer psychology, design and

package their loan products to exploit these biases. Accordingly, this paper suggests that

Canadian policymakers adopt a correlative strategy, namely, applying mandated

disclosure regimes that employ cognitive biases to counteract others. These measures

would make the potential consequences of payday loan related overindebtedness

more apparent to borrowers, improving the accuracy of their evaluation of the likelihood

of the occurrence.

iii!

Table of Contents

Chapter 1 Introduction ........................................................................................ 1

Chapter 2 The History of Payday Lending Regulation in Canada ................ 18

Chapter 3 Behavioral Economics, Bounded Rationality and the Consumer

............................................................................................................................ 27

Chapter 4 Behavioral Economic Analysis and Payday Lending Reform in

Canada ............................................................................................................... 36

1 Imperfect Self-Control ................................................................................. 36

2 Optimism Bias ............................................................................................. 40

3 Hyperbolic Discounting .............................................................................. 43

Chapter 5 A Behavioral Approach to Regulation ........................................... 47

Chapter 6 Conclusion ....................................................................................... 68

Chapter 1

Introduction

Carla, a twenty-something single mother of two, depends heavily on her car. She

purchased it used after having saved up for the better part of a year. The car has

substantially improved her family's mobility and, by extension, the quality of their lives.

For instance, it made it possible for Carla to transfer her children, both of whom suffer

from learning disabilities, to an alternative program at a school outside their

neighborhood's yellow bus network. It also allowed her to secure a job as a delivery

woman for a local courier company, which provides considerably better working hours

than her previous job working the graveyard shift as a cashier at a 24-hour convenience

store.

On a Friday, while driving home, following Carla's last shift of the workweek, the car

began to rattle and make uncharacteristic noises. Carla pulled into a nearby garage to

have the car inspected. The mechanic informed her that the car's fan belt was broken. He

could replace it over the weekend, at a cost of $250, thereby ensuring that Carla would

not miss her next shift and could also drive her children to school by the start of the next

school week.

Carla has approximately 48 hours to determine how she will cover the cost of the repair.

She currently has enough money jointly in her checking and savings account to cover the

balance. Covering the cost of the repair with her savings, however, will leave her with

very little money, between now and her next paycheck, to cover day-to-day expenses,

such as groceries, let alone less foreseeable expenses, such as additional car repairs. In

addition, Carla does not have access to immediate sources of low-cost consumer credit,

such as a credit card or line of credit, largely the consequence of an impaired credit

history. Walking home from the garage, Carla's attention is caught by the banners

plastering the windows of a Money Mart location on Bloor Street in Toronto's west end,

advertising low-cost, hassle-free cash advances 'as easy as 1-2-3.' She decides to solicit

further information inside the store from a company representative. The representative

explains that Money Mart will advance her $300 for 14 days in exchange for a one-time

fee of $63, in cash, in as little as an hour. Carla opts to take the loan on the simple

assumption that deferring the cost of the car repairs is worth the one-time fee.

The credit transaction Carla has entered into is commonly referred to as a payday loan.

Payday loans are small, short-term cash advances offered at very high effective interest

rates to borrowers with impaired credit histories, that is borrowers who mainstream

financial institutions typically view as a high credit risk.

Borrowers can generally apply

for these loans either in person, at a payday lender's retail location, or over the Internet,

on a lender's website.

To qualify for a typical payday loan, a borrower need only hold

an active bank account and demonstrate proof of employment income; an up-to-date bank

statement and recent pay stub usually suffice.

If a prospective borrower satisfies these

criteria, lenders will cement the contractual deal by extending a loan on one date in

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Ronald J. Mann and Jim Hawkins, "Just Until Payday" (2007) 54 UCLA L. Rev. 855 at 857; Karen E.

Francis, "Rollover, Rollover: A Behavioral Law and Economic Analysis of the Payday-Loan Industry"

(2009-2010) 88 Tex. L. Rev. 611 at 611; Brian T. Melzer, "The Real Costs of Credit Access: Evidence from

the Payday Lending Market" (2011) 126 The Quarterly Journal of Economics 1 at 517; Jesse Bellam and

Aiden Talai, "Short-Term Emergency Lending: Examining Usury and Consumer Credit Protection Law in

the United States and Canada" (2012) 2 Western Journal of Legal Studies 1 at 1.

This latter option is only available in certain Canadian provinces, namely, Alberta, British Columbia,

Nova Scotia, Ontario and Saskatchewan.

See "Payday Loans", online: Money Mart <http://www.moneymart.ca>; "Short-Term Loans", online:

Cash Store Financial <http://www.csfinancial.ca>; "Payday Loans", online: Stop n' Cash

<http://www.stopncash.com>.

consideration for a promise – usually collateralized by a postdated check – to repay the

loan amount as well as a standard fee – typically in the range of $20 to $25 per $100

borrowed – by the maturity date on the loan, generally two weeks from the date on which

the loan was first issued.

Payday loans have become something of a lightning rod for criticism. Opponents of

payday lending argue that "the terms of a typical payday loan combine to trap cash-

strapped consumers in a cycle of debt."

More specifically, critics argue that the finance

charges levied against borrowers are so excessive that they "immediately [put] an

obstacle in the way of the borrower's ability to repay the loan."

In turn, a cycle of

financial distress is virtually assured, because the core characteristics of the payday loan

product – an exorbitant effective interest rate coupled with a limited window for

repayment – requires borrowers to allocate a substantial share of their next paycheck to

repaying the loan, which "leaves most borrowers inadequate funds for their other

obligations, compelling them to take a new payday loan almost immediately."

Parrish

and King estimate that repeat borrowing accounts for nearly three quarters of the entire

volume of payday loans.

The authors' tabulation of loan-level data also demonstrates

that more than half of these “new loans are taken out at the borrower's first opportunity

upon paying a previous loan back," that is within less than one day of repayment.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Mann and Hawkins, supra note 1 at 863.

Laura Etherton, "Predatory Lending in Lane County: A Survey of Payday Lending in Eugene and

Springfield" (2006) Oregon Student Public Research Interest Group, online: OSPIRG

<http://www.ospirg.org> at 9.

Ibid.

Leslie Parrish and Uriah King, "Phantom Demand: Short-term due date generates need for repeat payday

loans, accounting for 76% of total volume" (2009) Center for Responsible Lending, online: CRL

<http://www.responsiblelending.com> at 2.

Ibid at 2-3.

Ibid at 2.

Another oft-criticized feature of payday loans is the conditions imposed on borrowers

who wish to refinance an existing payday loan. In particular, opponents argue that the

cost of refinancing drastically exacerbates the extent to which "borrowers get into cycles

of chronic borrowing at high interest rates."

Unlike conventional consumer credit,

borrowers are typically required to repay their payday loans in a single payment, rather

than through payments over time.

Lenders sometimes insert contractual clauses that

either expressly disallow installment payments or render them prohibitively expensive by

assessing borrowers additional finance charges to process them.

Accordingly, when a

payday loan reaches maturity, a borrower must either pay the entire balance owing,

namely, the principal and related interest, or extend the loan for another term and pay an

additional interest charge. These loan renewals, commonly referred to as a "rollovers,"

impose substantial costs on borrowers, because "the penalty fees and/or the charges

associated with [the] new loan increase the borrower's short-term debt load and make the

loan increasingly difficult to repay."

For instance, if a borrower rolls over a $300 loan

with a $45 fee three times before fully repaying the loan, he or she will pay four $45 fees,

or $180, and still owe the $300 principal, thereby ballooning that borrower's debt

obligation to $480 within two months of taking out the initial loan (assuming the standard

two-week maturity rate applies). Even where rollovers are statutorily prohibited, as is the

case in the Province of Ontario, legislation rarely prevents borrowers from carrying loans

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Susan Payne Carter et al., "The Difference a Day (Doesn't) Make: Does Giving Borrowers More Time to

Repay Break the Cycle of Repeated Payday Loan Borrowing?" (Paper delivered at the American Economic

Association, 5 January 2013), online: AEA <http://www.aeaweb.org>.

Etherton supra note 5 at 9.

Ibid at 10.

Andrew Kitching and Sheena Starky, "Legislative Summary (PRB 05-81E0 Payday Loan Companies in

Canada: Determining the Public Interest" Parliamentary Information and Research Service (26 January

2006), online: Parliament of Canada <http://www.publications.gc.ca>.

from other lenders or from restarting the debt cycle immediately after the existing loan

has been paid.

In these cases, the borrower will either default on the loan, thereby

allowing the lender to exercise its interest in the post-dated check collateralizing the loan,

or secure repayment by taking out a loan from a third-party payday lender. All told,

opponents of payday lending contend that heavy short-term debt loads often prompt

borrowers to rely on extensions of existing or additional payday loans to compensate for

their ballooning debt obligations. In turn, payday borrowers habitually find themselves

re-borrowing and are thereby ultimately mired in a cycle of debt, "continually paying

interest and other charges that quickly exceed the initial value of the loan in order to

avoid defaulting."

In this sense, consumer advocates suggest that payday lending is predatory by design.

Not only do high fees, short-term due dates, and single balloon payments work to ensure

repeated borrowing and a long-term cycle of debt, but also loans are often packaged in

ways that obscure their true costs.

Loan terms often include complex interest-rate

structures, transaction fees, late penalties and other factors that can make the real cost of

an underlying loan difficult for borrowers to readily decipher. Moreover, without an

accurate measure of cost it can become difficult for consumers to reliably compare

various credit options.

Accordingly, most consumer protection laws require lenders to

disclose the Annual Percentage Rate of Interest ("APR") for all types of loans.

APR

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

See e.g. Payday Loans Act, 2008, S.O. 2008, c. 9.

Ibid.

Susanna Montezemolo, "Payday Abuses and Predatory Practices" (2013) Center for Responsible

Lending, online: CRL <http://www.responsiblelending.com> at 1-3.

Stephanie Ben-Ishai, "Regulating Payday Lenders in Canada: Drawing on American Lessons" (2008) 4

CLPE 3 at 28.

See e.g. Consumer Protection Act, 2002, S.O. 2002, c. 30, s 61.1(4); Truth in Lending Act 12 CFR s

226.26(b) (2003); Consumer Credit Cost Disclosure 15 USC s 1665a (2000).

provides a standardized computation of cost that calculates the simple interest rate on an

annual basis, taking into account most fees, in addition to the amount of time a borrower

has to repay a given loan, while also factoring in the reduction in principal as payments

are made over time. In other words, APR provides borrowers with a bottom-line figure

that allows for easy comparison-shopping across potential lenders.

Payday lenders are legally obligated to disclose the relevant APR to their borrowers. The

extent of this disclosure, however, is often limited. Payday lenders frequently obfuscate

their disclosure obligations by discreetly embedding the APR within the fine print of loan

documents, their Internet websites or storefront signage, for instance. Rather than

clearly state the APR to customers, payday lenders typically advertise the cost of loan

products as reflecting a certain amount per $100 borrowed. For instance, lenders might

quote a rate of $21 per $100. However, consumer advocates argue that this often gives

an undiscerning consumer the impression that a simple interest rate of 21 percent applies

to their loan, and thereby reflects his or her true cost of borrowing. In turn, a consumer

might view that option as less expensive than a Credit Card Cash Advance advertising an

interest rate of 22%. If both rates are clearly expressed in terms of APR, which reflects

the simple interest multiplied by the number of times the term goes into one year, then

the real cost is much easier to understand. In particular, the terms would starkly favor the

option of a cash advance at an APR of 22% as compared to the payday loan, which would

carry an APR of 546% (21% times 26 two-week terms). To put the difference in

perspective, consider Carla's experience and assume that she not only takes an initial two-

week payday loan, but also re-opens that payday loan for an additional two weeks. In

terms of dollars, in opting to take out a $300 payday loan to pay for her emergency car

repair at a rate of $21 per $100 borrowed, the real cost borne is $126, which equals 23

times more than the cash advance carried for one month, the total cost of which is $5.50.

In this sense, if payday lenders obscure the APR on their loans, borrowers lack "the

necessary information to make an informed judgment regarding whether he or she can

repay the loan or whether there is a more affordable option."

All told, consumer advocates complain that payday lending "is per se a predatory lending

practice."

Predatory lending generally refers to lending practices "that are considered to

be so detrimental to borrowers as to be considered abusive."

Put in terms of economics,

predatory lending constitutes a "welfare reducing provision of credit."

Payday lenders

make households worse off by deceiving them into borrowing more than is optimal,

which, in turn, "reduces household welfare, and may increase default risk."

particular, payday lenders "exclusively target vulnerable consumers with low incomes

and insufficient collateral to borrow from a bank."

These low-income, cash-strapped

consumers have few mainstream alternatives, such as savings or credit cards, and

consequently "feel that they have nowhere else to go."

For instance, a survey recently

conducted in the state of Wisconsin reports that the average annual income of payday

borrowers is roughly $19,000 and that upwards of 80 percent of borrowers do not own a

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Center for Responsible Lending, "APR Matters on Payday Loans: Interest rate disclosures allow apple-

to-apple comparisons, protect free market competition" (2009) CRL Issue Brief, online: CRL

<http://www.responsiblelending.org> at 2.

Michael A. Stegman, "Payday Lending" (2007) 21 The Journal of Economic Perspectives 1 at 170.

Ibid.

Donald P. Morgan, "Defining and detecting predatory lending" (2007) Staff Report, Federal Reserve

Bank of New York, No. 273, online: Econstor <http://www.econstor.eu> at 1.

Ibid at 6.

Bellam and Talai supra note 1 at 9.

Ben-Ishai supra note 17 at 5-6.

home.

Moreover, the typical borrower is often worried about how they will "get enough

cash to pay overdue telephone and electric bills" or in Carla's case, an urgent car repair.

Critics charge that payday lenders exploit this vulnerability, which is made easier by the

fact that "fringe" borrowers overwhelmingly tend to be less educated than mainstream

borrowers and in many cases are also "first-time borrowers (or are rebounding from a

failed first foray into credit)."

In fact, recently uncovered internal memoranda from a

large American payday lender described "minority [groups] with a household income of

less than $25,000, a high school or GED education or less, ages ranging from 18-59 years

and female heads of household with dependents [...] and welfare recipients" as "fertile

markets" for payday lenders.

Policymakers have therefore been deluged, in recent years, by “a flurry of critical

proposals” to remedy the alleged problems of the high-cost, short-term credit market.

At one end of the spectrum are calls for the outright ban of payday lending practices. The

prohibitory model is anchored in the view that payday-lending services are "predatory,

usurious, and unconscionable" and, on that basis, justifies denying the flow of sub-prime

credit as "in the individual's best interest."

