Provinces need the power to keep payday lenders in check

  • The Vancouver Sun
  • Mon 01 May 2006
  • Page: A6
  • Section: Editorial
  • Source: Vancouver Sun

The Conservative government seems ready to revive a bit of unfinished business tabled in the last days of the Liberal regime that would finally address the problems with payday loans.

The federal plan was -- and still is -- to empower the provinces to regulate the payday loan industry, allowing them to introduce licencing requirements, set interest rates and write the rule book on fees, terms, disclosure and other matters. Provincial authorities have been hampered in their prosecutions of payday loan abuses because they have few legal tools other than Section 347 of the Canadian Criminal Code that deems annual interest higher than 60 per cent to be illegal.

Last year, an Ottawa judge in small claims court ruled that two payday loan companies suing clients who had defaulted were exploiting the vulnerable and charging interest rates that were "unconscionably usurious." In one of those cases, a loan of $280 rose with interest and penalties to $551 in a month, indicating an annualized rate of more than 2,000 per cent. Despite his harsh criticism, the judge ruled that the companies were entitled to repayment, though only the actual amount their clients had borrowed.

It takes a brazen lender to go to court to enforce an illegal payment. But, too often the client doesn't show up and the lender wins a default judgment to garnishee wages, compounding the financial woes that drove the client to the payday lender in the first place.

The Canadian Payday Loan Association, a group that represents the payday loan industry, argues that its members' rates and fees are higher than those charged by conventional lenders because the loans are unsecured. However, the group has made efforts to improve the industry's image with a code of conduct and voluntary guidelines that, among other things, prohibit rollover loans that add fees and interest to unpaid principal, trapping borrowers in a vicious cycle of indebtedness at escalating cost.

But the group represents only 850 of the estimated 1,350 payday loan outlets, accounting for roughly three-quarters of the $1 billion the industry is thought to make each year. It has no way to enforce its guidelines on non-members and, accordingly, has come out in support of government regulation.

Ottawa could assume this responsibility with amendments to the Criminal Code to add particular provisions covering payday loan companies and Ontario is encouraging the federal government to pursue that course of action. But Manitoba is leading the way to a more promising and practical approach. Last January, it took payday lender Paymax to court, alleging that it charged a criminal rate of interest.

It is astonishing, given the proliferation of payday loan outlets in the last decade and the outrageous practices of some of them, that this was the first criminal action in Canada. Furthermore, Manitoba is moving ahead with a package of consumer protection measures, such as a requirement that all fees and charges a consumer will have to pay be disclosed up front.

Consumer protection is constitutionally a shared jurisdiction, but provinces regulate most non-bank financial services and have statutes to control unfair business practices. The payday loan industry clearly falls under this umbrella and would be best governed by provincial authorities.

Manitoba has legislation pending that would set payday loan rates and licencing requirements, but needs approval from the federal government, which has exclusive jurisdiction over interest rates. Justice Minister Vic Toews seems favourably disposed to the provincial plan and promised to consider it.

British Columbia has yet to take a firm position in this debate, but Victoria should embrace the Manitoba model and urge Ottawa to give the provinces the power to make payday lenders toe the line.