A maze of fast cash and fees

Re-loaning isn't re-loaning at all. It's a nice way of saying rollover, a dirty word payday lenders try to avoid because of its nasty connotations…The Star opts to roll over…When the Star decides to pay off the loan after eight weeks of rollovers, the $100 loan has cost $96.88.

The Toronto Star
June 19, 2004

A maze of fast cash and fees
Over the course of two months, a Star reporter took out 12 loans from 12 Toronto payday lenders. ‘Fees’ plus interest totalled ma.
Nicole MacIntyre

Tucked in the back corner of the Seaway Plaza in south Etobicoke, past the 24-hour laundromat and before the abandoned Chinese restaurant, Totally Cash stands out as the newcomer to the strip.

Its blue and yellow sign, offering payday advances and money transfers, is brighter than the rest after less than a year in business. Beyond the barred windows, a single chair sits on a spotless, newly tiled floor.

The counter is at the back, chest high, and topped by protective glass. A lone man in the rear of the office is on the phone. He looks up to acknowledge his visitor and keeps talking. Five minutes pass. A bottle of Pepto-Bismol and a pile of papers clutter the counter. A TV, split into four scenes, records the long wait and empty parking lot.

Hanging up, the man, who identifies himself as Nate, approaches the counter and pushes an application form through a hole in the glass. The form is paper interrogation. Name, address, phone number, social insurance number, employer, job history, references from friends and family, landlord's name and number and details of any outstanding debts.

Scanning the finished paperwork, Nate picks up the phone and, on the spot, calls the reporter's boss, the Star's city editor, to confirm employment. Then, on speakerphone, he calls each reference to make sure their numbers work. When one relative picks up, he hangs up.

Nate asks about other loans and discovers the Star reporter has taken out two recent payday loans from competitors down the road. That doesn't seem to concern him, but he says in the future it would be best to deal exclusively with him.

Almost an hour into the transaction, Nate's finally ready to hand over the money. The reporter asked for $100 but is told the choice is $80 or $120.

Today, $120 costs $150.

The reporter gave permission for money to be directly debited from her account to cover the loan and the $30 markup — the cost of borrowing the $120 for what was, in this case, a week. A loan document, signed and handed over to the reporter at her request, doesn't break down the cost of the loan into fees or interest. It simply states when the $150 is due and warns there is a $95 fee if the debit doesn't go through.

It also warns of "$300 legal/administrative costs plus court costs $245, plus document preparation costs of $60, plus late payment fee of 1 per cent per week" on any amount owing if you default.

If one were to consider the $30 markup as interest, and calculate it as an annual percentage rate, the rate for the Star's seven-day loan is in excess of 1,300 per cent. If the loan were for a two-week pay period, the rate decreases to 652 per cent, and ranks among the highest of those sampled by the Star.

That's more than 10 times the 60 per cent limit allowed by the Criminal Code of Canada, although the law has never been used against a payday lender. It's on par with the amounts being charged by other payday lenders in the country.

The Star shopping mission, part of a three-month investigation into the payday loan business, shows how erratic the industry is. With no government or licensing body to answer to, payday lenders charge a confusing assortment of interest and fees.

Many also allow, and in one case all but encourage, "rollovers." This allows a borrower to repeatedly refresh an outstanding loan by paying a fee, instead of paying in full — a practice critics say can lead to an inescapable cycle of debt.

Most of the 12 Toronto payday lenders sampled had different names for their fees and different prices for their loans. One company, Payroll Loans, referred to the extra charges as a "brokerage" fee.

Wage garnishment forms, which state payments can be taken off paycheques if a customer defaults, were required in nearly every store. Never mind that they are technically unenforceable. In Ontario, only credit unions and Revenue Canada can use such a tool. All other creditors would have to get a garnishment order from the courts.

The payday loan industry is taking steps to self-regulate, and says the interest and fees charged reflect the cost and risk of short-term, payday lending.