However, few jurisdictions have endorsed

this regulatory schema. In Canada, for instance, only the provinces of Quebec and

Newfoundland and Labrador have effectively barred the practice of payday lending. This

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Pearl Chin, "Payday Loans: The Case for Federal Legislation" (2004) 3 University of Illinois Law Review

723 at 728.

Creola Johnson, "Payday Loans: Shrewd Business or Predatory Lending?" (2002) 87 Minn. L. Rev. 1 at

Morgan supra note 20 at 2.

Chin supra; Dory Rand, "Using the Community Reinvestment Act to Promote Checking Accounts for

Low-Income People" (1999) 33 Clearinghouse Review Journal of Poverty Law.

Francis supra note 1 at 613.

Charles A. Bruch, "Taking the Payday Out of Payday Loans: Putting an End to the Usurious and

Unconscionable Interest Rates Charged by Payday Lenders" (2000-2001) 69 U. Cin. L. Rev. 1257 at 1287.

seems to reflect the view that an unqualified prohibition of payday lending transactions is

an overly blunt regulatory instrument. Notwithstanding a broadly based moral

disapprobation of payday lending practices, sub-prime lenders nevertheless provide low-

income consumers, many of whom have limited access to traditional banks, with

alternative means of credit. Accordingly, Bellam and Talai note, that "shuttering the

industry without first providing a feasible alternative to payday loans is a problematic

solution, as it is likely to leave an entire class of consumers without access to credit."

Furthermore, commentators also caution that the wholesale prohibition of the market for

subprime consumer credit may unintentionally push an already "vulnerable group [of

borrowers] to turn to loan sharks and more criminal lenders."

According to this view,

therefore, any public policy effort to overcome the market failures borne out of payday

lending must nonetheless ensure that low-income and, in many instances, high-risk

borrowers have sufficient access to credit.

Along these lines, some commentators have proposed ostensibly simpler fixes to "slow

the treadmill [of debt]," including, "placing modest caps on the interest rates that payday

lenders can charge."

The push for interest rate regulation of payday lending products is

typically grounded in the view that "the payday lending and other short-term lending

industries are classic failed markets."

In a perfect market, "competitive forces will

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Bellam and Talai supra note 1 at 1.

Ben-Ishai supra note 17 at 6.

Los Angeles Times Editorial Board, "Stop Legal Loan Sharks," Los Angeles Times (14 May 2001)

online: Los Angeles Times <http://articles.latimes.com>; Marc Anthony Fusaro and Patricia J. Cirillo, "Do

Payday Loans Trap Consumers in a Cycle of Debt?" (2011) SSRN Working Paper 1960776, online: SSRN

<http://www.ssrn.com>.

Nathalie Martin, "1,000% Interest - Good While Supplies Last: A Study of Payday Loan Practices and

Solutions" (2010) 52 Arizona Law Review 3 at 607.

10!

eliminate excessive profits."

Consider two banks located at the same busy intersection.

In an effort to attract consumers, these banks both advertise their respective mortgage

rates in their storefront windows for the public to see. This ensures that neither bank "can

obtain excessive profits, since the consumers are fully informed" of the banks' prices.

Moreover, competition (or antitrust) law prohibits the banks from colluding with one

another to set high mortgage prices. Under these circumstances, to remain competitive,

the banks "must set prices as low as possible so that they do not lose business to the

neighboring [bank], but high enough so that they earn a fair profit" for providing

mortgages.

As a result, consumers who borrow from either bank obtain their mortgage

at an equilibrium rate, namely, the price where supply intersects with demand, "and

where neither [bank] is reaping an excessive profit."

In an imperfect market, however, prices do not adjust in lockstep with competition. In

the payday lending market, for instance, reformers contend that competitive market

forces have not succeeded in bringing the cost of payday loans down to equilibrium

prices. Rather, lenders tend to levy "the exact same thing for a loan, typically the largest

amount allowed by law."

This is made easier by the fact that payday customers tend

not to be financially savvy, such that they typically do not understand the cost of their

loans and, as a result, are unlikely to comparison shop. Moreover, recent studies suggest

that payday borrowers are driven primarily by convenience when choosing a lender.

Because competitive market pressures do not condition lending behaviour, payday

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Aaron Huckstep, "Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Prices" (2007)

12 Fordham Journal of Corporate & Financial Law 1 at 212.

Ibid.

Martin supra note 35 at 607.

Ibid.

11!

lenders are able to charge more than they otherwise could in a perfectly competitive

market and, by extension, are able to earn allegedly excessive profits. In charging

interest above the market rate, "large numbers of people, usually those who can least

afford it, are getting trapped in the humiliating and costly cycle of recurrent debt

associated with payday loans."

Proponents of reform contend that an absolute interest

rate cap can offset this problem. While regulatory intervention may be inappropriate

when market forces are working properly, "failed markets create a need for regulation."

According to this view, the current payday lending market warrants stricter interest rate

regulation, because it appears as though market forces have not driven down prices.

Moreover, the only factor seemingly limiting existing rates is the maximum amount

allowable under the law. Accordingly, proponents of payday lending reform argue that

policymakers should respond to this market failure by lowering existing usury rates in an

effort to drive prices down closer to equilibrium, albeit artificially.

It is important to note, however, that enacting new rate ceilings will not necessarily

achieve a better result. Market forces do not automatically condition the price levels that

regulators deem appropriate. Because legislators rarely make economic decisions with

complete information, statutory price caps can in some ways be quite arbitrary. More

importantly, in some cases, imperfect knowledge may result in a legislated rate ceiling

considerably below that which would operate in an unregulated market.

In turn, Cayne

and Trebilcock note that "ceilings set below the levels necessary to sustain the efficient

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Martin supra note 35 at 607.

Ibid.

David Cayne and Michael J. Trebilcock, "Market Considerations in the Formulation of Consumer

Protection Policy" (1973) 23 University of Toronto Law Journal 396 at 416.

12!

lender will eliminate lender credit from the market place."

For instance, Bertrand and

Morse note that the Military Lending Act that recently took effect in the United States and

imposes a federal usury cap of 36% APR for payday loans issued to military personnel

and their family, as well as a law enacted in the state of Ohio that limits APRs on payday

lending to 28%, do not provide sufficient margins for payday lenders to cover the cost of

borrower default.

As a result, the authors suggest that effectively "these legislations

eliminate payday lending" for certain demographics.

These drastic legislative measures,

however, appear to disregard conditions that are central to the relationship between

demand and supply for consumer credit. In particular, demand for subprime credit

appears significantly less elastic than its supply, "that is, the imperatives inducing a

person to borrow at high rates are more powerful than the forces which impel a person to

lend at these rates."

Accordingly Cayne and Trebilcock note "that very serious

exclusionary consequences for borrowers would result from the collective withdrawal of

lenders from a regulated market place in which they find it uneconomic to operate."

Given the inelasticity that typifies low-income consumers’ demand for credit, loan sharks

and other criminal lenders are likely to take advantage of "rate ceilings which eliminate

the efficient lender."

By way of example, the authors cite the passage of the Russell

Sage Foundation's Uniform Small Loans Law in the United States, first enacted in 1907,

which responded to concerns that existing usury rates, statutorily enforced throughout the

country, had "prevented legitimate lenders from transacting business with high-risk

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Cayne and Trebilcock supra.note 44 at 414.

Marianne Bertrand and Adair Morse, "Information Disclosure, Cognitive Biases and Payday Borrowing"

(2011) 66 Journal of Finance 6 at 1865.

Ibid.

Cayne and Trebilcock supra.

Ibid.

Ibid at 415.

13!

borrowers, with the result that these borrowers began to rely upon illegal lenders to

service their needs."

Moreover, a robust enforcement regime is required for stricter usury limits to have their

intended effect. However, efforts to actively enforce statutory interest rate restrictions

are not always successful. The Canadian experience, for instance, serves as a cautionary

tale. I will address the nuances of the regulatory schema governing the provision of

consumer credit throughout Canada, in greater detail, later in this paper. For the present

purposes, however, it is worthwhile noting that while s 347 of the Criminal Code

prohibits lending agreements that set the payment of interest at a criminal rate, defined as

anything higher than a 60 percent APR, the provision has never been used to prosecute

payday lenders who levy interest charges in excess of the prescribed rate.

Not

surprisingly therefore, payday lenders throughout Canada levy interest rate charges in

excess of the federal usury limit.

For instance, payday lending rates in Nova Scotia

routinely exceed 900% APR, while interest charges running 700% APR are equally

common in British Columbia.

This is particularly problematic because it leaves

borrowers with "the dangerous illusion that there is in fact a federal ceiling on interest

rates" when, in fact, "the reality is that the federal usury cap in s 347 of the Criminal

Code provides little in the way of consumer protection."

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Cayne and Trebilcock supra.note 44 at 415; see also Bruce G. Carruthers et al., "Bringing Honest Capital

to Poor Borrowers: The Passage of the Uniform Small Loan law, 1907-1930" (2009) Yale University

Economic Growth Center Discussion Paper No. 971, online: Yale University <http://www.econ.yale.edu>.

Criminal Code R.S.C. 1985, c C-46 s. 347(1) [Criminal Code].

Bellam and Talai supra note 1 at 1.

Ibid at 6-7.

Ibid at 14.

14!

Another commonly advocated approach to regulation of the payday lending industry

involves improving existing mandated disclosure regimes. Disclosure is the linchpin of

consumer protection regulation. Accordingly, most consumer protection regimes impose

a "uniform interest-rate disclosure obligation on payday lenders."

As noted above,

however, payday lenders frequently obscure the full extent of a borrower's interest rate

obligation by directing their attention towards the cost per $100 borrowed, rather than

more instructive characteristics, such as the annual percentage rate. Moreover, Mann and

Hawkins note that current disclosure schemes are "also problematic because consumers

often get the information too late in the process for it to be useful."

Most disclosure

regimes are limited to requiring the lender to provide the borrower with mandated

information, such as the APR, at some point before the contract is signed. As a result,

lenders often only disclose this information just before the parties culminate the lending

agreement, thereby leaving the borrower with no practical opportunity to comparison-

shop.

Furthermore, Mann and Hawkins also note that there exists a "substantial

problem of noncompliance."

Recent studies suggest that payday lenders

overwhelmingly neglect to comply with mandated interest rate disclosure requirements or

routinely disclose them inaccurately.

Until relatively recently, payday lending was a distinctly American phenomenon. The

payday loan industry, at least in its current "storefront" incarnation, began operating in

the United States in the early 1980s. The industry has since then experienced meteoric

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Mann and Hawkins supra note 1 at 903; See e.g. Manitoba Consumer Protection Act, R.S., ch. C200, s

4(3)(1987); Truth in Lending Act 15 U.S.C. ss 1601-1693 (2000); Uniform Consumer Credit Code, 2001, ss

14-15 and s 143 (Austrl.).

Mann and Hawkins supra at 904.

Ibid at 904.

Ibid.

Ibid at 904-905; Ben-Ishai supra note 17.

15!

growth ballooning from virtually no payday lending stores to more than 25,000

establishments, that is more locations than McDonalds, Wal-Mart, Starbucks and Home

Depot combined.

But payday lending is a relatively new phenomenon in Canada. It

emerged in much in the same way as it did in the United States, namely, as a fast-

growing offshoot of the check-cashing industry that developed "on a large scale when

checking accounts had proliferated into the bottom half of the income scale."

However,

the industry only claimed its foothold in Canada's fringe lending market during the past

decade. As of 2009, various payday-lending firms now comprise approximately 1,500

storefronts, spread across the country, that collectively generate estimated annual profits

in excess of $1 billion.

As a result, Canada’s regulatory experience with payday lending is a relatively fledgling

enterprise. Moreover, in recent years, it has also undergone a number of dramatic

reforms. This shift was essentially a response to popular conceptions of payday lending

practices as predatory. In other words, existing regulations did not sufficiently curtail the

market failures of payday lending and, in turn, vulnerable consumers were regularly co-

opted into improvident borrowing arrangements. The country’s new regulatory approach,

perhaps somewhat predictably, endorses many of the reforms commonly advocated by

proponents of payday lending reform. In turn, the regulatory landscape is made up of a

patchwork of outright bans and interest rate caps as well as mandated disclosure

obligations. Earlier in this introduction, I outlined some of the pitfalls various

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Paige Marta Skiba and Jeremy Tobacman, "Do Payday Loans Cause Bankruptcy?" (2009) Vanderbilt

Law and Economics Research Paper No 11-13, online: SSRN <http://ssrn.com> at 1.

Robert Mayer, "Loan Shark, Interest-Rate Caps, and Deregulation" (2012) 69 Wash. & Lee L. Rev. 807 at

836.

Olena Kobzar, “Perils of Governance through Networks: The Case of Regulating Payday Lending in

Canada” (2012) 34 Law & Policy 1 at 37; Bellam and Talai supra note 1 at 5; Kitching an Starky supra

note 13; Ben-Ishai supra note 17 at 1.

16!

commentators have associated with typical regulatory efforts to correct the market

failures of the payday-loan industry. The common theme underlying these criticisms

seems to be a sense that, on the one hand, these regulatory interventions are too intrusive;

outright bans and interest rate caps, for instance, impede the flow of institutional credit to

low-income consumers, thereby pushing them to criminal lenders. On the other hand,

disclosure regimes do too little, that is, they are a weak proxy for consumer protection;

they tend not only to be easy to avoid, but borrowers also often do not have the requisite

financial savvy to comprehend them.

The following discussion suggests that Canada’s regulatory project, much like similar

efforts elsewhere in the world, may not achieve its desired results, less as a consequence

of regulatory over or under reach and more as a result of the economic narrative that

informs it. Neoclassical economics has been the dominant policy paradigm for

developments in regulated industries for more than four decades. It is built on a strong

assumption that all economic agents are fully rational and thereby make consumer

decisions accordingly. This conceptual framework and analytical tool has, therefore,

figured prominently in the design of consumer protection regulation. However, this

approach to economic policymaking has increasingly been called into doubt by an

emerging trend in legal academia, namely, the intersection between law and behavioral

economics. Behavioral economics is rooted in the view that “real people exhibit

cognitive biases that create systematic departures from the assumption of unbounded

rationality.”

Proponents of this new analytical approach argue that policy grounded in

this worldview is “based on a richer model of individual behavior than the rational actor

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Francis supra note 1 at 614.

17!

model underlying mainstream economic analysis.”

Law and behavioral economic

scholars consequently argue that this insight “must be incorporated to generate sound

predictions and legal policy.”

Behavioral economics “has attracted widespread

attention for its possible relevance particularly to consumer protection regulation.”

