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Payday loan industry looking for better laws

• PUBLICATION: New Brunswick Telegraph-Journal
• DATE: 2006.09.27
• PAGE: A2
• SECTION: NEWS
• BYLINE: David ShipleyTelegraph-Journal

The Canadian Payday Loan Association is again pushing Ottawa to move forward with a new law that will allow the provinces to regulate the burgeoning industry.

Michael Thompson, president of the association, said the incoming Liberal government in New Brunswick supports such legislation, which will allow the province to protect consumers from unscrupulous lenders.

"It enables the proper protection of consumers and provides a certain amount of business certainty to the industry."

More than two million Canadians make use of payday loans services each year with the sector valued at more than $1.5 billion.

The Harper government said in the summer it would consider payday loan legislation. The industry group wants legislation brought forward in the fall session of Parliament.

At the heart of the payday loan issue is a provision in the Criminal Code that caps the amount of annual interest that can be charged on a loan at 60 per cent.

The law is designed to crack down on loan sharks and organized crime - not the legitimate institutionalized financial sector, said Thompson.

"The way that section of the Criminal Code requires that interest rates be calculated often leads to situations where we end up with very high rates of interest," he said.

A loan of $100 with a one dollar charge for five days could result in a calculation, using the Criminal Code, of a 107 per cent annualized interest rate, said Thompson. A loan of the same amount over three days with the same one dollar charge would be about 126 per cent, more than double the limit set by the Criminal Code.

In order to make money, payday loan companies must charge more than one dollar for short-term loans, he said.

Implementing new regulations for the industry will allow it to make a reasonable profit while punishing those who abuse consumers, said Thompson.

In a Sept. 13 letter to the association, premier-designate Shawn Graham wrote that his party would work with the industry to put in place payday loan regulation legislation.

"The regulations will ensure protection for consumers from poor business practices and excessive lending rates," the Liberal leader stated.

Thompson said government regulation is required because although his association does a good job policing its 850 members, another 500 payday loan outlets in the country don't belong to the organization and fail to subscribe to its strict code of conduct.

In New Brunswick there are 25 payday loan outlets. Of the companies, 15 are registered as members of the association, he said.

One practice banned by the association is called a roll-over loan. A roll-over loan is one that is issued by an outlet and then extended beyond its original term at the customer's request.

It’s a practice the association would like to see eliminated in non-member institutions.

"If you roll over your loan several times, the cost of servicing that loan balloons really quickly and consumers can find themselves in trouble with their debt situation," he said.

Several provinces have either developed, or are working on, payday loan legislation that will include a ban on roll-over loans, he said.

"It’s something that needs to be put into law."