Watching the moneylenders

  • PUBLICATION: The Ottawa Citizen
  • DATE: 2006.10.06
  • EDITION: Final
  • SECTION: News
  • PNAME: Editorial
  • PAGE: A12
  • SOURCE: The Ottawa Citizen

Handing the regulation of payday loans over to the provinces is the best thing the federal government could do to fix a situation that has allowed financially troubled consumers to be victimized by predatory lenders.

Cash stores are the Starbucks of financial institutions, popping up practically wherever there’s an empty storefront in a working-class neighbourhood. Companies like Money Mart offer services the major banks mostly don’t, such as cashing cheques on the spot, and are often open hours no bank would dream of -- some 24 hours.

Their bread and butter are payday loans, so called because the loans are usually supposed to last just a few days until the borrower’s next payday. The loans are usually for no more than a few hundred dollars, maybe to make the rent in a bad month or to fill an unexpected prescription or (less prudently) to pay for a big night out when the credit card is already maxed. How the customer uses the money isn’t the lender's business.

Payday loans are a billion-dollar industry. Trouble is, they’re illegal. A Criminal Code section targeting loansharking outlaws charging more than 60-per-cent annual interest on any loan, and payday loans always carry with them interest and fees far above that limit; even a $20 fee for a small loan over a short time can work out to an annual interest rate in the thousands of points.

The Criminal Code is a federal responsibility, while regulating payday lenders as businesses is up to the provinces. Each level of government pointed to the other, while in the shadows some sinister practices flourished. For instance, some lenders would let borrowers roll one loan over into a new, larger one in perpetuity. That practice turns a theoretical annual interest rate into a real problem, with borrowers sometimes having to repay several times what they borrowed. Many ultimately turn to another service, so-called "title loans" -- underneath mountains of small-print paperwork, these are just agreements for borrowers to pawn their cars. Numerous courts have found that borrowers have been deliberately misled about the agreements that led to their losing their means of getting to work, sometimes for small fractions of their vehicles’ market prices.

Not all payday lenders are shady, and in fairness they provide a demonstrably needed service. Without regulation, though, the predatory lenders have an advantage over the honourable ones.

Until now, the federal government’s only option would have been to try to throw payday lenders in jail using the Criminal Code. That wouldn’t solve the problem -- if it were even superficially successful, borrowers would merely have turned to the loan sharks the law was supposed to put out of business.

The provincial governments have the meaningful powers here, the power to regulate the industry so that customers know what they’re getting when they make a deal with a payday lender. The provinces just haven't done it because they didn’t want to set rules permitting an activity that was officially illegal.

So the Tories’ decision to make a Criminal Code exception to the interest-rate rules is welcome. Some provinces have already drafted customers’-rights regulations, and Ontario should join them as soon as possible.