Francis notes, however, very little academic attention has been paid to the “possibility of

using behavioral law and economics in analyzing the payday-loan industry.”

Even less

thought appears to have been given to the application of this new analytical paradigm to

payday lending reform in Canada. Accordingly, the following discussion evaluates

existing and proposed regulatory frameworks for Canada’s payday lending industry

through the lens of behavioral law and economics.

The balance of this paper is divided into five parts. Part two provides an overview of the

history of payday lending regulation across Canada. Part three provides a basic primer

on behavioral economic analysis of the law and juxtaposes this framework against the

neo-classical economic model. Part four sets out the pitfalls of Canada’s current

regulatory model. In particular, this section highlights its inability to sufficiently account

for the cognitive biases that condition borrowing behavior, both among low-income

demographic segments as well as across the broader population of consumers. Part five

draws on the application of behavioral law and economics to other policy domains in an

effort to present some potential solutions for improving the effectiveness of Canada’s

regulation of payday lending practices. Part six is the conclusion.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Michael A. Salinger, “A Symposium on Antitrust & Behavioral Economics: Behavioral Economics,

Consumer Protection, and Antitrust” (2010) 6 Competition Pol’y Int’l 65 at 65.

Francis supra note 1 at 614.

Salinger supra.

Francis supra.

18!

Chapter 2

The History of Payday Lending Regulation in Canada

The regulation of payday lending practices in Canada constitutes a decidedly confused

experiment in consumer protection. From a historical standpoint, payday lenders are "an

industry relatively insulated from regulation either at the federal or provincial level."

The payday lending industry stormed Canada's financial services market in the early

1990s. Between then and 2007, the chief federal legislation governing their lending

practices was s 347 of the Criminal Code. The provision treats receiving a payment of

interest in excess of 60 percent per annum as an indictable criminal offence subject to a

term of incarceration of not more than five years.

Payday loans are "almost always in

violation of the Criminal Code interest limits."

However, while a limited few lower

court decisions have struck down payday loans for contravening s 347, "rarely (if ever)

have such 'respectable' usurers been prosecuted."

In large part, this reflects the original

purpose of the provision, which in adding s. 347 to the Criminal Code in 1980, the

federal government declared was "to give police forces across Canada a prosecutorial

handle with which to fight loan sharking," rather than buttress consumer protection

policy.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Kobzar supra note 63 at 127.

Criminal Code, supra note 50.

Mary Anne Waldron, "What is to be done with Section 347?" (2003) 38 Can. Bus. L.J. 367 at 368.

Iain Ramsay, "Of Payday Loans and Usury: Further Thoughts" (20030 38 Can. Bus. L.J. 386 at 386;

Waldron supra.

Jacob Ziegel, "Does Section 347 Deserve a Second Chance? A Comment" (2003) 38 Can. Bus. L.J. 394

at 395.

19!

Payday lenders are known to charge rates that often exceed the interest reportedly

collected by illegal loan sharks.

It appears, however, that charging exorbitant interest

rates is not sufficient to trigger scrutiny under s 347. Rather, Parliamentary hearings on

Bill C-44, which culminated in the adoption of the criminal rate of interest, seem to imply

that the prosecutorial ambit underlying s 347 is limited to lenders that not only charge

excessive interest rates, but also "operat[e] surreptitiously [...] and us[e] or threaten[] to

use violent collection methods if the borrower default[s]."

That being said, the anti-

usury law contained in s. 347 does not expressly encompass this qualification. For this

reason, in Garland v. Consumers' Gas Co., the Supreme Court of Canada opined "that s.

347 is a deeply problematic law" insofar as "some of its terms are most comfortably

understood in the narrow context of street-level sharking, while others compel a much

broader application," such as to consumer and commercial transactions.

Accordingly,

in its holding, the Court effectively urged Parliament to take the required remedial action

to clarify the underlying premise for the provision.

The Supreme Court decision in Garland added to mounting public pressure to improve

the regulatory scheme governing the rapidly growing payday lending industry. In turn,

Parliament addressed the question of how to effectively regulate payday-lending practices

by passing Bill C-26, which came into force after receiving Royal Assent in the spring

2007. Rather than reframe the language of s 347 in such a way that it could readily invite

prosecutorial scrutiny of payday lenders charging in excess of the proscribed interest rate

ceiling, "Bill C-26 contemplated a quite different solution to the problem of their reputed

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Chin supra note 26 at 729; Bellam and Talai supra note 1 at 8.

Ziegel supra note 72 at 395.

[1998] 3 SCR 112 at 52.

Ibid.

20!

excessive charges."

Under the new regulatory framework, the federal government

retained a 60 percent interest rate cap as the country's designated usury limit. The new

scheme did, however, change the regulatory landscape in a number of important respects.

Firstly, the Bill statutorily defined payday loans as "an advancement of money in

exchange for a post-dated cheque, a preauthorized debit or a future payment of a similar

nature but not for any guarantee, suretyship, overdraft protection or security and not

through a margin loan, pawnbroking, a line of credit of a credit card."

Secondly, the

new legislative framework allowed "for provincial regulation of the area, if the province

exercises its option to regulate under the new s. 347.1(3)."

More specifically, under s.

347.1(3), provinces can opt into a federally-defined regulatory scheme, which gives

consenting provinces the authority to act as industry regulators provided they implement

"a licensing or other type of authorization system for lenders, the establishment of limits

on the total cost of borrowing, and a framework of protections for consumers."

The

basic components generally include: (a) interest rate caps; (b) cancellation protection; (c)

mandated disclosure; (d) rollover prohibitions; (e) licensing; and, (f) consumer

remedies.

Where provinces are designated as having satisfactorily assumed this

regulatory burden, Bill C-46 specifically exempts payday loans under $1500 and for less

than 62 days from scrutiny under the Criminal Code, provided the issuing lender is

licensed under the applicable statutory regime of their host province. Since the Criminal

Code was amended to allow Provinces to regulate the payday loan industry, every

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Kobzar supra note 63 at 34.

Criminal Code supra note 50 at s 347.1(2) and (3).

Ben-Ishai supra note 17 at 11.

!Ibid!at!12.!

Ibid at 12-13.

21!

province and territory, other than Quebec and Newfoundland

, have opted in to the new

regulatory scheme and adopted the requisite enabling legislation to set up their own

regulatory regimes.

As mentioned, Bill C-26 effectively delegates jurisdictional responsibility for payday

loans to the provinces. While the amendment requires consenting provinces to commit to

certain regulatory thresholds, namely, consumer protection legislation that includes limits

on the overall cost of borrowing, it nonetheless leaves the provinces with significant

legislative discretion in how they do this. As a result, despite the fact that most

provinces share similar legislative frameworks, the extent and scope of their respective

regulations often differ widely from one another. For instance, all provincial regimes

prohibit straightforward loan rollovers. The extent of this restriction, however, has

historically varied between jurisdictions. Ontario first enacted provincial legislation

dealing specifically with the provision of payday loans in 2008. Prior to enacting the

Payday Loans Act, 2008, payday lenders operating in Ontario were regulated primarily

under existing provincial consumer protection legislation, which incidentally prohibited

rollover loans. However, lenders could easily skirt the rollover prohibition by issuing

back-to-back or concurrent loans. While back-to-back loans did not technically qualify

as rollovers, they nonetheless engendered similar sequela, namely, over-indebtedness

resulting from ballooning interest charges that left the principal untouched.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Both provinces effectively prohibit the provision of payday loans outright, albeit in different ways. For

instance, Quebec statutorily limits interest on all loans to 30% APR, while Newfoundland has opted not

legislate on the matter, thereby leaving the federal usury cap of 60% APR in place. Because payday

lenders ostensibly cannot operate with these interest rate limitations in place, payday loans are de facto

illegal in both provinces.

Kobzar supra note 63 at 34-35.

Ben-Ishai supra note 17 at 28.

22!

As another illustration, most provincial regimes cap the cost of borrowing. In Ontario,

for instance, provincial law caps the cost of borrowing at 21 dollars per 100 dollars

advanced.

However, the governing legislation does not expressly bar additional fees

from being applied to the loan.

As a result, payday loan companies commonly issue

loans through a debit card, which borrowers can only access once an activation fee is

paid.

In turn, when this fee is pooled with the interest charges already accruing to the

borrower, "the resulting APR easily exceed both the federal and advertised provincial

usury caps."

More importantly, under the current regime of federally sponsored provincial regulation,

all participating jurisdictions allow for annual percentage rates far in excess of the federal

usury limit. Under the current regulatory framework, legislation prescribes the maximum

allowable interest rate that lenders can charge borrowers on a 12-day loan cycle.

However, when these simple interest rates are calculated in terms of APR, the resulting

percentages skyrocket past the federal usury limit. For instance, Nova Scotia permits a

simple interest rate of 25 percent, which translates to 760 percent APR

; British

Columbia permits 23 percent or 700 percent APR

; Alberta permits 23 percent or 700

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Payday Loans Act, 2008, SO 2008, c 9, s 23.

Bellam and Talai supra note 1 at 7.

"Payday lenders skirt loan charge limits" CBC News (14 June 2011), online: <http://www.cbc.ca>.

Ibid; Bellam and Talai supra.

In the Matter of the Consumer Protection Act, 2011 NSUARB 22 (Nova Scotia Utility and Review

Board) at 114.

BC Reg 57/2009, s. 14.

23!

percent APR

; Manitoba permits 17 percent interest or 517 percent APR

; and

Saskatchewan permits 23 percent interest or 700 percent APR.

At first glance, these simple interest rates appear substantially lower than the federal

usury limit and, in a sense, they also accurately reflect the borrowing costs associated

with a standard two-week payday loan. However, a rate ceiling predicated on a 12-day

loan cycle tends to disregard the circumstances of the average payday loan consumer. As

mentioned earlier, an overwhelming majority of these consumers are repeat borrowers.

According to some estimates, "for every loan to a new customer, payday lenders make 15

loans to repeat customers on average across the country."

A recent consumer survey

conducted in Toronto by the Association of Community Organizations for Reform Now

(ACORN) indicated that nearly half of all payday loan borrowers take out six or more

payday loans a year.

To put these consumer habits in perspective, another study found

that if a Toronto-based borrower "pursued back-to-back loans for one year (26 loans) on

a principal amount of $300 [they] would pay roughly $60 in interest every two weeks [...]

over $1,560 in interest (520% APR) for a $300 loan."

Altogether, attempts to limit the

cost of borrowing through caps grounded in a simple rate of interest allow lenders to

significantly distort the real costs borne by most borrowers.

The devolution of authority over the payday loan industry has, therefore, received

repeated criticism both among academic policy analysts and consumer watchdogs. In

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Alta Reg 157/2009, s. 7.

The Consumer Protection Act, CCSM, c C200, s 151.1(1); Man Reg 50/2010 s 2.2(1)-(2).

An Act respective Payday Loan Agreements, Payday Lenders and Borrowers, 2007, c P-4.3, s. 23 (1);

Sask Reg RRS P-4.3 Reg 1, s. 14(1).

Ontario Ministry of Consumer Services "Capping Borrowing Costs: A Balanced Approach to Payday

Loans in Ontario" (2009), online: <http://www.sse.gov.on.ca> at 9.

Ibid.

Ben-Ishai supra note 17 at 28.

24!

particular, commentators note that ceding control over payday loan companies to the

provinces has resulted in "a hodgepodge of regulations with no overarching national

standards."

Along similar lines, critics also point out that Parliament promulgated the

federal-to-provincial shift in jurisdictional responsibility over the payday lending industry

as a way to incentivize better enforcement on the part of provincial officials who until

that point had not adequately enforced the existing federal usury law. Under the old

regime, the federal government argued that it had not been able to proceed with criminal

charges against payday lenders for otherwise blatant contraventions of the federal usury

prohibition, because "s. 347 of the Criminal Code is unusual in that it requires the

consent of the provincial Attorney-General in order to prosecute an offence under it."

Provincial officials apparently refused to grant this authority under the guise that

prosecutions would "drive away payday loan companies, leaving consumers to the mercy

of loan sharks."

100

Accordingly, Parliament opted to shift the burden to the provinces by

putting the regulatory ball in their courts. However, Kobzar argues that the provinces'

historical reluctance to sign off on prosecutions notwithstanding blatant violations of the

federal usury limit "should inspire little confidence in any provincially-devised and

enforced regulatory scheme for payday loans."

101

Accordingly, proponents of reforming Canada's current regulatory framework governing

the provision of payday loans argue that the federal-provincial devolution of authority

should be replaced with an overarching federal scheme grounded in a fixed usury rate

ceiling coupled with uniform disclosure requirements. Provincial regulation currently

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Kobzar supra note 63 at 35.

Ibid at 40.

100

Ibid.

101

Ibid at 35.

25!

"requires disclosure in the form of posted warnings and information in agreements about

the cost of credit and the high cost of the loans."

102

The current framework for disclosure

requires that lenders disclose the cost of a loan in terms of a dollar amount, for example,

$25 for $100 borrowed for one week, totaling $125 for one week. The provinces also

require lenders to post both the total cost "clearly at the front of the store or on the

counter in a similar fashion to the way that banks post the daily exchange rate" as well as

a notice that the loans are intended to be short-term.

103

According to Ben-Ishai, however,

the key is not whether disclosure made in terms of dollar cost per $100 borrowed or

articulated as an annual percentage rate more accurately conveys the total cost of

borrowing, but rather whether the way this information is provided is easy for the

borrower to understand and compare among different lenders. In the absence of a

mandated uniform disclosure template, however, payday lenders can provide this

information in ways that satisfy their statutory disclosure burden without easing the

asymmetries of information that challenge the consumer’s ability to make informed

borrowing decisions.

104

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

102

Ben-Ishai supra note 17 at 29.

103

Ibid.

104

!It!is!wo rthwhile!noting!that!the!regulation!of!payday!lending!in!Ca na da !is!roughly!the!sam e!as!in!

comparable! jurisdictions.! ! For! instance,! Australia’s! new! regulatory! regime! adopts! similar!

intervent ion s .! ! The! key! fea tu re s! of! the! Consumer!Credit!Legislation!Amendment!(Enhancements)!Act!

2012! include! an! interest! rate! ceiling,! various! limitation s ! on! ancillary! fees! and! other! charges,!

restrictions! on! rollovers! and! on! borrowers! entering! into! m ultiple! loans.! Along! sim ilar! lines,! the!

