Payday loan biz put in spotlight

PUBLICATION: Winnipeg Free Press
DATE: Thursday, November 22, 2007
PAGE: A6
SECTION: City
BYLINE: Joe Paraskevas

THREE distinct visions of the future of this country's payday loan industry are emerging in presentations before the Manitoba Public Utilities Board.

The different scenarios have different implications for consumers and for an industry until now unencumbered by regulation.

Industry players and the Consumers' Association of Canada are advising the province's independent regulatory agency as it seeks to make Manitoba the first province in the country to establish limits on the fees payday loan companies can charge customers.

The Canadian Payday Loans Association, whose 20 member companies represent about 40 per cent of the industry, called this week on Manitoba to set a cap of between $20 and $23 per $100 over the short life of the payday loan.

By government definition, payday loans are generally small -- no more than $1,500 -- and issued for a short term -- not longer than 62 days.

Such limits would "allow smaller companies to operate in Manitoba and allow entry of new companies," Lawrence Gould, a University of Manitoba finance professor and director of the university's Centre for International Business Studies, told a PUB panel Tuesday.

The CPLA asked him to represent the organization before the board, Gould said.

To the public and an industry battling the image that it takes advantage of customers often too desperate to look for loans at mainstream financial institutions, the CPLA's plan might come as a shock. Gould admitted a typical loan of $300, carrying a fee of $20 per $100, would cost a customer $60 over a two-week term, "amounting to over 500 per cent as an annual percentage return."

The example made the CPLA, which says it is trying to bring respectability to its industry, appear not much different from other industry voices that haven't sounded as diplomatic.

At the outset of the PUB's hearings, one company owner bragged of making 700 per cent interest on loans, drawing the ire of consumer groups. Until last spring, the payday loan industry was run under a federal law which prohibited companies from charging more than 60 per cent in interest annually. Part of the move to provincial regulation of the industry is to have provinces set acceptable fees payday loan companies can charge.

However, Gould and others suggested looking at the payday industry strictly through the lens of annual interest returns was misguided.

"Although the numbers ... make lurid headlines or catchy sound bites, the calculations are an incorrect application of financial theory," Gould said, in his presentation.

Another expert who has studied the payday loan industry -- but from a consumer's perspective -- agreed.

"I'm not sure that's the best way to look at it," said Ruth Berry in an interview. She is a professor of family social sciences at the U of M. "For a short period of time, for two weeks, maybe $23 or $37, even if you are borrowing only $200, it's worth it to you."

Berry, an adviser to the Consumers Association of Canada, said the board should look at restricting the number of payday loans borrowers can take out and limit the value of loans people can access, relative to their income, as a way of preventing personal bankruptcies.

The payday loans industry has grown rapidly in the last two decades but it is the only segment of Canada's financial services sector that is unregulated.

joe.paraskevas@freepress.mb.ca

Idnumber: 200711220037