Bill introduced to rein in errant payday loan operators

  • PUBLICATION: The Ottawa Citizen
  • DATE: 2006.10.07
  • EDITION: Final
  • SECTION: Businessv
  • PAGE: D1 / Front
  • BYLINE: Carly Weeks
  • SOURCE: The Ottawa Citizen
  • ILLUSTRATION: Colour Photo: Andre Forget, Halifax Daily News / MichaelThompson, president of the Canadian Payday Loan
  • Association, says the new law will provide clarity.

Payday lending services in Canada would face the threat of harsh punishment if they charge ultra-high interest rates and fees under a federal bill tabled yesterday that gives power to the provinces to crack down on lenders that charge rates some critics have described as criminal.

The changes will remove payday loan institutions from Section 347 of the Criminal Code, which says interest that exceeds 60 per cent over the course of a year is illegal. The exemption will allow provinces to set their own caps on interest rates, as well as other fees, and will also allow provincial officials to enforce the rules.

Manitoba Finance Minister Greg Selinger, one of the leading supporters of payday regulation, applauded the federal government's move.

"I think once we can get it passed, it will allow for some real effective regulatory control to the advantage of consumers," he said.

There are an estimated 1,300 payday lending outlets in Canada.

Payday loans are short-term cash advances that usually must be paid back out of the customer's next paycheque. But, in order to receive the loan, which is usually limited to 30 per cent of paycheque income, customers must agree to pay service fees and high interest rates. For instance, the total fees applied to a typical $300 14-day payday loan would be $50, according to the Financial Consumer Agency of Canada.

Over the course of the year, that loan would cost 435 per cent of the amount borrowed.

The new rules will make it easier for Canadians to understand the terms of their loan and how much interest they will pay, said Michael Thompson, president of the Canadian Payday Loan Association.

He said that most lenders will probably move to a system where they tell customers up-front how much money they will be charged. For instance, a lender will tell consumers it will cost $20 to receive a $100 loan, instead of the current system, where a percentage rate is used and the amount that will be owed is sometimes left unclear.

Although some within the payday industry feared they would be driven out of business if restrictions become too tight, Mr. Thompson said he is optimistic.

"All provinces have indicated at this point they want the industry to be able to provide this service so we would expect they would put caps in place that are not damaging to the industry," he said.

Provinces demanded changes because they complained the federal government was failing to enforce its limits on interest rates and that thousands of consumers were being victimized.