Predatory Lending Divestment Note for Advantage SRI Advantage Capital Strategies identifies industries that have detrimental environmental, social, and economic effects and takes action to mitigate risk both through screening and advocating for change. The Predatory Lending Industry Explained Predatory lending refers to payday lenders, pawnbrokers, rent-to-own stores, subprime mortgage and auto loan providers, and cheque cashers.1 These types of loans can be acquired by almost anyone regardless of financial background, but they come with exorbitantly high interest rates and other fees. Payday loans are not provided by financial institutions such as banks, which are regulated by the federal government, but rather by providers who are regulated provincially. Many provinces do not have restrictions on payday loans, although recently there have been some provincial efforts to better control the industry. Advantage Canada SRI does not invest in companies engaged in predatory lending because of the negative social effects of this industry. There are currently no predatory lending companies on the S&P 500. The Economic Rationale for Divestment Predatory lenders are subject to provincial regulation, but they are not currently subject to the same federal regulations as financial institutions such as banks. The operation of predatory lenders is a contentious issue, as they often provide necessary financial services to those who could otherwise not access them, but charge extremely high interest rates while doing so. Recently there has been a push from certain organizations for provinces to impose stricter regulations on payday loan providers. For example, Alberta recently implemented strict regulations on the interest rates predatory lenders can charge, a change that has severely crippled the industry in that province.2 The possibility of further provincial or federal regulation on predatory lenders represents an economic risk for these companies and therefore for investors. The Social Rationale for Divestment Payday loans and other types of predatory lending are problematic because they ultimately prove unaffordable and they disproportionately affect vulnerable people who cannot afford to pay for them.3
1 ACORN Canada: www.scribd.com/document/35804053/Conflict-of-Interest-How-Canada-s-biggest-bank-support- predatory-lending 2 CBC: www.cbc.ca/news/canada/calgary/alberta-payday-lenders-suffering-bill-15-1.4114628 3 Canada Without Poverty: www.cwp-csp.ca/2015/03/cashing-in-on-poverty-predatory-lending-explained/
Payday loans often have annual interest rates of close to 400%, as compared to loans provided by banks where interest rates traditionally range from 3-8%.4 Almost any individual would struggle to pay off a loan with 400% interest, but low-income individuals are at a particularly severe disadvantage. In fact, annual interest rates over 60% are not only almost impossible to pay off, they are also criminal according to section 347 of the Canadian Criminal Code.5 However, payday loans are uniquely exempt from the Criminal Code and are regulated by the provinces. Low-income individuals, particularly the working poor, are disproportionately affected by predatory loans because they often do not qualify for bank loans due to low finances. Contrastingly, predatory lending firms will lend to anyone, regardless of income and financial health. The working poor may even be unable to open up a bank account because of their financial situation, meaning they must visit a payday loan provider just to cash their paycheck. Individuals may take out payday loans to pay for necessities such as rent, utility bills, food, or unexpected expenses such as funerals.6 Not only do these loans come with exorbitant interest rates, they are also accompanied by high service fees.7 Companies that provide predatory loans are no doubt aware of their active role in perpetuating the cycle of poverty: storefront locations are predominantly concentrated in low-income areas.8 These loans play a role in perpetuating the cycle of poverty and debilitating debt faced by many Canadians. The Environmental Rationale for Divestment There are no significant negative environmental impacts associated with the predatory lending industry. Our primary driver for divestment is social.
Further Reading: Poverty: Predatory Lending spcoxford.ca/wp-content/uploads/2017/12/FactSheetonPredatoryLending.pdf
4 Canada Without Poverty: www.cwp-csp.ca/2015/03/cashing-in-on-poverty-predatory-lending-explained/ 5 McMillan: mcmillan.ca/Canadian-interest-rate-rules 6 Canadian Centre for Policy Alternatives: www.policyalternatives.ca/newsroom/news-releases/payday-loans-and- predatory-lending-services-last-resort-survey 7 Canada Without Poverty: www.cwp-csp.ca/2018/01/slowing-down-the-predatory-lending-cycle/ 8 Huffington Post: www.huffingtonpost.ca/2015/07/31/predatory-lending-canada_n_7898598.html