Most payday lenders to end rollover loans

ACORN's Young blamed the growth of payday lending on closures of bank branches in low-income areas.

The Toronto Star
November 30, 2004

Most payday lenders to end rollover loans
About three-quarters of Canada's outlets will follow change
Canadian Press

Most of the payday loan outlets in Canada have signed on to a code of practice aimed at forestalling complaints about exploitation of vulnerable borrowers.

The new rules — "designed to protect payday loan customers and unify industry business practices" — cover 90 companies operating about 900 of the roughly 1,200 payday loan outlets across Canada, providing unsecured short-term cash advances, typically of a few hundred dollars for less than two weeks.

The Canadian Association of Community Financial Service Providers said today that its code "establishes standards in the areas of disclosure of information, business practices and consumer education."

It also prohibits rollover loans — extending loans that customers are unable to repay on time, for an additional fee.

This requirement that debts be cleared before additional credit is granted will begin Jan. 1, while the other aspects of the code are effective immediately.

The code requires members of the six-month-old association to provide full and clear disclosure of all loan terms, including fees and penalties triggered by default.

"Members will collect past-due accounts in a professional, fair and lawful manner," the code adds.

Payday loan providers must also inform clients about the appropriate use of short-term credit and the availability of debt counselling services.

The association — which doesn't represent about one-quarter of payday loan outlets, as well as Internet lenders, pawnbrokers or title loan providers — said it is developing penalties for member companies that violate its code, including fines, expulsion and publication of revoked membership.

The release of the code came two weeks after an organization representing low-income communities demanded immediate government action to rein in the payday loan industry.

The Association of Community Organizations for Reform Now, a U.S. group expanding into Canada, estimated that loans to Canadians who need a few hundred dollars to get them to their next payday generate more than $1 billion a year in revenue.

ACORN noted that while the Criminal Code limits loan interest to 60 per cent annually, the short-term fees of payday lenders, if extended for a full year, would amount to 300 to 900 per cent or more.

However, such calculations are not meaningful, Bob Whitelaw, president of the lenders association, said in an interview.

"What we're dealing with here is a small short-term loan," he said.

"I guess the best example I can give is: I rent a car regularly; I'm told the car is $50 a day…. Is it useful if the rental car company tells me: ‘By the way, that’s $18,200 for the year'?"

Today's industry move "doesn't address the issue at all of criminal interest rates," said John Young, executive director of ACORN.

And the no-rollover provision is "misleading and ingenuous," Young added in an interview.

He noted that a borrower could pay off one loan and immediately take out a new one, "so in terms of repeat cycles, and one loan after another at extremely high interest rates and finding yourself in a debt trap as a result of that, this model doesn't do anything."

The association's Whitelaw said members will display the association logo and prominently post the code of practice.

"Consumers will differentiate where they want to do business — whether with a member that complies with the code, or a payday retail store outside the membership."

Whitelaw — countering the stereotype of payday-loan clients as impoverished — said that "these are educated people: our typical consumer earns between $35,000 and $55,000 a year, has a college or high-school education, owns a home … has a job, has a bank account."

He added: "Many Canadians are living payday to payday."

ACORN's Young blamed the growth of payday lending on closures of bank branches in low-income areas.

"It is true that thousands and thousands of working Canadians and the ever-growing number of the working poor are using payday lenders," Young said.

"And that's certainly very good for the business but it's not necessarily very good for those Canadians who find themselves with no other access to small loans."


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