We're just a bunch of softies

in the U.S., when they say they're going to do something, they go after big fish. In Canada, when we say we're going to do something, we go after little fish. You don't inspire confidence … by going after little fish."

The Toronto Star
May 28, 2006

We're just a bunch of softies
WHITE COLLAR CRIME That's Canada's reputation when it comes to cracking down on corporate wrongdoing. But that's about to change, officials vow.
Tara Perkins

Payday lenders argue they provide a needed service. But are their charges fair? Chris Robinson, a professor of finance at York University, thinks they’re now.

In a study for ACORN, also known as the Association of Community Organizations for Reform Now, he proposes a fee cap that could save Canadians about $194 million a year.

That's about 57 per cent of his estimate of recent industry revenues.

Robinson predicts his proposed rate structure would drive smaller, high-cost lenders out of existence: "Their scale will be too small to survive on the lower fees."

Only one or two large chains would survive, he predicts, but they could expand and be more profitable.

Meanwhile, a legislated fee limit with the government's seal of approval might then encourage banks and credit unions to offer small, short-term loans in competition.
This, says Robinson, could lead to further rate reductions.

Mainstream financial institutions offer more services than payday lenders. So, Robinson predicts, the big traditionals would be in a position to undercut the big payday lenders, National Money Mart Co. and The Cash Store.

"Without properly designed regulation, they will not enter the market, and hence borrowers will always face exceptionally high fees," Robinson argues.

The Criminal Code of Canada sets a cap on effective annual interest rates of 60 per cent a year, or 90 cents to borrow $100 for a week. But payday lenders charge interest and fees totalling as much as $13 and $35 per $100.

Federal and provincial regulators have been studying and debating appropriate controls on the fast-growing sector of the loan business for years. Meanwhile, police in Manitoba have charged one payday lender criminally, and various former clients are seeking certification for class-action lawsuits.

Manitoba and other provinces want to legislate fee limits once Ottawa provides payday lenders an exemption under the Criminal Code, as was done earlier for tax-rebate discounters.

But Ontario seems to be holding out for federal legislation. Ottawa limits tax-rebate discounters to $15 per hundred dollars for the first $300, and for larger loans $50 on the first $300 and 10 per cent of the rest.

Robinson is proposing two alternative fee structures for payday loans. Option 1 would limit total charges on a $100 loan to $15.91 for one week, or $18.67 for four weeks. Option 2 would limit charges to $12 for up to 31 days.

Larger loans would have a lower cost per $100. But Robinson proposes loans be limited to the lesser of $1,500, or 25 per cent of net pay, with no more than 31 days to repay.
He describes his two options this way:

Option 1: A fixed fee of $10 per loan, plus an effective annual interest rate no higher than 60 per cent, plus a fee equal to 5 per cent of the loan.

Option 2: A fee of 12 per cent of the first $250, plus 6 per cent of the loan principal in excess of $250.

The current and former presidents of the Canadian Payday Loan Association say they welcome Robinson's and ACORN's call for regulation, with sufficient fees for lenders to recover their cost of operation.

But they do not endorse Robinson's proposed fee cap.

Michael Thompson, the current president, says the fee cap should be set high enough to allow any company that offers payday loans to operate at a profit, and leave it up to consumers to shop.

"We don't think he should try to manipulate the marketplace," he says.

Former association president Robert Whitelaw says Robinson should be applauded for at least putting some numbers on the table, but the data should be up for discussion.

He notes one of Robinson's proposed rate formulas is not as high as is permitted in some U.S. states. Washington State, for example, allows $15 per $100 on loans up to $500, and 10 per cent beyond that. The maximum loan is $750, for up to 45 days.

Whitelaw left the payday loan association to join the 150,000-member Alterna Savings credit union, where he is investigating the feasibility of offering small, short-term loans once the Criminal Code is amended. He has heard other credit unions are also investigating the business.

The majority of consumers who use payday lenders have chequing accounts with a bank or credit union, and access to other forms of credit. Yet, most express satisfaction with payday lenders.

Whitelaw says it's unknown whether payday-loan users don't want their main financial institutions to know cash is so tight that a payday loan is needed.

Whatever the reasons, it's clear that calls for consumer protection are coming from all sides.

James Daw, CFP, appears Tuesday, Thursday and Saturday.

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