Legitimizing payday loan offices

Manitoba Finance Minister Greg Selinger is not trying to drive payday lenders out of existence in his province, just regulate the practice. "We want to ensure that borrowers are protected against high fees and industry practices that contribute to the debt spiral that borrowers can encounter."

The Toronto Star
March 25, 2006

Legitimizing payday loan offices
Manitoba move aims to protect borrowers
James Daw

The number of payday loan offices in Canada has grown from zero to 1,350 in just about a decade, rivalling the number of Royal Bank of Canada branches.

They've spread in clusters to both affluent neighbourhoods and poor, unfettered by government oversight or requirements except in Quebec. One payday loan office in Ottawa is located in the same building as the Department of Finance, which doesn't say much for the money-management skills of its largely civil-servant clientele.

An administrative order in Quebec limits annual interest charges for short-term loans to 35 per cent, making it uneconomical for payday lenders to operate; so they don't.

Now Manitoba will attempt a new approach, if it can persuade Ottawa to exempt payday lenders from the 60 per cent interest cap set out in the Criminal Code of Canada to control loan sharks.

So far, Ontario has only set out requirements for the disclosure of interest and other charges. This does not do much to protect those borrowers who are so desperate they use one payday loan to repay another.

Manitoba's tabling of legislation last week is winning praise from the bulk of the payday loan industry, which sees regulation as a way to eliminate abusive practices and win legitimacy.

The province has also won conditional support from one of the harshest critics of payday lenders, and the impact their service has on poor or vulnerable clients.

"We agree regulation is critical," says John Young, executive director of Association of Community Organizations for Reform Now (ACORN), a grassroots non-profit citizen group with offices in Toronto and Vancouver.

He would like something tougher than Manitoba is proposing, such as a 20 per cent limit on the percentage of a future paycheque a person may borrow. But Young says he is hoping regulation will entice banks and credit unions to compete with payday lenders and drive down costs for consumers.

Payday lenders offer few other services to cover the cost of keeping their offices open long hours. About three-quarters of what they collect from clients goes to cover their operating costs, according to Ernst & Young. About 20 per cent is lost to unpaid loans, and 5 per cent for capital and lending costs.

In the past couple of years, the industry has come under attack on several fronts. Last year, Winnipeg police laid charges of criminal interest rates against the owners of a lender called Paymax Canada Inc.

Meanwhile, lawyers in Ontario and elsewhere have been attempting to apply the federal law to win certification for several class action lawsuits.

But, apart from those attempts, Section 347 of the Criminal Code has gone largely unenforced when it comes to payday lenders, whose fees and interest charges far exceed the interest limit. A move by Ottawa to alter the criminal-interest law was interrupted by the election.

A study by the tax policy services group of Ernst & Young in 2004 found that payday lenders charged between $10 and $35 — or an average of $20.66 — to lend $100. The average payday loan was $280 for a period of 10 days.

If the Criminal Code limit were applied to the interest rate and additional fees they charge, payday lenders could only collect 90 cents per $100, according to the two-year-old Canadian Payday Loan Association.

Manitoba Finance Minister Greg Selinger is not trying to drive payday lenders out of existence in his province, just regulate the practice. "We want to ensure that borrowers are protected against high fees and industry practices that contribute to the debt spiral that borrowers can encounter."

A survey last year by Environics Research Group found that 11 per cent of Manitoba residents had used a payday lender, compared with 3 per cent in Ontario. While that same survey found that most adults hold payday lenders in low regard, most users are satisfied with their costly, but convenient and discreet, service.

Bob Whitelaw, president of Payday Loan Association, says Manitoba's proposed law is in line with the Code of Best Business Practices adhered to by his members, who operate 800 of the 1,350 payday loan offices in the country. What's not known is the fee cap the province would set. Selinger is proposing to make fees and rates on payday loans subject to public review by the local Public Utilities Board.

If the rate is not set too low, then the larger companies will be allowed to thrive while the smaller, less efficient and more costly operators may fall by the wayside.

Until such limitations come to Ontario, those tempted to use a payday lender would by wise to get credit counselling advice.

Duke Stregger, executive director of the Credit Counselling Service of Toronto, says about 10 per cent of clients now have payday loans, double the number a couple of years ago.

James Daw, CFP, appears Tuesday, Thursday and Saturday. He can be reached at Business, 1 Yonge St., Toronto M5E 1E6; at 416-945-8633; 416-865-3630 by fax; or by email at ac.ratseht|wadj#ac.ratseht|wadj.


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