Payday loan industry in court

Payday loan shops have mushroomed since the early '90s when the banks pulled out of the lower end of the consumer market. It is now a $2 billion-a-year business.

The Toronto Star
February 1, 2006

Payday loan industry in court
Carol Goar

In the annals of crime, the Paymax raid in Winnipeg would scarcely rate a paragraph. But to the quarter of a million Canadians at the mercy of unregulated lenders, it was a signal event.

On Jan. 7, 2005, Winnipeg police descended on four payday loan shops and carted off 150 boxloads of evidence. It was the culmination of a three-month investigation into allegations that the company was charging extortionate interest rates.

Today, the co-owners of Paymax Canada Inc., Vladimir Kvaternik, 53, and Donald Laluk, 65, appear in court to face charges of "entering into an agreement with the public to charge a criminal interest rate."

Nothing like this has ever happened before.

Law enforcement authorities have never enforced Section 347 of the Criminal Code, which prohibits lenders from charging more than 60 per cent interest rates. Provincial governments have shown no interest in cracking down on payday loan shops. Federal politicians, while deliberating endlessly about putting loan sharks out of business, have done nothing.

The eyes of consumer advocates, anti-poverty activists and legal scholars will be on Winnipeg today, as Manitoba's attorney general attempts to secure a conviction.

"I think this unprecedented Criminal Code charge is a shot across the bows of the incoming Conservative government, telling it that the provinces - Manitoba in particular - want to get this issue under control," said John Young, executive director of ACORN Canada, a non-profit group that works with low-income Canadians. "I'm hoping it will shine a light on the industry."

It is a shadowy business, although it operates in plain view. There are roughly 1,200 payday lending outlets in Canada, most found in strip malls or seedy retail zones. They cater to people who can't borrow anywhere else. Their clients typically have no collateral, a poor credit rating and a lot of outstanding debt.

Payday loan shops make it easy. All an individual needs is a pay stub and an updated bank statement to get a loan worth 50 per cent of his or her net pay. In return, the company requires a post-dated cheque covering the loan, interest charges and any additional fees.

It is these additional fees that send borrowing costs into the stratosphere. Len Terlinski, supervisor of the commercial crime unit of the Winnipeg police, says interest rates can reach 20,000 per cent on a short-term loan.

Most clients - 74 per cent of those interviewed by Strategic Communications Inc. last fall - are unaware of all the fees and charges that are tacked on to their bill.

Payday loan shops have mushroomed since the early '90s when the banks pulled out of the lower end of the consumer market. It is now a $2 billion-a-year business.

Low-income advocates have pleaded with politicians for years to curb this modern form of usury. A few backbenchers have put forward private members' bills. But they have run into a wall of indifference.

Some social activists think a successful prosecution in Winnipeg could have a domino effect across the country. But Young is dubious. He knows of no current police investigations into payday lending. He sees no evidence that Ontario and British Columbia, which have the largest concentration of payday loan shops, are willing to follow Manitoba's lead. And he is not sure what to expect from incoming prime minister Stephen Harper.

All three levels of government bear some degree of responsibility for this issue. Ottawa has jurisdiction over banking and interest rates, the provinces are in charge of consumer protection and the municipalities look after local policing.

It would be ideal if they tackled the problem together. But, if necessary, each could do a lot of good separately.

The federal government could amend the Criminal Code, bringing down the 60 per cent interest ceiling to a more reasonable rate. Ottawa could also require chartered banks to develop services for low-income clients.

The provinces could license and monitor payday lenders, aggressively prosecuting those caught gouging their clients.

The police could enforce the existing law, which would at least deter payday lenders from piling extra fees and charges on the 60 per cent maximum.

It's good to see one case of predatory lending finally coming to court.

It would be better to see the people's elected representatives standing up for them.

Carol Goar's column appears Monday, Wednesday and Friday.

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