United!Kingdom!recently!announced!new! payday! lending!regulations,!which! include!caps!on!the!cost!

of! payday! loans,! limits! on! rollovers,! an d ! a! req u ir e ment! t h a t! lender s ! undert a k e ! afforda b il ity!

assessments! before! issuing! loans! as! w ell! as! a! rule! that! advertisements! for! payday! loans! include!

warnings!that!alert!prospective!borrowers!about!the!potential!financial!risks!associated!with!payday!

loans.!! W hile! each!country!approaches! the!regulation!of! payday!loans!somew hat! differently!from!one!

another,! they! nonetheless! all! involve! “intervening! in! the! market! for! payday! loans!to! prescribe! the!

terms! o n!which!those!loans!can!be! m ad e!available!to!borrower s.”!! Mo re!specifically,!they !tend! to!rest!

on!some!combination!of!interest!rate!caps,!limitations!on!repeat!borrowing,!and!mandated!disclosure!

requirements.! See! Paul! Ali,! Cosima! McRae! and! Ian! Ramsay,! “Payday! Lending! Regulation! and!

Borrower!Vulnerability!in!the!United!Kingdom !and!A ustra lia!(Forthco m ing!20 14 ).!

26!

More importantly, as the rest of this paper sets out, the “potential of disclosure as a

regulatory tool” may itself be a flawed exercise in consumer protection insofar as

research on bounded rationality increasingly suggests, “that consumers do not always act

in the rational way that underlies the rationale for disclosure."

105

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

105

Ben-Ishai supra note 17 at 29.

27!

Chapter 3

Behavioral Economics, Bounded Rationality and the

Consumer

To recap, the regulatory framework outlined above aims to correct the failures of the

market for delivery of high-interest emergency loans. More specifically, competitive

forces have not sufficiently conditioned the relationship between supply and demand,

such that the cost of borrowing remains considerably higher than it otherwise would in a

more perfect market. Demand for credit is also markedly inelastic. These conditions join

together to create a perfect storm for low-income borrowers.

Mainstream banks tend to view the low-income borrowing segment as a high credit risk.

Many of these borrowers have impaired credit histories or insufficient assets to

collateralize their borrowing habits. As a result, mainstream banks have strategically

"segment[ed] the financial services market such that low-income people face sub-prime

lenders and fringe banks while middle and upper-income people face mainstream bank

financial services supply."

106

The market's segmentation constrains consumer choice for

low-income borrowers by restricting their access to mainstream sources of credit, such as

credit cards and lines of credit. This leaves them in a precarious position. Industry

regulators closely monitor the behavior of mainstream banks, whereas they pay

comparatively little attention to fringe financial institutions.

107

Because low-income

borrowers cannot easily meet their spontaneous needs for credit within the protective

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

106

Jerry Buckland et al., "Serving or Exploiting People Facing a Short-term Credit Crunch? A Study of

Consumer Aspects of Payday Lending in Manitoba" (2007) Report for the November 2007 Public Utilities

Board Hearing to Cap Payday Loan Fees at 17.

107

Ibid at 21.

28!

confines of mainstream financial service institutions, they must gravitate to whoever is

willing to lend to them, whether or not that lender is subject to regulatory scrutiny. This

makes low-income borrowers an essentially captive audience for predatory lenders.

Payday lenders take advantage of these conditions, for example, by marketing their loans

as short-term emergency sources of credit while packaging them in such a way that

borrowers seeking a ‘quick fix’ find themselves mired in a cycle of debt that inevitably

leads to greater financial distress than would otherwise have been the case had they opted

against the loan.

Regulatory efforts to correct this market failure are more often than not grounded in neo-

classical economic theory. Viewed through this analytical lens all consumers of payday

lending services are targets for industry exploitation, not because of some comparative

socio-economic disadvantage, but more as a consequence of certain imperfections that

burden the market for fringe lending products. The most important consequence of these

market imperfections is that payday borrowers pay too much for the product.

108

Neo-classical economic theory contends "that people make rational decisions to

maximize their 'satisfaction' including decisions about what type, and what size of credit

to use."

109

As rational economic actors, consumers will only use payday loan products if

it is consistent with their personal or household goals. However, the market's

imperfections create structural barriers to this exercise. Payday lenders routinely conceal

the real cost of their products, which ensures they have better information than

prospective borrowers. This creates an imbalance of bargaining power that significantly

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

108

Buckland et al., supra note 105 at 17.

109

Ibid at 20.

29!

disadvantages the borrower. In particular, this asymmetry of information invariably

hinders his or her ability to make an informed decision regarding the loan. It induces

prospective borrowers into thinking they are paying less than they are for payday loans.

Because borrowers are misinformed about the real cost of these loans, they have no

discernable way to anticipate whether carrying these liabilities is likely to push them into

a debt cycle. If the lender had accurately conveyed all the relevant information with

which to make a decision, borrowers would avoid loans with unfavorable terms and

conditions, particularly those that give rise to potentially prohibitive costs. In other

words, this theory contends that information asymmetries explain the anomalous

borrowing habits that alarm policymakers.

Neo-classical economics argues that government intervention in consumer contracts is

generally unwarranted. This anti-regulation presumption is set aside, however, when

consumer misperception distorts the free market, for example, when it results in the

adverse selection of loan products. Under these circumstances, neo-classical economics

believes that “disclosure mandates should be one of the main regulatory responses to the

problem of consumer misperception.”

110

In particular, disclosure mandates “target

imperfect information and misperception with respect to product attributes.”

111

In order to tackle the adverse selection of payday loan products, therefore, regulators

should ensure that borrowers have a complete picture of their real cost. Hence,

mandating disclosure requirements obliging lenders to both accurately as well as

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

110

Oren Bar-Gill and Richard A. Epstein, “Consumer Contracts: Behavioral Economics vs. Neoclassical

Economics” (2007) NYU Center for Law & Economics Research Paper Series, Working Paper No. 07-17

at 4.

111

Ibid.

30!

conspicuously disclose this information should suffice in correcting the welfare costs

commonly associated with payday lending products. Symmetry of information would

force lenders to charge only a competitive market price, which is the maximum amount

borrowers would be willing to pay taking into account what the lender requires to sustain

a profitable business. In other words, perfect information is the solution to the ills of

payday lending.

The Canadian experience, however, suggests that disclosure is not a sufficient proxy for a

perfect market. Rather, it appears to confirm the insights into consumer credit decision-

making provided by behavioral law and economics. Behavioral science argues that real

people are boundedly rational. In contradistinction to the rational actor model that

underpins neoclassical expectations of human economic behavior, the work of Tversky

and Kahneman, for example, demonstrates that cognitive biases habitually motivate

human judgment and choice.

112

This cognitive predisposition means that actual

judgments often systematically depart from "unbiased forecasts" and resulting decisions

thereby tend to differ from those anticipated by neoclassical theory.

113

In this sense,

behavioral science arguably sketches "a more realistic conception of human behavior."

114

It also implies that the standard assumptions of traditional law and economics are

sometimes false. Accordingly, behavioral law and economics applies "traditional

economic tools, enhanced by a better understanding of human behavior" in a

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

112

See Amos Tversky and Daniel Kahneman “Judgment under Uncertainty: Heuristics and Biases” (1974)

185 Science 4157.

113

Christine Jolls et al. "Behavioral Approach to Law and Economics” (1998) 50 Stanford Law Review

1471 at 1477.

114

Ibid at 1545.

31!

corresponding effort to "offer[] a host of novel prescriptions regarding how to make the

legal system work better."

115

The development of behavioral economic analysis of law equips academic policy

analysts with better analytical tools for prescribing public policy. In particular, it

provides a compelling alternative to the prevailing approach to economic policy analysis,

namely neo-classical economic theory, which many examples of existing regulated

activity demonstrate, often fails to produce sound policy prescriptions. For example,

traditional economic reasoning views punitive damages favorably, because they are a

private alternative to public regulatory intervention. The purpose of punitive damages is

to supplement compensatory awards that provide insufficient deterrence of socially

undesirable private behavior.

116

However, neo-classical economic theory also

recommends that punitive damages should be awarded only if "an injurer has a

significant chance of escaping liability for the harm he caused."

117

In other words, the

utility of punitive damages lies in the fact that while some “injured parties do not detect

and seek compensation for all injuries,” society nevertheless has an interest in deterring

the behavior that caused those harms. Therefore, in order for punitive damage awards to

succeed in reaching optimal deterrence, courts should instruct juries to "estimate the

likelihood that the defendant might have escaped having to pay for the harm for which he

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

115

Jolls et al. supra note 113 at 1546 and 1547.

116

Cass R. Sunstein et al., “Assessing Punitive Damages (with Notes on Cognition and Valuation in Law)”

(1998) 107 Yale L.J. 2071 at 4.

117

A. Mitchell Polinsky and Steven Shavell, "Punitive Damages: An Economic Analysis" (1997-1998) 111

Harvard Law Review 872 at 870.

32!

or she should be responsible" and award punitive damages that reflect the probability of

non-detection.

118

Sunstein et al. note, however that "psychological work on punishment has suggested that

when thinking about punishment, people's ideas diverge from what would be expected

from an optimal deterrence approach."

119

For instance, real people have difficulty

mapping the probability of non-detection onto an unbounded scale of dollars.

120

Moreover, a juror’s sense of moral outrage over a given tortfeasor’s actions often

disproportionately informs their calculation of punitive damages. In turn, these

behavioral tendencies often produce arbitrary and erratic judgments that undermine the

neo-classical economic basis for punitive damages. Accordingly, Sunstein et al. note that

“if the basic problem is that people’s moral judgments are not the proper basis for

punitive awards,” but jurors lack sufficient behavioral constraint to set aside their moral

outrage when rendering awards, then perhaps an expert administrative body would

provide the requisite rationality, even if it is a bureaucratic alternative.

121

Punitive damages are but one example of existing public policy that might benefit from a

more robust appreciation of the bounds of rational human decision-making. Behavioral

insights are also regularly applied to the study of optimal law enforcement,

122

anti-trust

law,

123

tax reform

124

, and so on. While a rich body of academic literature on behavioral

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

118

Polinsky and Shavell supra note 117 at 957.

119

Cass R. Sunstein et al., Punitive Damages: How Juries Decide (Chicago: University of Chicago Press,

2002) at 134.

120

Sunstein et al. supra note 116 at 4.

121

Ibid at 10.

122

See generally Nuno Garoupa, “Behavioral Economic Analysis of Crime: A Critical Review” (2003) 15

European Journal of Law and Economics 5.

123

See generally William E. Kovacic, “Behavioral Economics and Its Meaning for Antitrust Agency

Decision Making” (2012) 8 J.L. Econ. & Pol’y 779.

33!

economic analysis of law has developed, only recently has it made a foray into consumer

credit regulation.

In Seduction by Contract, Oren Bar-Gill, an expert on the law and economics of contracts

and contracting, argues that consumer contracts are a function of the interaction between

market forces and behavioral psychology.

125

The author argues that consumers are

imperfectly rational, namely, their decisions tend to be partially motivated by bias and

misperception.

126

In particular, consumers are psychologically predisposed to

shortsightedness and over-optimism. These cognitive biases instinctively draw

consumers to products and services that offer short-term benefits, notwithstanding their

potential long-term costs. These mistakes are also systematic and predictable, which

further motivates sellers to actively engage with them. More specifically, sellers design

their “products, contracts and pricing schemes to maximize not the true (net) benefit from

their product, but the (net) benefit as perceived by the imperfectly rational consumer.”

127

In other words, sellers conceal the true costs of a given product or service in complex

contracts, which makes them “appear more attractive than they really are.”

128

According

to Bar-Gill, this result is a market failure, because it suggests that many consumer

transactions are not economically efficient; that is only the seller is made better off.

Moreover, Bar-Gill notes that neoclassical economic assumptions regarding the capacity

of seller competition to “increase efficiency and protect consumers” are misplaced in the

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

124

See generally Simon James and Alison Edwards, “The Importance of Behavioral Economics in Tax

Research and Tax Reform: The Issues of Tax Compliance and Tax Simplification” (2014) University of

Exeter Discussion Papers in Management, Paper Number 07/14.

125

Oren Bar-Gill, Seduction by Contract (London: Oxford University Press, 2012).

126

Ibid at 2.

127

Ibid.

128

Ibid.

34!

context of behavioral market failures.

129

Rather, under these conditions, competitive

forces oblige “sellers to exploit the biases and misperceptions of their customers,”

because an altruistic seller will necessarily lose business to the “low-road seller who

offers what the consumer mistakenly believes to be the best contract.”

130

Bar-Gill has detailed this dynamic in a case study of consumer credit products.

131

In this

study he demonstrates that credit card issuers shape their contracts and pricing schemes

“around consumers’ systematic deviations from perfect rationality.”

132

For instance,

consumers habitually underestimate the extent of future borrowing. This reflects the

average consumer’s tendency to misjudge self-control problems coupled with an

optimism bias “that might lead consumers to underestimate the likelihood of

contingencies bearing economic hardship,” (i.e. the probability of losing their job or the

difficulty they will face finding a new one) that are likely to prompt excess borrowing in

addition to factors as mundane as the borrower’s own forgetfulness. Accordingly, credit

card contracts offer features that cater directly to a consumer’s behavioral impulses in

providing immediate benefits such as low introductory interest rates and frequent flyer

points, as well as zero annual and per-transactions fees that appear alongside high long-

term interest rates and large over-limit fees in addition to significant cost penalties for

late payment.

133

In this sense, the credit card contract is “a tool designed to exploit

consumers’ underestimation bias.”

134

In particular, pushing short-term perks, while

inconspicuously burying the complete picture of a borrower’s cost exposure in

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

129

Bar-Gill supra note 125 at 2.

130

Ibid.

131

Oren Bar-Gill, “Seduction by Plastic” (2004) 98 Northwestern University Law Review 1373.

132

Ibid at 1373.

133

Ibid at 1376.

134

Ibid at 1377.

35!

contractual fine print, contributes to staggering levels of credit card borrowing, which

“renders the consumer more vulnerable to financial hardships.”

135

In crafting a policy

response to the welfare costs associated with excessive consumer borrowing, therefore,

Bar-Gill and others insist that regulators take better stock of consumers’ limited will

power and imperfect rationality.

Despite Bar-Gill’s insights into the relationship between consumer psychology and the

manner in which lenders orient the consumer credit market, few researchers have

expressly applied behavioral economic analysis to payday lending more generally, let

alone considered it in the Canadian policy context. Bar-Gill and Elizabeth Warren, an

active consumer protection advocate, however, have noted, that “payday loans provide

another example of a credit product that can impose substantial costs on imperfectly

informed and imperfectly rational borrowers.”

136

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

135

Bar-Gill supra note 131 at 1378.