According to one U.S. study, the default rate is as low as 2 per cent. In an analysis penned by a Canadian payday lender, the rate — unstated — is said to be much higher. Amir Mahmoudzadeh, executive vice-president of Cambridge-based Cash 4 You Corp., says in his report that some form of regulation is required but shouldn't compromise lenders' revenue. He declined to be interviewed, and directed the Star to the payday lending industry's newly formed association.

The association has enlisted an outside researcher to study the operating costs of the payday lending business. It hopes to have the results of that study by the end of the year.

The industry also maintains the fees charged on top of interest, usually just below the legal limit, should not be considered as interest — a debate that's at the heart of a growing number of proposed class-action lawsuits.

When combined and calculated as an annual interest rate, the interest and fees charged by the 12 stores sampled by the Star ranged from 390 per cent to a high of 891 per cent, on a two-week loan.

The Criminal Code doesn't distinguish between short- and long-term loans. It says, with some exceptions, that interest is the total of all charges and expenses attached to a loan or credit offering, and calculated as an annual percentage rate.

When it comes to payday loans, Nate, like everybody else in his line of business, disagrees.

"It's not an interest rate. We charge a fee for processing and the risk that we take because, as you know, we don't check credit or anything. We just have our people (clients) pay it off on their payday," Nate said when contacted by the Star, after the shopping mission had concluded and all the loans had been paid back in full.

He didn't set the rates, Nate added. His boss did, and wasn't available. Nate eventually agreed to take a message, but warned it was unlikely the boss would call back. He didn't.

Over the course of a month, the Star took out three loans from Totally Cash. The first, $120, cost $30. The second, $100, cost $25. The third loan, in an effort to shore up some customer loyalty, was described as a "free loan" but still cost an extra $5.

"What was the five dollars for?" Nate said on the phone, parroting a reporter's question. "I don't know."

It's billed as the "easiest way to get the money you need when you need it."

Based online, 310-Loan caters to customers too busy or embarrassed to head to the store down the street. Rates are no cheaper, about $25 on $100. The process isn't any faster, either.

But there is privacy, at least initially. An application can be filled out online. Then comes a phone call requesting the customer send, by fax, a signed loan agreement, pay stubs and bank statements.

What starts as an online application for a $100 loan ends with a phone call, confirming approval.

The money is deposited directly into the Star reporter's bank account the next business day. No face-to-face meeting required.

A week and a half later, three days before the loan is due, the Star receives its first reminder phone call.

"Are you looking to re-loan on the hundred?" asks a friendly voice.

Re-loaning isn't re-loaning at all. It's a nice way of saying rollover, a dirty word payday lenders try to avoid because of its nasty connotations.

But rolling over is exactly what 310-Loan and others are offering. The Star opts to roll over, and, instead of paying off the $123.62 owed, $23.62 is automatically debited from the reporter's bank account and the loan is extended for another two weeks. A later phone call confirms $22 of it is an "administration fee" and the $1.62 is interest.

Paying down the interest, fees and principal in instalments is not an option.

Two weeks later, 310-Loan repeats the same offer. The Star rolls over a second time. And a third. When the Star decides to pay off the loan after eight weeks of rollovers, the $100 loan has cost $96.88.

Passing a stack of loan papers through the photocopier, the young Stop ‘N’ Cash employee takes a moment to warn his new client about the dangers of payday loans.

"One word of advice," he says above the whiz of the machine, "try not to get in a cycle. I don't know your personal situation; it's not my business. But from what I've seen, don't get into the cycle of having to re-borrow the whole paycheque because you see a lot of customers doing that and then you get behind in your bills, and so on and so forth."

The clerk discovers he's 10 days older than the Star reporter. He is 24, and works for one of 59 Stop ‘N’ Cash franchises in the province. He speaks with authority about the ins and outs of payday loans as he enters data into a computer.

Unlike other stores, which offer services like money-changing, cheque-cashing and tax returns, Stop ‘N’ Cash offers only payday loans. As a first-timer, the Star reporter is offered a maximum loan of slightly more than half of her take-home pay.

