Province first to cap payday loan fees
- PUBLICATION: Winnipeg Free Press
- BY: Bruce Owen
- PAGE: A5
- DATE: Saturday, April 5, 2008
Manitoba will be the first province in the country to cap what payday loan companies charge their clients for borrowing small amounts of money.
Friday's decision by the arm's-length Public Utilities Board to regulate money-lenders outraged the payday loan industry. They claim the cap will drive smaller lenders out of business and force cash-strapped consumers to go to pawn shops or even organized crime to get a loan.
"That's bunk," provincial Finance Minister Greg Selinger said in reply. "This won't drive it underground. The whole purpose of this is to protect the consumer from unfair practices."
The PUB, which also regulates hydro and car insurance rates, said the maximum cost of credit will be 17 per cent for loans up to $500; plus 15 per cent for $501 to $1,000; and six per cent for loans between $1,000 and $1,500.
The board also went one step further by reducing borrowing costs for those on employment insurance or social assistance. For these consumers, the maximum cap will be six per cent of value received to $1,500.
Selinger said while first in Canada, Manitoba is not the first jurisdiction to rein in the payday loan industry, which until now were not regulated in how it conducted business.
He said more than half the states in the United States have taken the same steps for the same reasons.
"The industry has survived," Selinger said.
With the PUB's decision, the Doer government will start taking applications for licences from payday loan companies in May and will likely have the new rules in place this fall.
"This will bring significant cost-savings to consumers, as much as 20 to 50 per cent, " said Byron Williams, director of the Public Interest Law Centre at Legal Aid Manitoba. The group acted for Winnipeg Harvest, the Consumers Association of Canada, Manitoba Branch and the Manitoba Society of Seniors at last year's public hearings on the payday loan industry.
"This will give them better protection than the marketplace provided."
The move to regulate the industry started in late 2004 when Winnipeg police opened an investigation into four city payday loan locations. That probe climaxed in early 2006 when Paymax Canada Inc. and its owners Vladimir Kvaternik and Donald Laluk were charged with imposing a criminal interest rate in a case police allege netted more than $5 million from 7,000 local customers.
In some cases the company was allegedly charging its customers effective annual interest rates as high as 20,000 per cent, according to court documents obtained by the Free Press. The legal rate is 60 per cent.
Last May, the now-closed Paymax was fined $100,000 after it pleaded guilty in court to charging a criminal interest rate.
The sentence came as a result of a plea bargain that saw identical charges dropped against Kvaternik and Laluk.
The quick-loan industry typically hands out small short-term loans in the range of $200 to $1,000 to people with a bad or no credit rating. Clients were charged close to the allowable 60 per cent annual interest rate on loans, but until the PUB's decision they were also charged brokerage and handling fees. It's those costs that push the effective annual interest rate to amounts not allowed by law.
For example, a loan of $500 at the maximum lawful rate of 60 per cent over a period of 14 days would cost $11 in interest. With additional charges totalling $105, the total cost of the loan was $616, resulting in an excessively high interest rate being paid by the client.
The industry has battled for years an image that it takes advantage of customers often too desperate to look for loans at mainstream financial institutions. About 1.5 million people across Canada take out loans from payday loan companies annually, according to the Canadian Payday Loan Association, which represents major industry players.
CPLA president Stan Keyes said the PUB's decision will actually hurt consumers and drive many smaller businesses out of the industry.
"The PUB got it wrong," Keyes said. "Many consumers will now be forced to unhook the TV set and take it down to the pawn shop. The decision will also put many small and medium businesses, members of our association, out of business.
"These business are providing a worthy service. They have loyal clients. They're not raking in huge profits. They've not driving Cadillacs. They're not living in multi-million dollar homes. Now they might as well close their doors."
The PUB's full report on payday loan maximum rates can be found at www.pub.gov.mb.ca.
Arguments for payday loans:
- Payday loans help poor families who need emergency cash.
- They provide quick, short-term small loans of $100 to $500, normally for no more than one or two weeks, that are not available from other lenders.
- A study funded by payday loan stores maintains the stores don't take advantage of the poor: over 75 per cent are employed full-time, and 39 per cent have a household income over $50,000.
Arguments against payday loans:
- Payday loans take advantage of people desperate for cash r who are on low incomes.
- Payday loan interest is exhorbitant. Interest rates, when translated annually, can range from 535 and 1,321 per cent, according to a Public Interest Law Centre study.
- There is not enough regulation governing the loan stores, which have increased to 63 in Mantioba, including 30 in Winnipeg.