136

Oren Bar-Gill and Elizabeth Warren, “Making Credit Safer” (2008) 157 U. Pa. L. Rev. 1 at 44.

36!

Chapter 4

Behavioral Economic Analysis and Payday Lending Reform

in Canada

Bar-Gill applied behavioral economic analysis in an effort to better explain the staggering

levels of credit card borrowing in the United States. As mentioned above, Bar-Gill

suggests that consumers exhibit a cognitive predisposition that he refers to as

‘underestimation bias’, which undermines their capacity to make sound ex ante

judgments of future borrowing. Underestimation bias is effectively a composite of the

following psychological susceptibilities: imperfect self-control, over-optimism and

hyperbolic discounting. Policymakers often regard credit cards and payday loans as

distinct forms of consumer credit. While credit card and payday loan contracts may bear

different features and determinants, they are nonetheless both vehicles for accumulating

substantial liabilities. Moreover, in both cases, policymakers have questioned the

wisdom and caution of borrowers and lenders alike in generating economically

significant amounts of consumer debt. Accordingly, the cognitive biases used to better

understand the habits and preferences of prime borrowers may provide a useful

framework when conducting a similar inquiry regarding the behavior of their subprime

counterparts.

1 Imperfect Self-Control

Real people often display bounded willpower, which “refers to the fact that human beings

often take actions that they know to be in conflict with their own long-term interests.”

137

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

137

Jolls et al. supra note 108 at 1479.

37!

This psychological impediment explains why so many people have trouble committing to

a diet or have difficulty quitting smoking. These self-control problems can also help

explain consumer-borrowing decisions.

138

More specifically, according to Bar-Gill and

others, imperfect self-control is a major reason why most consumers habitually

underestimate their future borrowing.

139

Consumers assume they have sufficient

willpower to resist the temptation to finance consumption with debt. Lenders are keenly

aware of this consumer psychology and so they design contracts that exploit borrower

self-control problems by tempting “consumers to borrow more in the short term than they

would prefer in the long run.”

140

Open-ended loans, such as credit cards or lines of

credit, open the proverbial door to these problems of self-control.

141

Close-ended loans,

such as a typical bank loan, determine the amount borrowed up-front. Under these

circumstances, self-control is not at issue, because the loan provides the borrower with no

ex post facto discretion regarding the extent of his or her liability. In this sense, a close-

ended loan serves as a commitment device, which enables “the consumer to constrain her

future self by pre-committing to a maximum amount of debt.”

142

Conversely, credit

cards are not equipped with the same default; that is, they leave the extent of the

borrower’s liability open or capped with an upper-limit. While the consumer may plan

beforehand to limit their borrowing to a pre-determined amount, he or she is not

“contractually bound to that intention, so her willpower will be tested continually.”

143

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

138

Francis supra note 1 at 627.

139

Bar-Gill supra note 131 at 1397.

140

Francis supra at 628.

141

Bar-Gill supra.

142

Ibid.

143

Francis supra.

38!

At the outset, payday loans appear more closely aligned with traditional bank loans,

because the amount of the debt and related term are similarly determined upfront.

144

Francis notes that for practical purposes, however, payday loans are more analogous to

open-ended loans insofar as consumers can effectively roll them over indefinitely.

145

other words, when the original term matures, a payday borrower can shift present costs

into the future by extending the loan over an additional term. In this sense, rollovers are

a “temptation similar to the one credit-card users face when they decide whether to pay

off their entire balance or to pay only the minimum payment.”

146

The rollover option

changes the nature of a payday loan by essentially rendering it a “fixed-principle loan

with an open-ended term.”

147

The availability of rollovers heightens a borrower’s exposure to imperfect self-control

and can lead to certain consumer mistakes.

148

On the one hand, consider borrowers who

are unaware they exhibit bounded willpower. These borrowers take out a payday loan as

a one-time solution to a temporary shortfall in liquidity. They calculate that the related

fees are a relatively small price to pay to meet an immediate expense. They are also

aware of the costs of rolling over a loan, but they believe their loan is “one of the 10% of

loans that do not lead to repeat borrowing.”

149

However, this confidence masks the fact

that borrowers consistently underestimate their future borrowing, “since when the future

comes they may not be able to resist the temptation to extend the loan for two more

weeks and incur the additional unexpected cost of the rollovers, which were not

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

144

Francis supra note 1 at 628; Creola Johnson, “Payday Loans: Shrewd Business or Predatory Lending?”

(2002) 87 Minn. L. Rev. 99 at 64-69.

145

Francis supra.

146

Ibid.

147

Ibid.

148

Ibid.

149

Alan M. White, “Behavior and Contract” (2009) 27 Law & Ineq. 135 at 162.

39!

calculated as part of the initial loan.”

150

On the other hand, consider borrowers who are

aware they exhibit bounded willpower. These borrowers may mistakenly view a payday

loan no differently than a typical bank loan, namely, as a close-ended transaction.

Moreover, this feature may appeal to these borrowers, because it offers a “deliberate

device” which protects against self-control problems, “just as a dieter might place a lock

on the refrigerator.”

151

For instance, White recounts the story of a payday borrower who

opted for a payday loan in lieu of a credit card offer, because the “repayment system of

the payday loan, in her mind at least, precluded runaway debt.”

152

When payday rolls

around, however, they are presented with the option of deferring their costs to another

loan cycle. Under these circumstances, they quickly “discover that their borrowing is not

as constrained as they had anticipated,” because while they were aware they exhibited

bounded willpower, they did not expect that it would be challenged.

153

Accordingly,

these borrowers “will also have underestimated their future borrowing.”

154

Canadian provinces that have opted to regulate intra-provincial payday loan products,

under the new federal policy model, all ostensibly prohibit the extension of an

outstanding payday loan for a fee or the advance of a new payday loan to pay off an

existing payday loan. At the outset, this gives the impression that the imperfect self-

control bias is not an issue in the context of the Canadian payday lending market. As

mentioned above, however, until very recently payday lenders operating in certain

jurisdictions were able to skirt this obligation by packaging extensions as back-to-back or

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

150

Francis supra note 1 at 628-629.

151

White supra note 149 at 162.

152

Ibid.

153

Francis supra at 629.

154

Ibid.

40!

concurrent loans as opposed to straightforward rollovers. Even now that most

permutations of fee-based loan extensions are prohibited, enforcement is not always

sufficiently robust to ensure compliance. Moreover, save for inconvenience, very little

appears to prevent a borrower from taking out a loan from a third party payday lender to

defer the costs of an existing loan. Notwithstanding even an assiduously enforced

rollover prohibition, the availability of this option means that only consumers who are

aware of their imperfect self-control are shielded from repeat borrowing. Conversely,

consumers who are entirely unaware of their cognitive predisposition remain vulnerable

to the over-indebtedness associated with repeated payday borrowing, because the original

loan effectively remains open ended.

2 Optimism Bias

Jolls et al. note that a “common feature of human behavior is overoptimism.”

155

In short,

most people operate their day-to-day lives under the mistaken belief that bad events are

far less likely to happen to them than to others.

156

Put another way, “people are often

unrealistically optimistic about the probability that bad things will happen to them.”

157

Vast swaths of empirical research support this insight into human behavior. It appears

that nearly everyone believes they are significantly less likely than others to experience

hardships. For instance, most consumers believe that they are less likely than their

counterparts to suffer the harms commonly associated with the products they use,

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

155

Jolls et al. supra note 108 at 1524.

156

Ibid.

157

Christine Jolls, “Behavioral Economics Analysis of Redistributive Legal Rules” (1998) 51 Vand. L. Rev.

1653 at 1659

41!

including car accidents and adverse health outcomes.

158

One case study found that

“while smokers do not underestimate statistical risks faced by the population of smokers,

they nonetheless believe that their personal risk is less than that of the average

smoker.”

159

The phenomenon of risk underestimation has also found anecdotal support

in surveys of college undergraduates, who when polled anonymously at the start of a

university course, both consistently and overwhelmingly predict they will score above the

final average grade in the course. As Jolls aptly points out, however, “these beliefs

cannot all be correct; if everyone were below (or above) average, then the average would

be lower (or higher).”

160

Unrealistic optimism or overoptimism can have profound implications for public policy.

For instance, policy efforts to improve the quality of our air, land and water, are often

“characterized by a belief that government must compel the market to behave

environmentally.”

161

Accordingly, governments develop systems of pollution control,

which generally include regulatory prescriptions that oblige private economic actors to

take necessary precautions to protect the environment coupled with a strong enforcement

mechanism to secure compliance with the regulatory system. There appears to be broad

consensus among policymakers that high penalties – including but not limited to

substantial monetary penalties, the revocation and suspension of firm operating licenses,

and so on – are required ingredients of this regulatory mix, because they not only punish

wrongdoing and avoid a recurrence, but more importantly they deter others from

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

158

Cass R. Sunstein, “Behavioral Economics, Consumption, and Environmental Protection” (2013)

Regulatory Policy Program Working Paper RPP-2013-19 (Cambridge, MA: Mossavar-Rahmani Center for

Business and Government, Harvard Kennedy School, Harvard University) at 7.

159

Ibid.

160

Jolls supra note 152 at 1659.

161

Robert N. Stavins and Bradley W. Whitehead, “Pollution Charges for Environmental Protection: A

Policy Link Between Energy and Environment” (1992) 17 Annu. Rev. Energy Environ. 187 at 188.

42!

committing similar offences.

162

However, if prospective polluters consistently

underestimate their likelihood of being sanctioned, then it seems unlikely that a penalty-

based regulatory regime, even if robustly enforced, will have the desired deterrent effect.

In this sense, sound policy must somehow account for this systematic error in human

judgment.

Accordingly, a thorough consumer protection policy should have a strong appreciation

for the fact that “many consumers exhibit overoptimism, which contributes to overall

underestimation of future borrowing.”

163

In the context of payday lending, for example,

optimism bias contributes to the underestimation of borrowing in the following ways.

Most borrowers believe they are less likely to rollover their payday loan than the average

borrower.

164

As mentioned earlier, borrowers often find it difficult to avoid deferring the

present costs of repayment when tempted with an extension, such as a rollover.

Therefore, optimism bias can cloud a prospective borrower’s ex ante judgment regarding

the actual risk of repeat borrowing and his or her related exposure to over-indebtedness.

Unrealistic optimism causes borrowers to underestimate future borrowing in other ways

as well. In particular, it hinders their capacity to accurately project future expenses,

because most people discount the probability they will face urgent medical bills or car-

repair expenses, for instance.

165

As a result, consumer-borrowing decisions regarding the

size and cost of a given payday loan, tend to be informed only by present-day liquidity

constraints. This can often leave very little room to absorb costs that might arise in

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

162

See Steven Shavell, “Extensions of the Theory of Deterrence” in Foundations of Economic Analysis of

Law (Cambridge, Mass: Harvard University Press, 2004).

163

Francis supra note 1 at 629.

164

Ibid.

165

Ibid.

43!

relation to future adverse events thus inducing “economic hardships that lead people to

borrow more,” such as getting fired.

166

Furthermore, this condition is actually

exacerbated when individuals “perceive that they have some degree of control over

whether or not the negative event will occur,” which as mentioned earlier, is a common

symptom among payday borrowers.

167

In particular, payday-loan borrowers sometimes

exhibit unrealistic optimism regarding “the likelihood that they will have fewer expenses

and more money in two weeks and, even more, that they will have the self-control to

repay the loan on its maturity date.”

168

Therefore, policy efforts aimed at redressing the

increasingly staggering levels of payday loan debt must necessarily account for the

frequency with which unrealistic projections of future self and circumstance inform

borrower decision-making.

3 Hyperbolic Discounting

Hyperbolic discounting (or present-biased preference) is another source of “weakness of

the will” that can help further explain why so many consumers end up borrowing more

than they had initially anticipated.

169

Neoclassical economic models of consumer

behavior assume a constant discount. In other words, traditional economic analysis

argues that “the difference between the attractiveness or aversiveness of a reward or

punishment today versus tomorrow is the same as the difference between a year from

now and a year and one day from now.”

170

However, there is considerable evidence to

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

166

Francis supra note 1 at 629.

167

Ibid at 629-630.

168

Ibid at 630.

169

Bar-Gill supra note 126 at 1398.

170

Jolls et al. supra note 108 at 1539.

44!

the contrary, namely, that real people exhibit sharply declining discount rates.

171

In terms

of economics, Bar-Gill explains the phenomenon as follows. Hyperbolic discounters

systematically discount costs and benefits that will materialize in the near future, but

apply smaller additional discounts for costs and benefits that seem further away.

172

other words, people exhibit extreme impatience for short run rewards, but this preference

declines steadily over time. This inter-temporal inconsistency of preferences effectively

means that “one’s present desires for the future are at odds with one’s future desires for

the future.”

173

This cognitive tendency directly informs consumer-borrowing patterns. Because

hyperbolic discounters are generally unaware of their “present-biased time preferences”

they rarely take stock of the ways in which this conditions their borrowing habits.

174

particular, present bias heightens consumer desire for instant gratification, which can

often result in problems restricting spending. More importantly, when confronted with a

shortfall in liquidity, consumers often rely on credit to fuel their present consumption

desires, which in turn often leads to increased borrowing.

175

Consider the application of this behavioral pattern to a consumer debating whether or not

to sign up for a new credit card. For many consumers this decision rests on a balance

between the utility of having greater access to credit and their concomitant exposure to

greater indebtedness. Therefore, at the outset, point X in time, the consumer evaluates the

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

171

Jolls et al. supra note 108 at 1539

172

Bar-Gill note 126 at 1399.

173

Jolls et al. supra.

174

Bar-Gill supra; Stephan Meier and Charles Sprenger, “Present-biased Preferences and Credit Card

Borrowing” (2010) 2 American Economic Journal: Applied Economics 1 at 193.

175

Meier and Sprenger supra note 169 at 194.

45!

likelihood he or she will borrow on the card at point Y in the future. The consumer

“weighs the future benefit from a credit card purchase [at Y] against the more distant [Z]

cost of debt repayment, including payment of interest charges.”

176

Taking for granted an

ex ante appreciation that there are substantial costs of borrowing on his or her credit card,

the consumer concludes that their preference at X is not to borrow at Y. In light of this

preference, the consumer moves forward from X under the assumption that he or she will

not borrow at Y, which, in turn, induces the consumer to take out the new credit card. The

consumer is later confronted with an actual borrowing decision at Y; that is “now [Y] is

the present and [Z] is the near future.”