A one-time start-up fee of $11 will be added on to today's transaction. Borrowing $120 — Stop ‘N’ Cash also doesn't offer $100 loans — costs $41, the most expensive of all payday loan outlets sampled.

Several blocks away, there's a small line at the Money Mart. One customer pays a bill, while another inquires about an income tax return. The female teller behind the glass-enclosed counter is friendly when she learns her customer is new to payday loans.

Money Mart calls it a "fast cash advance." Explaining her way through the company's multiple loan forms, she asks the applicant's height, avoiding the space for weight. Reaching for a small computer camera, she tells the customer to smile as she takes a mug shot for their records.

Borrowing $100 takes less than 30 minutes. Next time, she promises, you'll be in and out in no time. Pulling five $20 bills from a drawer, she takes the cheque for $118.94. If the reporter pays $100 by the due date, a week away, the cheque will be returned and the loan will only cost 89 cents, which is interest charged at 59 per cent per annum. Here's the catch — the due date is the day before payday, standard practice for Money Mart. Waiting until you get paid will cost you the full $18.94.

If Money Mart is the McDonald's of the payday lending business, Advance Cash is the no-frills neighbourhood greasy spoon. It's located on the second floor of a Jane St. plaza, with minimal signage.

After a short climb up the stairs, customers are left to sit in the waiting room. It's bare, decorated only by a few chairs, one plant (living), one plant (dying), and an Advance Cash poster pinned to the wall.

Inside, a closed-circuit television hangs from the wall, showing the office for what it is. Small. Stuffy. Two desks. A young employee, with fancy nails and hunt-and-peck typing skills.

She takes close to an hour to enter the reporter's information on her keyboard. On her screen are the names, addresses, numbers and employers of her past 20 or so customers. All personal information is in clear view of her client.

The rates here are $15 on the $100 per week. Almost every client on the computer screen has taken out the business's maximum of $200.

Before taking $100 in cash from a filing cabinet on the floor, the woman asks the reporter for two cheques. One, she explains, should be made out for the repayment amount of $115. The other should be signed and left blank.

She's understanding when the reporter balks at handing over a signed, blank cheque. All the customers do it, she says, so Advance Cash can fill in a new amount if customers default on their loans. She attempts to call her boss. He's not there, so she relents, handing over the cash without receiving the blank cheque.

Far on the other side of town, along Sheppard Ave. E. in Scarborough, Cash Now is also operating out of the top floor of a strip mall. When customers reach the door, it's locked. With a knock, a man's voice asks, "Who's there?"

Realizing a new customer awaits, a middle-aged man named J.J. opens the door and ushers his young client inside.

His rates are $10 on $100 per week, but the minimum fee is $15. That means if someone just wants $100, it actually costs $15 for the week. Customers, of course, have the option of taking out a larger loan or paying it back over a longer period. The Star chose to borrow $100 at a cost of $20 for two weeks.

His rates, he tells his customer, may be cheaper than some of the competition, but it's still more expensive than the bank. His business should only be used for emergency purposes, he says.

From his computer screen he prints a slew of forms, each requiring the borrower to give permission for references and employers to be contacted, wages to be garnisheed and credit to be checked. All of these things will only be done, he says, if a customer defaults. When asked for copies of all signed documents, J.J. jokes he can't do that because his new client, a Toronto Star reporter, might put them in the paper for his competition to see. He hands over the loan papers but hangs on to some documents outlining default consequences.

There is also not enough cash on hand on this day at Cash Now, part of a small chain of franchises, but J.J., using e-mail and an Internet transfer of funds, moves the money into the reporter's account.

Now that that's over with, J.J. offers his client a frequent-user card. Though he's just advised using his service only for emergencies, this card rewards customers for multiple loans.

Every fifth loan is half price, and if you refer another cash-strapped customer to Cash Now's locked door, you'll be rewarded with a discount.

With a smile, he tells his newest client to call him, any time.

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Risks: Fox to guard the henhouse (self-regulation), Lawsuits, class action, Re-loaning, McDonald’s of…,, Canada, 20040619 A maze

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