Watchdog curbs loans firm

Critics say payday loans trap consumers in a cycle of debt and a number of class-action lawsuits have been proposed, alleging payday lenders charge interest rates higher than the 60 per cent per annum cap spelled out in the Criminal Code.

The Toronto Star
August 31, 2004

Watchdog curbs loans firm
Ontario's insurance watchdog targets Stop ""N"" Cash. Fees are charged for service ‘that cannot be offered’.
Jim Rankin and Nicole MacIntyre

Stop ‘N’ Cash payday loan company and an off-shore insurance company used by the Kitchener-based chain have been ordered to stop conducting insurance business in Ontario.

The Superintendent of Financial Services, Ontario's insurance watchdog, issued interim cease and desist orders yesterday against Stop ‘N’ Cash headquarters and SNC Insurance Company (Barbados) Inc. Its investigation determined that the companies, through an additional fee they charge on loans, had been carrying on insurance business without being properly licensed with the province.

The payday loan company and the insurance company have been ordered to stop conducting insurance business in the province.

British Columbia has issued similar orders. The rulings affect about 55 corporate and franchisee-owned stores, all but one of them in Ontario.

It is unclear what effect the orders will have on the operation of the stores in Ontario. In Abbotsford, B.C., the province's sole Stop ‘N’ Cash franchisee stopped offering insurance but remains open for business, said Ken Fraser of the B. C. Financial Institutions Commission, following the original cease and desist order issued last month.

Rather than charge insurance fees, other payday lenders, such as industry leader Money Mart, collect administrative or other fees on top of their loans.

If the payday lending chain fails to comply with the insurance regulator's orders, it could face penalties. Stop ‘N’ Cash and SNC can request a hearing into the interim order, but it becomes effective immediately.

"The Superintendent is of the opinion that the interests of the public may be prejudiced or adversely affected by any issuance of a permanent order, because SNC does not dispute that it is carrying on the business of insurance in Ontario while unlicensed," reads the Ontario order.

"Each day that SNC operates in Ontario while unlicensed, Stop ‘N’ Cash franchisees will be collecting loan insurance charges from borrowers for insurance that cannot be offered in Ontario."

For five years, Stop ‘N’ Cash has been charging clients an insurance fee equal to 24 per cent of the amount borrowed. The fee is collected by the stores and sent to the Barbados insurance company, which then rebates 97 per cent of the insurance fee back to the stores. If clients fail to pay back the loan due to death or disability, the individual stores are covered by the insurance.

Lawyer Steven Sofer, who represents Stop ‘N’ Cash, said yesterday the company has been in contact with the Ontario insurance regulator and is working to satisfy the commission's concerns. From his understanding, said Sofer, the company had made progress in convincing the regulator that there is no insurance sold between the franchisees and customers, but the regulator still has concerns that the relationship between SNC and the franchisees constitutes the business of insurance in Ontario.

"Stop ‘N’ Cash is working with the regulator to satisfy them that even on that aspect of the business, that the business of insurance is being conducted outside of Ontario," he said.

Sofer said Stop ‘N’ Cash will continue to work with the insurance commission.

It's unclear what, if anything, will happen with the millions of dollars that have been collected from customers in the name of insurance.

The Ontario order noted that "attempting to make restitution to the public for such insurance charges would be impracticable, if not impossible," and that there is no evidence SNC, the insurance firm, would have the resources to make restitution.

The commission "took this action to ensure that customers were not inappropriately charged for insurance," Rowena MacDougall, a spokesperson with the Financial Services Commission of Ontario, said in a telephone interview.

A recent Star series on Canada's burgeoning payday loan industry, which has grown from zero to 1,200 stores in less than a decade, found the businesses charge a confusing mix of fees and interest on the paycheque-to-paycheque loans.

The series, which highlighted Stop ‘N’ Cash, also included a sampling of 12 Toronto payday stores. When combined and calculated as annual interest, the fees and interest charged on a two-week loan ranged from 390 to 890 per cent. Stop ‘N’ Cash was the most expensive of those sampled.

The Ontario orders followed a ruling last month by British Columbia, and yesterday B.C. issued new orders, this time in conjunction with the Ontario orders. Critics say payday loans trap consumers in a cycle of debt and a number of class-action lawsuits have been proposed, alleging payday lenders charge interest rates higher than the 60 per cent per annum cap spelled out in the Criminal Code.

Bona fide insurance fees are excluded from the Criminal Code section that gives the definition of criminal interest, and the law hasn't been used to charge a single payday lender.

Ottawa and the provinces are looking at ways to regulate the industry.

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