177

Assuming the consumer is a hyperbolic

discounter, they will heavily discount the costs of Z from Y. In other words, “even if the

future [Z] cost of borrowing is substantially higher than the present Y benefits, the

consumer, [at Y], may decide to borrow on her credit card.”

178

According to Bar-Gill,

this reversal in preference (i.e. the preference at X not to borrow developing into a

preference and decision to borrow at Y) “is an immediate implication of hyperbolic

discounting.”

179

Hyperbolic discounting is also helpful in describing how and why consumers frequently

underestimate the total cost of an initial payday-loan transaction.

180

The consumer is

typically confronted with an unanticipated expense. The payday lender offers the

consumer a $300 loan in exchange for a $75 fee payable in two weeks. The consumer

has a choice between paying $300 today and $375 in two weeks. If the consumer heavily

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

176

Bar-Gill note 126 at 1399.

177

Ibid.

178

Ibid.

179

Ibid at 1400.

180

Francis supra note 1 at 630.

46!

discounts the value of a future surplus of $75 in relation to a present-day surplus of $300

with a deferred cost of $75, then he or she is likely to pay the high fee in exchange for the

loan. According to Francis, the underlying problem is that even if the borrower

demonstrates a strong ex ante preference for repaying the loan in two weeks, he or she is

likely to change their mind.

181

In other words, this preference is likely to reverse when

the loan matures. More specifically, when the two weeks expires, the borrower is

confronted with a new present or “today.”

182

If their tendency to discount future rewards

still applies, then they will yet again “prefer paying a high fee later over paying anything

now.”

183

In this sense, the preference for short-run rewards over long-run costs often

results in “poor predictions of their future credit decisions.”

184

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

181

Francis supra note 1 at 630.

182

Ibid.

183

Ibid at 630-631.

184

Ibid at 631.

47!

Chapter 5

A Behavioral Approach to Regulation

With these behavioral insights in hand, a clear pattern emerges. Cognitive biases often

induce consumers to make misguided borrowing decisions. They also help explain

increasingly high levels of payday loan debt despite their prohibitive costs and

detrimental consequences for long-term financial health. Problems controlling spending

and borrowing, unrealistic projections of personal exposure to future adverse events as

well as a tendency to discount future costs in favor of present benefits, can make it

difficult for consumers to accurately and reliably project the potential cost burden of a

payday loan. By nature, payday loans are a last resort; that is their high transaction costs

make sense only in the context of an emergency shortfall in liquidity. In other words,

consumers should presumably avoid them except when there is little other option

available to deal with an emergency. The cognitive shortfalls mentioned above, however,

can cloud this critical insight with the result that consumers lose sight of the underlying

basis for payday loans, namely dire financial straits. Moreover, these behavioral traits are

a particular challenge for low-income consumers, who wrestle simultaneously with often

very limited access to mainstream sources of credit. These factors also create very

favorable market conditions for payday lenders. In particular, as mentioned earlier, it

allows them to design and package their loan products in ways that exploit the cognitive

fallibilities of already distressed borrowers.

Knee-jerk regulatory solutions to the problem of payday borrower over-indebtedness

generally involve some combination of absolute interest rate caps and mandated

disclosure. More extreme proposals have called for the outright ban of payday loan

48!

products. Previous sections of this paper have stressed the inherent weaknesses of these

approaches. On the one hand, bans and caps both acknowledge as well as respond to

low-income consumers who struggle to make rational borrowing decisions. However,

these regulatory efforts not only come at the expense of consumer freedom of choice, but

sometimes also jeopardize the broader safety of low-income consumers. As mentioned

earlier, this consumer demographic frequently exhibits markedly inelastic demand for

credit. This tendency sometimes prompts them to seek out alternative sources of credit,

such as violent criminal lenders, when legitimate lenders are either forced out by

wholesale bans or abandon marketplaces restricted by overly stringent caps. On the other

hand, mandated disclosure regimes tend to be grounded in the standard neo-classical

economic assumption that consumers are rational actors and that market failures, such as

information asymmetries, are the principal culprits for the pitfalls of the payday lending

industry.

Behavioral economic analysis, however, suggests that consumers are imperfectly

rationale. While this shortfall often causes consumers to make suboptimal borrowing

decisions, behavioral economic analysis offers a middle ground between the grim

expectations of consumer behavior that define overtly paternalistic regulatory solutions,

such as bans and caps, and the decidedly more optimistic projections of consumer

decision-making that frame regulation informed by a standard rational actor calculus,

such as crude mandated disclosure regimes. In particular, behavioral economic theory

posits that while bounded rationality and self-control often prompt people to make "ill-

formed" decisions, it is nevertheless possible to "steer people's choices in welfare-

49!

promoting directions without eliminating freedom of choice."

185

While people's choices

may be conditioned by certain cognitive predispositions, the possible directions these

choices can take can also be circumscribed through regulation. More specifically,

regulation determines the possible starting points from which these cognitive

predispositions can influence the direction of individual behaviour. Short of resorting to

prohibition, regulation cannot completely sever the influence of cognitive bias on

individual decision-making. However, wherever possible, policymakers should design

legal rules or starting points that preserve freedom of choice, but provide the

infrastructure that allows individuals to fully exercise that autonomy, while

simultaneously pointing them in the direction of those choices that policymakers view as

decidedly welfare-promoting.

186

Take for example the growing problem of obesity in Canada. Alarmingly high obesity

rates are increasingly linked to various chronic diseases, such as hypertension and Type 2

diabetes.

187

The economic cost to Canada's public health system for treating these

diseases was roughly $7.1 billion in 2011.

188

Obesity in Canada is hence a significant

public policy issue. High obesity rates are also increasingly attributable to excessive

sugar intake.

189

In other words, the dietary preferences of some consumers produce

unhealthy outcomes, the burden for which is felt not only by those individuals, but also

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

185

Cass R. Sunstein and Richard H. Thaler, "Libertarian Paternalism Is Not an Oxymoron" (2003) 70

University of Chicago Law Review 4 at 1159.

186

Ibid.

187

See e.g. Richard J. Johnson et al., "Potential role of sugar (fructose) in the epidemic of hypertension,

obesity and the metabolic syndrome, diabetes, kidney disease, and cardiovascular disease" (2007) 86 Am J

Clin Nutr 4.

188

Public Health Agency of Canada, Obesity in Canada: A Joint Report from the Public Health Agency of

Canada and the Canadian Institute for Health Information (Ottawa: Public Healthy Agency of Canada,

2011).

189

Johnson et al. supra note 183.

50!

by Canada's public health system as a whole. Outside of Canada, the public policy

response to this challenge has ranged from sin or excise taxes on unhealthy foods and

beverages to their wholesale prohibition, such as former New York Mayor Michael

Bloomberg's now infamous effort to ban the sale of mega sized sugary soft drinks.

However, these overtly paternalistic regulatory efforts often produce unintended adverse

consequences, notwithstanding the best intentions of policymakers to discourage

unhealthy behaviour. Sin taxes on unhealthy foods, for instance, tend to be regressive;

that is, they fall disproportionately on consumers at the lower end of the income

distribution. The basis for sin taxes is the notion that higher prices necessarily disrupt

marketplace decisions to consume high-calorie drinks, for example. However, lower-

calorie drinks are not necessarily less costly than their high-calorie counterparts. As a

result, the impact of raising prices to stifle obesity rates, which are widely dispersed and

affect all population groups

190

, is borne more substantially by poorer consumers. It

assumes further that potential substitute drinks not captured by the excise, such as orange

juice, contain less sugar. Most importantly, sin tax proponents also appear to assume that

individuals are inherently incapable of making healthy consumption decisions for

themselves. However, this ignores viable alternatives to paternalism, such as the recent

efforts of the federal government of Canada to implement changes to food labeling in

order to help consumers better understand the health implications of the foods they

consume. The recently proposed changes to the nutrition facts and ingredient labels on

packaged food includes a requirement that food manufacturers "clearly state on nutrition

labels the amount of sugar they have added to products" in addition to "suggested serving

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

190

J. Slater et al., "Socio-demographic and geographic analysis of overweight and obesity in Canadian

adults using the Canadian Community Healthy Survey" (2009) 30 Chronic Diseases in Canada 1 at 12.

51!

sizes that reflect what people actually eat, and mak[e] the calorie count more

prominent."

191

Not only does this strategy allow consumers to easily compare sugar

content among different brands, but in providing a standardized suggested serving size

consumers are in a sense forced to juxtapose their eating habits against a healthy

benchmark. As Sunstein notes, this type of disclosure is more likely to prove effective,

because it avoids abstract statements regarding what constitutes healthy eating in favor of

transmitting information that is "concrete, straightforward, simple, meaningful, timely

and salient" while also "clearly identify[ing] the steps that might be taken to obtain the

relevant goal" – namely avoiding overconsumption of sugar – by indicating the requisite

serving size associated with a healthy intake.

192

In other words, the disclosure is

behaviorally informed.

193

Along similar lines, in order to address the concerns commonly attributed to payday

lending, such as borrower over indebtedness, while simultaneously avoiding the

drawbacks of regulation that either assumes too little or too much of consumers, the

resulting policy framework must take stock of the behavioral predispositions at the heart

of the problem. These insights better place policymakers to design regulatory

frameworks that equip consumers with the necessary tools to overcome their inherent

cognitive predispositions that impede arriving at informed borrowing decisions. Along

this line of reasoning, policymakers might consider the following regulatory proposals.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

191

Eric Atkins, "Ottawa seeks overhaul of how food labels measure sugar intake" The Globe and Mail (14

July 2014), online: The Globe and Mail <http://www.theglobeandmail.com>.

192

Cass R. Sunstein, "Behavioral Economics, Consumption, and Environmental Protection" (2013)

Forthcoming in Handbook on Research in Sustainable Consumption (Lucia Reisch & John Thogersen

eds.), online: SSRN <http://ssrn.com/abstract=2296015> at 9.

193

Ibid at 8.

52!

Disclosure is the “least controversial mode of legal intervention” with which to regulate

predatory lending.

194

Disclosure regimes are “predicated upon the notion that if

consumers are provided sufficient information about loan products, including for

example, annual percentage rate, finance charges, payments schedules, settlement costs

and the like, they will have the information necessary to shop competitively for loans.”

195

In this sense, mandated disclosure is the normative preference of neoclassical economics

and policymakers alike, because it allows consumers to compare products “relatively

quickly and with few or no transaction costs.”

196

In the context of subprime lending,

however, the “theoretical premises of disclosure regulation seem quaint and utterly

insufficient.”

197

The various cognitive biases exhibited by borrowers suggest that

disclosure regimes that merely enforce the conspicuous disclosure of statistical

information, such as interest rates, simply do not go far enough.

198

In other words, these

disclosures “may remedy imperfect information, but they cannot remedy imperfect

rationality.”

199

As Bar-Gill points out, “if a consumer believes that she will not borrow

on her card, she will not mind the high interest rate, no matter how large the font.”

200

this sense, the Ontario Payday Loans Act, 2008, which requires lenders to unambiguously

disclose the total costs of borrowing, for example, by displaying posters in-store that set

out in 144 point font the maximum allowable cost per $100 borrowed, are not sufficient

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

194

Bar-Gill supra note 126 at 1378; R. Stephen Painter Jr. “Subprime Lending, Suboptimal Bankruptcy: A

Proposal to Amend ss. 522(f)(1)(B) and 548(a)(1)(B) of the Bankruptcy Code to Protect Subprime

Mortgage Borrowers and Their Unsecured Creditors” (2006) 38 Loyola University Chicago Law Journal

81 at 95.

195

Painter Jr. supra at 95-96.

196

Baher Azmy, “Squaring the Predatory Lending Circle” (2005) 57 Fla. L. Rev. 295 at 351.

197

Ibid.

198

Ibid.

199

Francis supra note 1 at 634.

200

Ibid.

53!

tools for borrowers to make an informed individualized borrowing decision.

201

Rather, if

the problem is that consumers routinely underestimate their future borrowing, an

effective mandated disclosure regime must find ways to warn of the dangers inherent in a

payday loan contract that better resonate with prospective borrowers. In other words,

effective disclosure must “cure the underestimation bias.”

202

Jolls and Sunstein therefore suggest that policymakers respond to instances where

bounded rationality prompts suboptimal social outcomes by attempting to “debias

through law by steering people in more rational directions.”

203

‘Debiasing through law’

essentially involves using certain cognitive biases to counteract others. To offset the

impact of optimism bias on consumer-borrowing habits, for instance, policymakers might

develop regulation that implements the availability heuristic. The technical definition of

a heuristic is “a simple procedure that helps find adequate, though often imperfect,

answers to difficult questions.”

204

Individuals commonly employ heuristics when making

judgments in situations of uncertainty.

205

The availability heuristic refers to the tendency

of people to overestimate the plausibility of a particular development on the basis of

knowledge or information that readily comes to mind.

206

For example, people might

“assess the risk of heart attack among middle-aged people by recalling such occurrences

among one’s acquaintances.”

207

In other words, events that conjure vivid mental images

“will be more available when individuals make decisions and thus disproportionately

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

201

See Payday Loans Act, 2008, S.O. 2008, c. 9, s 14.

202

Bar-Gill supra note 126 at 1421.

203

Christine Jolls and Cass R. Sunstein, “Debiasing through Law” (2006) 35 The Journal of Legal Studies

1 at 199.

204

Daniel Kahneman, “Thinking, Fast and Slow” (London: Penguin Books, 2011) at 98.

205

Tversky and Kahneman supra note 109 at 1124.

206

Ibid.

207

Ibid.

54!

impact [their] judgments.” Therefore, according to Jolls and Sunstein, “because making

an occurrence available to individuals will increase their estimates of the likelihood of the

occurrence, availability is a promising strategy for debiasing those who suffer from

excessive optimism.”

208

As Francis notes, Health Canada’s requirement that cigarette

packages bear full-color warnings that feature graphic images, which include a diseased

tongue and a child wearing an oxygen mask, are an attempt to use the availability

heuristic to combat the incidence of smoking.

209

Accordingly, Francis suggests that utilizing this debiasing mechanism can help frustrate

the underestimation bias, the arguably principal catalyst for repeat borrowing and related

over-indebtedness among low-income consumers of payday loan products. In particular,

she suggests that policymakers adopt what she refers to as a “specific narrative

disclosure.”

210

This disclosure model accentuates the potential costs and losses related to

payday loan products, by providing prospective borrowers with a “vivid narrative of a

borrower who has fallen into the debt trap” coupled with frequency statistics regarding

repeat borrowing rates. Francis provides the following examples of such narratives,

adjusted for the existing Canadian regulatory context:

Jamie Johnson received a two-week payday loan of $300. Her next paycheck did

not go as far as expected, so [after repaying her loan she took out a second two-

week loan] for another $45 fee. Four months later, Jamie [realized she had paid

$360 in fees, because of her decision to take out the first loan];

And,

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

208

Jolls and Sunstein supra note 189 at 210.

