Payday lenders want regulation

  • Publication: National Post
  • Date: Tuesday – April 4, 2006
  • Edition: National
  • Section: Financial Post: Comment
  • Page: FP19
  • Byline: Bob Whitelaw
  • Source: Special to the Financial Post
  • Note: Bob Whitelaw is the President and CEO of the Canadian Payday Loan Association. He was formerly president and CEO of the Canadian Council of Better Business Bureaus.

The Manitoba Government tackled an issue last month that governments have been ducking for 15 years -- payday lending. It introduced legislation to protect consumers and regulate fees for short-term loans, while also calling on the federal government to allow all provinces to regulate the industry.

This burgeoning industry now serves two million Canadians every year and is one of the last unregulated financial services sectors in the country. Critics insist that payday lenders target the "poorest of the poor." Business fundamentals suggest otherwise.

A successful business owner will only extend credit to someone who will pay it back -- in full -- on time. Like any commercial vendor, payday lenders will locate their retail outlets in high-traffic areas. A recent City of Vancouver study found that most payday loan outlets are located within steps of a bank and along busy commuter routes. In downtown Ottawa, there's a payday loan store attached to the lobby of the federal Department of Finance. Well-paid public servants are its biggest customer.

Manitoba's new legislation will require the regulation of payday lenders once the federal government gives them the authority to do so. Last October, the federal Cabinet agreed that all provinces in the country should be granted this authority. Federal legislation was drafted to set tough standards to protect consumers -- and set a maximum fee that makes sense for both business and consumers. But it has yet to be tabled in Parliament.

The current federal provisions mandate that loans should be calculated based on an annual percentage rate -- even though the term of the average payday loan is only 10 days. It's like mandating hotels to post their room rate as $63,875 per year instead of $175 per night.

Critics have grabbed hold of stunning headlines suggesting payday lenders charge million, billion, and even 61 trillion, per cent interest on loans. In fact, basic math would suggest that 61,000,000,000,000% on a single $1 loan = $61,000,000,000,000. Even the most ill-informed among us will agree that these are ridiculous and false suggestions. Well-intended critics should be focused on the substantive elements of regulation, rather than grabbing flashy headlines for the sake of a little profile.

The fact is, there is a high demand for payday loans. It is also a fact that relative to other forms of credit, payday lending is retail intensive and costly to provide. This was the conclusion reached in a recent study of the industry conducted by Ernst and Young.

The E & Y study highlighted that business fundamentals must come into play. Given the cost of store operations, staffing, security, defaulted loans and a high number of small-sum transactions, there is clearly a significant cost to providing this service that must be recovered.

The Manitoba legislation recognizes that consumers have a right to access this form of credit despite its higher costs. In fact, it has mandated that a public board establish a fee schedule that appropriately takes account of the "financial risks taken by payday lenders," and the "expenses and revenue requirements of payday lenders."

Payday loans are not designed to be a regular or long-term source of credit -- much as your corner 7/11 is not designed to be your regular supermarket or the no-name ATMs in gas stations are not designed to be your regular banking outlet. There is definitively a cost of convenience attached to all of these products. In all of these cases, consumers value the convenience and are willing to pay for it. It's a matter of personal choice and responsibility.

The Canadian Payday Loan Association was formed two years ago by mainstream lenders who believe there is a need to distinguish operators who provide a valuable service using ethical standards from those who do not. While our members voluntarily adhere to a tough code of best business practices, unfortunately there remain a significant number of operators who refuse to accept their social responsibility to treat consumers fairly. The Canadian Payday Loan Association believes these unscrupulous players must be either shut down, or forced to meet much higher standards of operation.

In an unusual turn of events, the Canadian Payday Loan Association is calling on governments to implement new regulations for this industry. It's fair to say that the day an industry association is calling for regulation, we're well past the point where governments should have stepped in.

We applaud government leaders -- like those in Manitoba -- who are willing to challenge the federal government to do its part. While we disagree with some elements of Manitoba's proposed legislation, in principle the province's effort to regulate is exactly what is needed.

All eyes should now be directed to the federal government, where the trigger lies. A piece of legislation that would grant regulatory authority to provinces is sitting on a shelf in Justice Minister Vic Toews' office. We strongly encourage the Minister of Justice to introduce this legislation and let provinces get the ball rolling on regulating this industry and better protecting consumers.