Payday loans with a conscience

"Don't be so naïve, that simply because it appears on a piece of paper, that that's sufficient protection for what are really very vulnerable borrowers, at the bottom of the economic ladder," the law professor said when told of Ontario's position. "It's bizarre for government officials to say, ‘Well as long as it’s all spelled out'. How do they know that it's all spelled out? Who's supervising it? They sure ain't."

The Toronto Star
June 21, 2004

Payday loans with a conscience
U.S. credit union freeing customers from trap. In Canada, industry wide open and unregulated.
Nicole MacIntyre and Jim Rankin

In North Carolina, a credit union is doing what the government couldn't — freeing people from the payday loan trap.

For less than $5, members of the North Carolina State Employees Credit Union can borrow up to $500 until their next payday. The loan's interest rate is just 11.75 per cent a year. It's payday lending at a cut rate and with a conscience.

The credit union started offering "salary advances" in 2001, the same year a law permitting payday loans expired. The small payday operations obeyed the law and stopped selling loans. The bigger chains just partnered with out of state banks and kept loaning, arguing they were no longer bound by state law.
They're still going, offering loans with annual interest rates of 200 to 900 per cent — a clear defiance of the state's usury limit of 36 per cent.

"Increasingly incensed" by how the payday lenders were taking advantage of their members, the State Employees Credit Union decided to offer a cheaper alternative, says Phil Greer, vice-president of loan administration.

About 38,000 of their million members use the service. Most use it continuously.

To help members who have fallen into the notorious cycle of taking out repeated payday loans because they can't pay them off, the credit union puts 5 per cent of each advance into a savings account. The money belongs to the clients and can be taken out at any time. The account allows members to build savings so they can eventually make it through a pay period without needing a loan. Once members use the account, they can't get another payday loan for six months.

The credit union makes just enough money off the interest charged to cover the cost of the program. Helping their members get through financial hardships is their main priority, says Greer, not profit.

"We feel like we can make a difference to the lives of our members."

In Canada, credit unions and banks are not in the payday loan business. People with no credit and desperate for money often have little option but to turn to the 1,200 payday loan stores that have sprung up across the country over the past decade. The industry is wide open and unregulated.

A three-month investigation by the Star found an industry that sets up in low-income neighbourhoods and charges a confusing hodgepodge of fees and interest.

When combined and calculated as an annual rate, interest and fees charged by a dozen payday lenders sampled by the Star ranged from 390 per cent to as much as 890 per cent, for a two-week loan. That's well above the 60 per cent per annum limit set out in the Criminal Code.

The payday lending industry insists it is operating within the law — a position it may have to defend in a number of proposed class-action lawsuits, launched by borrowers who say their rates are criminal.

The lawsuits have thrust payday lenders into the spotlight. But many say it's the duty of government — not the courts — to keep in check an unregulated financial industry that has the potential to ruin lives.

Payday lending as it exists now, say some critics, should be banned as a predatory practice feeding off the poor. Georgia did just that this spring when it pulled the plug with new usury laws. Fifteen other states have implemented or enforced existing laws that effectively outlawed payday lending.

Thirty-three other U.S. states have chosen to regulate the payday loan industry. For the most part, however, the rules are weak and serve simply to legitimize the business and do little to protect vulnerable borrowers, say critics.

Consumer advocates and academics interviewed by the Star say provincial and federal governments must undertake several key actions to deal with the payday industry, beginning with:

  • The Criminal Code. Modify it to directly address short-term loan products. That would allow provinces to push ahead with meaningful regulation.
  • Strict regulation and licensing. Set limits on all fees and interest and allow lenders to borrow for longer terms and pay back in instalments. Restrict loan extensions, back-to-back loans and rollovers, the practice of continuing a loan by paying off the fees and interest. Mandate a lengthy waiting period between loans and cooling off period after a loan.
  • Monitor the industry. Install a watchdog to ensure compliance with regulation. Require lenders to provide regular financial reports. Start a database to ensure customers don't have multiple loans at a time.
  • Protection and education. Create a 1-800 number for complaints. Force lenders to clearly state the real cost of borrowing. Inform consumers about budgeting and credit alternatives.
  • Encourage mainstream financial institutions to enter the short-term loan market.

Bob Whitelaw, president and CEO of the newly formed Canadian Association of Community Financial Service Providers, says the payday lending industry supports regulation and will work with government advisers, researchers, economists and marketing people to achieve that objective.

"The number one goal is to do whatever is necessary to establish and maintain the credibility of this industry."

Until 1981, Canadians taking out small loans, at the time mainly available through consumer loan companies such as Avco Financial Services, had protection from the Small Loans Act. It covered loans of $1,500 or less, required licensing and set graduated borrowing rates.

Federal legislators repealed that law, replacing it with a Criminal Code amendment setting the maximum annual interest rate at 60 per cent.

The law was aimed at mob-style loan sharking, but in theory treats loan sharking and commercial loans alike. It has never been used to charge a payday lender. University of Toronto law professor Jacob Ziegel believes it is woefully inadequate. Ziegel suggests the law either be replaced or modified to make the distinction between loan sharks and commercial lenders — as it already does for fees charged by instant tax refund businesses. "You need something like a payday loans, or small loans, act, that we had," says Ziegel. "The federal government threw out the baby with the bath water."

Duff Conacher, co-ordinator of Democracy Watch, an Ottawa-based non-profit government watchdog, says the federal government can get rid of the potential for abuse by adopting a floating rate model.