209

Francis supra note 1 at 634-635.

210

Ibid at 636.

55!

9 out of 10 payday loans are issued to borrowers with 5 or more payday loans a

year.

Francis notes that these disclosures serve two interrelated purposes. Firstly, they provide

a potential borrower with a personal narrative that breaks down the costs of a payday loan

in an easily digestible way. Secondly, the vivid illustration of those costs makes them

“more available to consumers in a way that will counteract their underestimation of

future borrowing.”

211

In other words, “a few lines relating the actual experience of

another payday-loan customer and the costs that he or she incurred will help customers

understand the real costs of the loan, even if they cannot grasp the complexity of the

APR.”

212

Bar-Gill also recommends individualizing the information disclosed to consumers. This

might involve requiring lenders to remind the consumer of their past borrowing habits.

This information would be more difficult for consumers to dismiss “as an abstract

statistic that does not apply to [them].”

213

In turn, this disclosure could help hyperbolic

discounters as well as borrowers who exercise imperfect self-control better predict their

future borrowing. For example, if policymakers require lenders to inform prospective

borrowers of the total number of payday loans they received in the past year, then

borrowers would better appreciate the broader cost ramifications of the loan.

214

Another

application of individualized disclosure might involve lenders informing borrowers of the

total dollar amount in payday loan fees they paid in the previous year. According to

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

211

Francis supra note 1 at 637.

212

Ibid.

213

Bar-Gill supra note 126 at 1422.

214

Ibid; Francis supra at 637-638.

56!

Francis, by outlining the costs accumulated by the borrower, “these disclosures become

more salient, and the loss more apparent.”

215

An obvious challenge for policymakers contemplating "psychologically-guided

information disclosure" is to determine how, when and where the narratives outlined

above should be communicated to borrowers.

216

As Sunstein and Thaler note, "it is

hopelessly inadequate to say that when people lack relevant information, the best

response is to provide it."

217

Rather, any such effort must account both for how

individuals process information as well as the ways in which the delivery of information

can influence that process.

218

Policymakers generally better succeed at drawing a

marketplace's attention to certain features of a product, for example, when those features

are salient to consumers, whereas consumers seem to under react to information that is

not salient.

219

The salience of information depends heavily on its presentation; that is,

"the behavioral consequences of otherwise identical information depend on how it is

framed."

220

Initiatives that rely principally on disclosure to achieve a given policy goal

must, therefore, be particularly “attentive to the importance of salience.”

221

For

example, binge drinking results, at least in part, from the relative ease with which

consumers can access low-cost alcoholic beverages. Accordingly, sin taxes are

sometimes applied as an economic tool with which to curb excessive alcohol

consumption. Sunstein notes, however, that the efficacy of these taxes varies

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

215

Francis supra note 1 at 638.

216

Marianne Bertrand and Adair Morse, "Information Disclosure, Cognitive Biases, and Payday

Borrowing" (2011) 66 The Journal of Finance 6 at 1865.

217

Cass R. Sunstein and Richard H. Thaler, "Libertarian Paternalism Is Not an Oxymoron" (2003) 70

University of Chicago Law Review 4 at 1182.

218

Ibid at 1182-1183.

219

Sunstein supra note 187 at 15.

220

Sunstein and Thaler supra at 1182.

221

Ibid.

57!

significantly depending on the moment at which the added cost is introduced to

prospective buyers. More specifically, sin taxes clearly identified in the posted price of

alcoholic beverages have a decidedly more downward sloping effect on alcohol

consumption than when they are applied at the register.

222

In this sense, it appears that

there are not only substantive, but also structural pre-conditions to salient information

disclosure. Accordingly, successful efforts to debias payday borrower overoptimism

through psychologically-guided disclosure, for example, may rest further on delivering

that information at a point in the loan process that resonates with prospective

borrowers.

223

In developing a methodology for this intervention it is useful to briefly consider the

experience of payday lending from the borrower's perspective. Bertrand and Morse

capture that experience in the following account:

The loan process begins when the customer approaches a counter or window

where a customer service representative (CSR) works and requests a new

loan or a refinancing of an existing loan. The customer provides the lenders

with a physical copy of her latest bank statement and paycheck stub, and the

CSR verifies and updates the employer, income, banking, and personal

coordinate information. The CSR takes a few minutes to review the bank

account information via a subscriber service and to enter the loan request and

borrower information into the system. The company software processes the

application and determines whether and how much can be loaned to the

customer. (No subjective input enters the loan acceptance process, and local

staff cannot influence loan acceptance.) If a loan is offered, the customer

signs forms that disclose the terms of the loan and convey the information

mandated by state laws, including the APR. The CSR puts the cash and a

copy of the paperwork inside a standard size (4 x 9 inch) company envelope

and writes the payment due date and amount due on the calendar printed on

the outside of the envelope.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

222

Sunstein and Thaler supra note 217 at 1182.

223

Bertrand and Morse supra note 212 at 1865.

58!

From a behavioral perspective, the substantive quality of the information presented here

is clearly problematic. The chronology also highlights an important structural barrier,

namely the timing of the disclosure. The alcohol consumption tax outlined above

suggests that consumers tend to under react to information disclosed toward the end of a

transaction. From a behavioral standpoint it appears that consumers are already

"psychologically committed to the deal at this point."

224

In other words, the salience of

information disclosures diminishes the further a consumer moves along the transactional

timeline. In the context of payday loans, Edwards notes that this condition is exacerbated

further by "high-pressure tactics from salespeople who discourage consumers from

walking away from a deal at the point of consummation and the burdens of further credit

shopping."

225

Therefore, the design of behavioral information disclosures must resolve

this timing and coordination issue.

Presumably the most effective solution is to move the consumer's initial interaction with

these disclosures closer to the outset of the loan process. However, this begs a number of

important questions. Firstly, at what precise moment in the chronology outlined above

should specific narrative disclosures be presented to consumers shopping for payday

loans? Secondly, even if the relevant timing issue is resolved, how can regulators ensure

that prospective borrowers actively engage with those narratives? Along similar lines,

how can regulators ensure that consumer service representatives do not actively interfere

with this process?

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

224

Matthew A. Edwards, "Empirical and Behavioral Critiques of Mandatory Disclosure: Socio-Economics

and the Quest for Truth in Lending" (2004-2005) 14 Cornell J.L. & Pub. Pol'y 199 at 227.

225

Ibid.

59!

In a recent field experiment, Bertrand and Morse tested possible alternatives to the

traditional payday loan process outlined above by altering it in two significant ways.

226

Firstly, at the front end of the loan process, prospective borrowers were asked to

complete a short survey upon submitting their application and related support materials.

The survey asked borrowers to identify the expenses motivating the loan application,

whether they intended to use the loan for something other than an emergency, to

anticipate their capacity to absorb the cost of repaying the loan, and to describe their

broader spending behavior.

227

This information was used to capture a profile of the

average payday borrower. Secondly, at the back end of the loan process, the regular cash

envelopes, which generally indicate the payment due date in addition to the amount due,

were replaced with custom envelopes printed with three different information

treatments.

228

The first treatment juxtaposed the median annual interest rate of payday

loans (443%) against the median rates of other types of loans, such as installment car

loans (18%), credit cards (16%), and subprime mortgages (10%).

229

The second

treatment indicated the cost in fees of borrowing $300 - assuming a fee of $15 per $100

borrowed - over two weeks ($45), one month ($90), two months ($180), and three

months ($270) respectively.

230

The treatment also provided a comparison of these costs

against borrowing the same sum on a credit card with a standard interest rate ($2.50,

$5.00, $10.00, and $15 respectively).

231

The third treatment provided information

regarding the frequency with which payday borrowers renew their loans. The treatment

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

226

Bertrand and Morse supra note 215 at 1868 ff.

227

Ibid at 1869.

228

Ibid at 1871.

229

Ibid at 1872.

230

Ibid.

231

Ibid.

60!

envelope explained that "Out of 10 typical people taking out a new payday loan... 2 1/2

people will pay it back without renewing, 2 people will renew 1 or 2 times, 1 1/2 people

will renew 3 or 4 times, 4 people will renew 5 or more times."

232

Bertrand and Morse suggest that each treatment framed the cost of payday loans in ways

that are easier for borrowers to internalize than current mandated disclosures.

233

incorporating "behavioural principles from psychology and economics," the treatments

armed borrowers with the requisite cognitive infrastructure to de-bias the mental lapses

often attributed to payday borrowing mistakes, such as repeat borrowing. For instance,

the APR information treatment "makes salient the stark difference in annual rates

compared to APRs with which [borrowers] are more familiar."

234

Along similar lines, the

dollar information treatment not only provides a dollar-for-dollar comparison to another

financial product "that helps borrowers assess the fundamental value of payday

borrowing," but also extends that comparison over time. In turn, the treatment

encourages borrowers to take a longer-term view of the cost of a payday loan, which

"may partly undo borrowers' tendency to apply too narrow a decision frame."

235

The

refinancing information treatment conveys, in simple language, the frequency with which

average borrowers refinance their payday loans, which may help debias borrowers

"overconfident about their ability to repay a loan quickly or about their future income and

expense levels."

236

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

232

Bertrand and Morse supra note 215 at 1872.

233

Ibid at 1866

234

Ibid at 1871.

235

Ibid.at 1873.

236

Ibid.

61!

Bertrand and Morse implemented these treatments through one of the largest payday

lending companies operating in the United States, which gave them "access to all the

customers entering 77 stores spanning 11 states over a period of 2 weeks."

237

The

participating lender later provided the authors "with administrative data on all

transactions the participating borrowers engaged in with the lender before and after

[their] intervention."

238

The authors found that individuals who interacted with the

various information treatments were 5.9% less likely to borrow from the lender in the pay

cycles following the intervention, which translated to an 11% decline relative to their

control group.

239

Bertrand and Morse concede that, at first glance, this reduction in

numbers may seem like a disappointing result, particularly for those who believe that

payday borrowing is inherently irrational.

240

Regardless, the field experiment provides

concrete empirical data that disclosure, which is "inspired by, and responds to, cognitive

biases or limitations that surround the payday borrowing decision" has the capacity to

influence consumers calculating whether to take out a payday loan, as compared to more

traditional regulatory approaches. All told, the field trial suggests:

That getting consumers to think more broadly about the decision to take up a

payday loan - by stressing how the fees accompanying a given loan add up

over time, by presenting comparative cost information to increase

evaluability, or to a lesser degree, by disclosing information on the typical

repayment profile of payday borrowers - results in a reduction in the amount

of payday borrowing.

241

Bertrand and Morse's field experiment is encouraging in a further respect as well. The

underlying focus of their research concerned the influence of behaviorally informed

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

237

Bertrand and Morse supra note 215 at 1867.

238

Ibid.

239

Ibid.

240

Ibid at 1889.

241

Ibid.at 1867.

62!

information disclosure on future borrowing as opposed to its impact on a consumer's

initial calculus to borrow. In turn, they measured whether psychology-guided disclosure

presented to borrowers on the back-end of a payday lending transaction can debias the

cognitive shortfalls that often contribute to irrational future borrowing. Their results

demonstrate an arguably significant statistical relationship between behavioral

approaches to information disclosure and borrower decision-making. However, the

broader debate surrounding the payday lending industry concerns the influence of

cognitive bias on a consumer's capacity to accurately reflect on cost before entering into

an initial loan. Given the diminishing returns of information disclosed to consumers as

they approach the back-end of a transaction, policymakers might nonetheless consider

applying at the outset of the loan process, information treatments similar to those

employed in Bertrand and Morse's field trial, the specific narrative disclosures outlined

by Francis or the individualized disclosures proposed by Bar-Gill.

Certain skeptics contend, however, "that disclosure regimes - be they as sophisticated as

possible - do not offer a sufficient solution to the problems posed by irrational

consumption."

242

This view essentially instructs that disclosure, whether or not informed

by insights from behavioral economics, is not sufficient to empower otherwise boundedly

rational consumers to “walk away from a bad deal and keep on searching for a better

one.”

243

These critics do not deny that cognitive biases can lead to mistakes in market

behavior, but rather view disclosure as a misguided tool with which to correct the

resulting market failures. Teichman posits that the difficulties consumers face evaluating

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

242

Doron Teichman, "Too Little, Too Much, Not Just Right: Seduction by Contract and the Desirable

Scope of Contract Regulation" (2014) 9 Jerusalem Review of Legal Studies 1 at 53.

243

Ibid at 56.

63!

complex financial products are so profound, that “direct regulation, including the

prohibition of certain practices, may be the only way to provide appropriate

protections.”

244

He posits further that behaviorally-informed disclosure regimes may not

only be an ineffective alternative to direct regulation, but may also unwittingly produce a

regulatory false-positive, namely a sense that policymakers have taken the necessary

corrective action, when, in fact, more intrusive regulation is necessary.

245

Epstein also agrees that reformers should tread cautiously in translating behavioral

findings into concrete regulatory actions, albeit for different reasons.

246

Disclosure

regimes are politically popular as much for their ostensible capacity to correct behavioral

losses while preserving freedom of choice as they are for doing so cheaply; that is,

behavioral economics posits that "most of the implementation costs are borne by the

regulated parties."

247

However, Epstein has misgivings about these alleged benefits. In

particular, he doubts that behavioral disclosure regimes constitute a cheap regulatory fix.

Rather, he suggests, "legislation and regulation always cost money."

248

Consumer

responses to government regulation are rarely universal.

249

While behavioral disclosure

regimes may be simpler than existing approaches and work effectively on some

consumers, many others lack the “skills that will enable them to make use of the

information they are provided with," such as basic linguistic and arithmetic

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

244

Teichman supra note 238 at 58.

245

Ibid at 58-59.

246

Richard A. Epstein, “Behavioral Error, Misguided Regulation, and Technical Innovation: Some

Observations about Oren Bar-Gill’s Seduction by Contract” (2014) 9 Jerusalem Review of Legal Studies 1

at 93.

247

Teichman supra at 58.

248

Ibid.

249

Epstein supra at 88.

64!

aptitudes.

250

Epstein suggests that an effective behavioral disclosure regime, therefore,

would likely need to address this shortfall, possibly by relying on ancillary public

education programs, which are almost certain to prove expensive.

