• Vancouver Sun
  • Monday, September 19, 2005
  • Page: A6
  • Section: Editorial
  • Source: Vancouver Sun

The federal government is expected to table amendments to the Criminal Code this fall that will finally give the provinces sufficient powers to regulate the payday loan industry.

This long overdue legislative initiative follows intense lobbying by consumer protection advocates, credit counsellors, anti-poverty activists, financial institutions, government bureaucrats and others concerned that short-term loans may be more of a problem than a solution for many people.

Payday lenders provide their customers with a small amount of cash to carry them over between paycheques. Usually, the borrower will hand over a personal cheque which the lender holds until the loan is repaid. Other than the cheque, the loans are unsecured, meaning no collateral is available in the event of default.

For that reason, says the Canadian Association of Community Financial Service Providers, which represents the payday loan industry, interest rates and service fees are higher than those charged by the chartered banks and credit unions.

Much, much higher. Most payday lenders charge an annual rate of 59 per cent, a percentage point below the legal limit under the Criminal Code amount of 60 per cent.

On top of that, there may be a cheque presentation fee, a transaction fee and other charges which could raise the effective rate to 300 per cent or more.

A city of Vancouver study found that a $100 one-week loan from MoneyMart, Canada's largest payday lender, would cost $18.97, including 89 cents interest, a $7.99 cheque presentation fee and another cheque-cashing fee of $10.08. The additional fees may be avoided if the loan is paid off early.

However, a lawsuit recently certified as a class action against The Cash Store Inc. indicates some payday practices may be abusive, if not illegal.

The plaintiff in the case alleges that he obtained a $300 loan on March 19, 2003, rolled it over five times, and repaid it on July 11 that year. On top of the $300 loan repayment, he paid $470.43 in broker fees, $40.13 in interest, $12.40 in "Card Capital" transaction fees and a $10 cash card fee (The Cash Store uses cash cards to advance funds to customers.)

Rollovers entrap borrowers in a cycle of debt in which increasingly costly new loans pay off old loans and the light at the end of the tunnel grows ever dimmer. The payday lenders' association, whose 750 members account for three-quarters of the $1-billion business, has banned rollovers, but it has little power to enforce its voluntary guidelines.

In their defence, the payday lenders claim their customers are just regular folks, with household income the same as the Canadian average, a similar level of education and a slightly higher employment rate, who use the services of a payday lender to handle unexpected expenses like auto repairs and to avoid a bounced cheque.

How can this be? Such people have credit cards, personal lines of credit, overdraft protection and other sources of money. And why would anyone with an average Canadian education agree to the terms of these loans if the true cost was fully disclosed?

Clearly, the customers of payday lenders are people who are already in financial difficulty and need credit counselling as much as quick cash.

With new powers to regulate and license payday lenders, the provinces can require the same level of honesty and disclosure they demand of mainstream financial institutions, and will be better able to protect the financially vulnerable people who use "alternative financial service providers" from exorbitant rates and harmful practices.

The sooner payday loan companies are subject to the scrutiny given other lenders the better.