"If it was at a reasonable interest rate, where they weren't going to get into the cycle that turns it into a predatory loan, then there isn't a problem."

The government has been looking at the alternative finance market, including payday loans, for several years. On Friday, members of the Consumer Measures Committee, a partnership of federal, provincial and territorial government departments responsible for consumer affairs, met for the second time this year to explore policy options. Michael Jenkin, director-general of the Office of Consumer Affairs and co-chair of the committee, says any policy changes will take time because the issue is "complicated," and there is no hard data on the payday lending industry's practices, revenues or customers.

A few provinces already license payday lenders but don't regulate their services. Certain payday loan practices are prohibited in Saskatchewan, but critics say the governance has been ineffective. In Quebec, the government has refused to license payday operations.

All provinces are rolling out cost-of-credit regulations. Manitoba is proposing lenders fully disclose all costs, in the form of an annual percentage rate, in their advertising.

Ontario has plans later this year to introduce cost-of-credit disclosure legislation that would require all loan businesses, from payday lenders to car dealers, to post the total cost of a loan as an annual interest rate.

Rob Dowler, the acting assistant deputy minister in charge of consumer protection for the Ministry of Consumer and Business Services, hopes clear disclosure will allow consumers to "vote with their feet."

"I guess we'd like to think in Ontario that we've taken the first step, which is to at least put in the information in front of consumers and hopefully when that's done, people will make decisions that are sensible and do some comparison shopping."

That's not nearly enough, Ziegel maintains.

"Don't be so naïve, that simply because it appears on a piece of paper, that that's sufficient protection for what are really very vulnerable borrowers, at the bottom of the economic ladder," the law professor said when told of Ontario's position.

"It's bizarre for government officials to say, ‘Well as long as it’s all spelled out'. How do they know that it's all spelled out? Who's supervising it? They sure ain't."

Payday lending, like any financial service, says John Lawford, of the Ottawa-based Public Interest Advocacy Centre, is open to abuse and requires government control. "It's not like a little basket weavers' association that you're trying to regulate," he points out.

Lawford presented his report on payday loans to the Consumer Measures Committee on Friday. He was joined by Jean Ann Fox, director of consumer protection for the Consumer Federation of America and a thorn in the side of payday lenders.

Fox has watched closely over the U.S.'s evolving payday loan industry, lobbying governments and monitoring how individual states tackle lenders within their borders. "Canada let this business get a toe hold, and then established, and now prolifically provided, without taking enforcement action," says Fox.

"They've been concerned about it, they've been talking about, they've studied about it, but to the best of my observations nothing has been done about it except for these private lawsuits."

The urban phenomena of payday lending has taken root in Canadian cities from coast to coast. In north Winnipeg, its epicentre is the corner of Selkirk Ave. and Main St. — payday loan central. They've opened up next to other so-called alternative, or fringe, financial services, such as pawn shops and rent-to-own stores.

In 1980, there were 20 bank branches and credit unions in the north end, and one alternative financial services store, a pawn shop. Today, there are no banks, two credit unions, and nearly 20 alternative financial services stores, and almost half of those are payday lenders.

"Every other door, it seems, is either a money lender or a pawn shop or a rent-to-own," says Judy Wasylycia-Leis, the incumbent New Democrat MP for Winnipeg North Centre.

She watched the slide, and pleaded, along with the community, with the banks to stay.

CIBC, she says, sent a few executives from Toronto to visit. But it didn't change much.

Since the visit, the bank shut down four more branches in the another inner-city riding.

Wasylycia-Leis, who has drafted a private member's bill that would require justification from banks prior to branch closings as well as a motion calling for regulation of the payday lending industry, doubts the banks will come back.

"I think, really, the only alternative is a new model, a community-based alternative financial service, where an operation has the capacity to loan money, to cash cheques, and at the same time to educate consumers about how to save money."

Sort of like the credit union in North Carolina.

Credit unions in Canada are not in the payday business. The consensus, says Veronica Feldcamp, director of trade association services at Credit Union Central of Canada, is that "there needs to be some consumer protection in the area" before credit unions would offer the service.

The Royal Bank has dipped its toe tentatively into the alternative financial services market.

The bank currently has two Cash & Save outlets, one in Regent Park and the other in Parkdale, which allow customers to cash cheques without holds at a cost of $1.25 per $100. Both opened after regular branches moved out.

Neither location offers payday loans, though they say clients have expressed interest in the service. So far, says Anne Lamont, vice-president of policy and regulatory affairs for RBC, the bank has stayed away from the contentious industry because of mixed reviews about its merits.

"Obviously, there's a perceived need out there. We would want to be looking at it. The one thing that we do not want to promote is something that is going to be a spiralling effect, so somebody can't get themselves out of debt."

The banks, Lamont says, can't afford to offer customers small, short-term loans with interest rates of less than 60 per cent, as critics have suggested they should.

"When you start talking about sitting down, talking to a client, processing an application, putting it into your system, having the technology to support it, it becomes a very, very costly way to advance $300."

Lawford disagrees and ended his report on payday lending with a plea to the mainstream institutions to give consumers a more palatable option.

"The banks could afford to do this. They could afford to give somebody a loan at 20 per cent over six months repayable, but they're not going to do it. It doesn't make them any money," says Lawford.

"Ideally…I would like them to have to offer that, just because they're banks and we live in a society where not everyone wants $20,000."


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