251

According to

Epstein, however, behavioral economics tends to overlook these costs. In the process, it

leaves policymakers with a misguided understanding that regulating behavioral losses

involves only modest public spending, when, in fact, the underlying cost burden is liable

to prove considerably more expensive. In turn, Epstein worries that policymakers may

regulate behavioral market failures without the benefit of a sound cost-benefit calculus,

the linchpin of rational law reform.

252

Accordingly, Epstein suggests that policymakers

avoid falling down this regulatory rabbit hole by "invest[ing] reform dollars in other

projects, relying on market forces to keep the size of the admitted behavioral losses in

check."

253

Empirical data may be required to blunt these criticisms. Put another way, policymakers

hoping to incorporate behavioral insights into their regulatory toolkit may need to

demonstrate that psychologically-guided disclosure, for example, represents more than

good intentions. Accordingly, these policymakers might consider proposing their

reforms as 'temporary law'. Temporary laws are essentially "regulations that include an

expiration date." Ginsburg et al. argue that making restrictions temporary allows for,

[...] a form of political compromise that might decrease the costs of political

struggles. Proponents of regulation will accomplish their goal but will, by

accepting an expiration date, bear the costs of extension. Opponents of

regulation will be less opposed to temporary rules than permanent ones.

Furthermore, if the proponents and opponents of regulation have genuine

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

250

Teichman supra at 57; Epstein supra note 243 at 88.

251

Epstein supra.

252

Ibid at 93.

253

Ibid.

65!

uncertainty about the consequences of a particular intervention, they might

welcome the information revealed by the temporary law.

254

In other words, temporary legislation can create space for policymakers to gather

information about institutional reforms that would otherwise run into political opposition

driven largely by "uncertainty as to what the effects of such a law would be."

255

In turn,

policymakers can better evaluate whether a proposed reform is more closely aligned with

an efficient outcome than the status quo, without having to absorb the fiscal burden and

attendant political risks inherent in permanent legislation.

256

If the premise on which the

temporary law is based proves false, then upon its expiry the relevant regulatory

framework merely reverts back to the status quo ante.

257

Conversely, if the temporary

law achieves what it set out to achieve, namely a more efficient outcome than the status

quo, then the targeted reform is less likely to face the informational hurdles preventing it

from becoming the dominant regulatory device. In this sense, "temporary law works like

an experiment."

258

Applied to payday lending reform, a temporary legislative approach to psychologically-

guided mandated disclosure may temper the conflict between its libertarian critics and

those favoring more intrusive regulation, such as permanent bans. On the one hand, the

temporary reform can reveal whether or not psychologically-guided disclosure regimes,

in and of themselves, are sufficient to significantly move consumer behavior toward

efficient outcomes or whether more intrusive intervention is needed. On the other hand,

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

254

Ginsburg et al., "Libertarian Paternalism, Path Dependence, and Temporary Law" (2014) 81 University

of Chicago Law Rewiew 291 at 297-298.

255

Ibid at 326.

256

Ibid at 358-259.

257

Ibid at 297.

258

Ibid.

66!

as a temporary regulatory exercise it involves no enforcement costs; if the law's

effectiveness correspondingly diminishes, then this suggests behavioral disclosure

treatments are not necessarily a low-cost stand-alone strategy for addressing behavioral

losses, which thereby reinforces the libertarian critique.

Along these lines, policymakers might consider the following modest proposal. In order

to submit a payday loan application, prospective borrowers must study a short narrative

that conveys, in simple terms, the potential finance costs of a payday loan. As a further

pre-condition for loan eligibility, these consumers must also complete a rudimentary

questionnaire that involves simply repeating the information gleaned from the narrative.

This approach to disclosure ostensibly satisfies many of the behavioral considerations

outlined by the literature that has been reviewed in this thesis. Disclosure staged at the

outset of the loan process is more likely to register as salient with consumers and the

questionnaire ostensibly encourages more active engagement with the relevant

information, which may help prospective borrowers to think more long term before

proceeding with the loan process. Regulators could also adopt a number of strategies to

thwart customer service representatives from interfering with this process. For instance,

there might be concern that lenders will encourage their customer service representatives

to become sufficiently familiar with the narrative and related questionnaire to be able to

hurry prospective borrowers through the loan process by supplying them with the correct

answers up front. Above and beyond expressly warning borrowers not to interact with

third parties when completing the questionnaire, regulators could also employ multiple

narrative disclosures that are not only regularly updated, but also delivered to payday

lending outfits in serial numbered pre-sealed envelopes while further requiring borrowers

67!

to reseal their completed questionnaires before submitting them to the lender. Payday

lenders could also be required to submit all completed as well as any uncompleted

questionnaires to regulators as a condition of maintaining their license. Moreover, this

type of intervention does not require regulators to disturb current regulatory measures.

Rather, policymakers can implement this type of information disclosure in lockstep with

existing requirements, such as the obligation that lenders conspicuously display the dollar

amount of their fees in-store. In a sense, this approach is relatively similar to the legal

requirement, in Canada, that skill-testing questions, such as a basic arithmetic exercise,

be completed as a pre-condition to participating in the contests or give-aways commonly

held by department stores and grocery chains.

In sum, it may be useful to reframe disclosure as a debiasing mechanism to counteract the

underestimation bias that routinely contributes to excessive borrowing and less as a tool

for relaying abstract financial details to consumers who are very unlikely to appreciate

them as guideposts for making informed borrowing decisions. In this sense, debiasing

disclosures “have the potential to make a significant impact by reducing the welfare costs

imposed by repetitive borrowing mistakes.”

259

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

259

Francis supra note 1 at 638.

68!

Chapter 6

Conclusion

Payday lending regulation in Canada has undergone a dramatic transformation in recent

years. Under the previous regime, all lenders were subject to a federal usury rate ceiling.

The government did not, however, enforce the federal interest rate cap against payday

lenders. As a result, payday lenders were largely unsupervised by federal and provincial

regulatory authorities. In turn, they consistently levied interest rate charges well in

excess of the federal usury limit. Given the ballooning debt loads of many payday

borrowers, the federal government acknowledged that better protection than the

regulatory framework provided was needed. The federal government thus opted to

delegate authority over the payday loan industry to the provinces. The resulting policy

make-up now includes a patchwork of outright bans, limitations on interest rates and

mandated disclosure rules. Aside from the prohibitory model adopted by Quebec and

Newfoundland, the rest of the provinces appear to have embraced the notion that if

borrowers are unambiguously provided with the statistical determinants of a prospective

loan, they will make the borrowing decision that best accords with their needs. This

paper has argued that this framework of disclosure is fundamentally misguided. In

particular, it is grounded in the notion that consumer-decision makers are inherently

rational actors. However, increasingly robust insights from behavioral economics

demonstrate that the decisions of most borrowers are informed by cognitive biases that

cloud their ability to make informed decisions regarding the extent of their debt

obligations. In particular, borrowers consistently underestimate the likelihood that they

will borrow for longer than the standard two-week loan. In turn, payday borrowers

69!

routinely incur unexpected additional costs that often result in financial paralysis.

Moreover, payday lenders are keenly aware of consumer psychology. As a result, they

design and package their loan products to respond to the consumer underestimation bias.

Accordingly, this paper suggests that Canadian policymakers consider adopting a similar

strategy, namely, applying mandated disclosure regimes that involve using certain

cognitive biases to counteract others. In particular, these debiasing measures would take

aim at borrowers who suffer from excessive optimism by making the potential

consequences of payday loan related over-indebtedness more available to them in a

corresponding effort to increase their estimates of the likelihood of the occurrence. This

task could be accomplished in any number of ways. Debiasing disclosure might involve

requiring lenders to present prospective borrowers with vivid narratives of typical payday

borrowers in financial distress, not unlike the requirement that cigarette packages bear

graphic photos of smokers suffering from tobacco-related illnesses. Regulators might

also require lenders to provide borrowers with individualized statistics and information

regarding their past borrowing habits, including the number of payday loans issued to

them in the previous year in addition to the dollar amount in fees they paid to facilitate

those loans. Altogether, the goal is to nudge consumers to better appreciate the real costs

of payday loans, so that they can make informed decisions about whether to use them.

70!

Bibliography

LEGISLATION

Alta Reg 157/2009.

An Act respective Payday Loan Agreements, Payday Lenders and Borrowers, 2007, c P-

4.3.

BC Reg 57/2009.

Consumer Credit Cost Disclosure 15 USC s 1665a (2000).

Consumer Protection Act, 2002, S.O. 2002.

Criminal Code R.S.C. 1985, c C-46.

Manitoba Consumer Protection Act, R.S., ch. C200.

Man Reg 50/2010.

Payday Loans Act, 2008, S.O. 2008.

Sask Reg RRS P-4.3 Reg 1.

The Consumer Protection Act, CCSM, c C200.

Truth in Lending Act 15 U.S.C. (2000)

Truth in Lending Act 12 CFR (2003).

Uniform Consumer Credit Code, 2001 (Austrl.).

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Garland v. Consumers' Gas Co., [1998] 3 SCR 112.

In the Matter of the Consumer Protection Act, 2011 NSUARB 22 (Nova Scotia Utility

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Ali, Paul, McRae, Cosima and Ramsay, Ian. “Payday Lending Regulation and

71!

Borrower Vulnerability in the United Kingdom and Australia (Forthcoming

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SECONDARY MATERIALS: ARTICLES

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Bar-Gill, Oren and Warren, Elizabeth. “Making Credit Safer” (2008) 157 U. Pa. L. Rev.

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Consumer Credit Protection Law in the United States and Canada" (2012) 2

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Lessons" (2008) 4 CLPE 3.

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Chin, Pearl. "Payday Loans: The Case for Federal Legislation" (2004) 3 University of

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72!

Edwards, Matthew A. "Empirical and Behavioral Critiques of Mandatory Disclosure:

Socio-Economics and the Quest for Truth in Lending" (2004-2005) 14 Cornell

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Epstein, Richard A. “Behavioral Error, Misguided Regulation, and Technical Innovation:

Some Observations about Oren Bar-Gill’s Seduction by Contract” (2014) 9

Jerusalem Review of Legal Studies 1.

Francis, Karen E. "Rollover, Rollover: A Behavioral Law and Economic Analysis of the

Payday-Loan Industry" (2009-2010) 88 Tex. L. Rev. 611.

Fusaro, Marc Anthony and Cirillo, Patricia J. "Do Payday Loans Trap Consumers in a

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Garoupa, Nuno. “Behavioral Economic Analysis of Crime: A Critical Review” (2003) 15

European Journal of Law and Economics.

Ginsburg et al., "Libertarian Paternalism, Path Dependence, and Temporary Law" (2014)

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James, Simon and Edwards, Alison. “The Importance of Behavioral Economics in Tax

Research and Tax Reform: The Issues of Tax Compliance and Tax

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Amend ss. 522(f)(1)(B) and 548(a)(1)(B) of the Bankruptcy Code to Protect

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Polinsky, A. Mitchell and Shavell, Steven. "Punitive Damages: An Economic Analysis"

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Shavell, Steven. “Extensions of the Theory of Deterrence” in Foundations of Economic

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Skiba, Paige Marta and Tobacman, Jeremy. "Do Payday Loans Cause Bankruptcy?"

(2009) Vanderbilt Law and Economics Research Paper No 11-13, online: SSRN

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Sunstein, Cass R. et al., Punitive Damages: How Juries Decide (Chicago: University of

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Sunstein, Cass R. and Thaler, Richard H. "Libertarian Paternalism Is Not an Oxymoron"

(2003) 70 University of Chicago Law Review 4.

Sunstein, Cass R. “Behavioral Economics, Consumption, and Environmental Protection”

(2013) Regulatory Policy Program Working Paper RPP-2013-19 (Cambridge,

MA: Mossavar-Rahmani Center for Business and Government, Harvard Kennedy

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(2013) Forthcoming in Handbook on Research in Sustainable Consumption

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Teichman, Doron. "Too Little, Too Much, Not Just Right: Seduction by Contract and the

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OTHER MATERIALS

Atkins, Eric. "Ottawa seeks overhaul of how food labels measure sugar intake" The

Globe and Mail (14 July 2014), online: The Globe and Mail

<http://www.theglobeandmail.com>.

Buckland, Jerry et al. "Serving or Exploiting People Facing a Short-term Credit Crunch?

A Study of Consumer Aspects of Payday Lending in Manitoba" (2007) Report for

the November 2007 Public Utilities Board Hearing to Cap Payday Loan Fees.

Carter, Susan Payne et al. "The Difference a Day (Doesn't) Make: Does Giving

Borrowers More Time to Repay Break the Cycle of Repeated Payday Loan

Borrowing?" (Paper delivered at the American Economic Association, 5 January

2013), online: AEA <http://www.aeaweb.org>.

Center for Responsible Lending. "APR Matters on Payday Loans: Interest rate

disclosures allow apple-to-apple comparisons, protect free market competition"

(2009) CRL Issue Brief, online: CRL <http://www.responsiblelending.org>.

Etherton, Laura. "Predatory Lending in Lane County: A Survey of Payday Lending in

Eugene and Springfield" (2006) Oregon Student Public Research Interest Group,

online: OSPIRG <http://www.ospirg.org>.

Kitching, Andrew and Starky, Sheena. "Legislative Summary (PRB 05-81E0 Payday

Loan Companies in Canada: Determining the Public Interest" Parliamentary

Information and Research Service (26 January 2006), online: Parliament of

Canada <http://www.publications.gc.ca>.

Los Angeles Times Editorial Board, "Stop Legal Loan Sharks," Los Angeles Times (14

May 2001) online: Los Angeles Times <http://articles.latimes.com>.

Montezemolo, Susanna. "Payday Abuses and Predatory Practices" (2013) Center for

Responsible Lending, online: CRL <http://www.responsiblelending.com>.

Morgan, Donald P. "Defining and detecting predatory lending" (2007) Staff Report,

Federal Reserve Bank of New York, No. 273, online: Econstor

<http://www.econstor.eu>.

Ontario Ministry of Consumer Services "Capping Borrowing Costs: A Balanced

Approach to Payday Loans in Ontario" (2009), online: <http://www.sse.gov.on.ca>.

Parrish, Leslie and King, Uriah. "Phantom Demand: Short-term due date generates need

for repeat payday loans, accounting for 76% of total volume" (2009) Center for

Responsible Lending, online: CRL <http://www.responsiblelending.com>.

"Payday lenders skirt loan charge limits" CBC News (14 June 2011), online:

76!

<http://www.cbc.ca>.

Public Health Agency of Canada, Obesity in Canada: A Joint Report from the Public

Health Agency of Canada and the Canadian Institute for Health Information

(Ottawa: Public Healthy Agency of Canada, 2011).