Payday loan association welcomes regulations
Legislation will help counter bad reputation, says president
- PUBLICATION: Business Edge - Vol. 7, No. 24 - Calgary/Red Deer Edition
- DATE: Friday, November 30, 2007
The marketplace for payday loans is changing.
Not only is it about to face an increasing amount of governing legislation - something the industry's association has called for - but its customers are apparently far removed from the low-income households previously thought to use these types of services.
"We're calling for regulation, not fighting it," says Stan Keyes, president of the Canadian Payday Loan Association (CPLA).
Payday loans, small-sum, short-term loans typically for a few hundred dollars, have come under intense scrutiny in the past, primarily due to high interest rates and fees charged in connection with the loans.
But with provinces now finding themselves with the ability to legislate over this sector, that could change.
To date four provinces - Manitoba, Saskatchewan, Nova Scotia and most recently British Columbia - have announced that they will step in and regulate the industry following federal legislation enabling them to do so.
All are at various stages of setting their rules; for example, public hearings recently started in Manitoba.
Meanwhile, both Alberta and Ontario are considering the merits of governing payday-loan companies in their respective provinces.
"The Canadian Payday Loan Association is not your typical industry association," Keyes notes. "And we're a leader in best-business practices and consumer protection.
"Our mandate is to work with governments toward a national regulatory framework that will allow for a viable industry and protect consumers."
Companies that are members of the CPLA - 22 companies representing 529 out of a total of 1,235 payday loan outlets across Canada - follow a code of "best business" practices, Keyes says.
Those 18 points include no payday loans that exceed $1,500, loans can't exceed a term of 31 days, no rollovers of the loan and a member may not take title to assets of a borrower as security for repayment of payday loans.
"Now we have four provinces in Canada that will have consumer protection legislation in place. Our code is mirrored in that legislation such as no rollovers and a right to rescind - if a customer comes into some money, they can rescind the loan on or before the close of the next business day," says Keyes.
He adds the new legislation will put an end to the industry's bad reputation, caused, he says, by "bad business practices of some payday loan lenders."
The federal enabling legislation has two requirements: The introduction of specific consumer-protection legislation and a maximum cap on the total allowable fees and charges for the payday loan product.
In Winnipeg, the head of a payday loan company recently told regulatory hearings that he has every right to charge borrowers interest rates of more than 700 per cent.
Leo Sorensen, of Sorensen's Loans 'Til Payday, was among the first people to speak at the hearings. He said the Manitoba government is taking a socialist approach in trying to regulate the industry, and should let businesses charge what they want.
Sorensen, whose company runs 30 stores across Western Canada, says he charges interest rates that work out to 720 per cent on an annualized basis.
He says because most loans are for small amounts and last only seven to 14 days, the actual amount of interest paid can be as little as $26, and is barely enough to cover his costs.
Manitoba's Public Utilities Board is seeking public input on what type of interest rates payday-loan companies should be allowed to charge.
Patti Smith, president of North American operations for payday loan giant Money Mart, says her company has advocated both federal and provincial legislation and is pleased laws have been passed in Nova Scotia, Manitoba, Saskatchewan and B.C.
"Greater regulatory certainty is good for our business and our customers," she says. "It is one of the factors that allows us to implement our growth strategy."
Keyes also says the stereotypical profile of the typical payday loan customer is now obsolete after the release of two recent polls - one in Manitoba, the other in British Columbia.
"These surveys will begin to put to rest inaccurate comments made about the education, income, knowledge and reasons why people look to payday loans instead of other forms of credit," says Keyes.
According to the Pollara survey, the average payday loan customer in B.C. is 40 years old; 77 per cent of these customers are employed full time and more than half (53 per cent) have completed post-secondary education.
The stats are similar in Manitoba: The average customer is 38 years old, 77 per cent are employed full time and just under half (46 per cent) have completed post-secondary education.
In both polls, customers say they understand the costs and terms of their payday loans.
While the polls were commissioned by the CPLA, Pollara chairman Michael Marzolini says that does not colour the results. "Certainly all the questions that were asked, scientific, neutral and objective," says Marzolini, who adds the results surprised him.
"There were misconceptions that I had at the beginning of this. They seemed to be basically the working poor or the non-working poor, and that's not the case," says Marzolini.
"But they're employed and they understand the deal when they walk into the payday loan place. Seven in 10 fully understand that."
Marzolini adds that his payday-loan customer surveys in B.C. show an average debt of $22,765 to various financial institutions, excluding mortgages. In Manitoba, the surveys indicate an average debtload of $24,356.
These figures, he says, closely mirror non-payday-loan customers in those two provinces.
"These are very small loans," adds Marzolini. "This is not a place where you go to borrow money to buy a car, get a car fixed or pay a debt. The people are employed, educated and informed. Only 21 per cent say they use it as a bank of last resort. For most people, it's a preference."
The average payday loan is for $280 for a period of 10 days, according to Keyes.
But John Lawford, a research analyst with the Public Interest Advocacy Centre (PIAC), a non-profit organization that provides legal and research services on behalf of consumer interests, is still concerned.
"What you're getting with provincial legislation is second- best," says Lawford. "Some provinces are tighter than others (in their regulations) and some don't have it yet."
The CPLA is also calling for the abolition of an annual percentage rate (APR) - an expression of the effective interest rate that the borrower will pay on a loan. It says it's the wrong measure for a short-term, small-sum loan.
But Lawford says it is appropriate, as U.S. data show that a percentage of payday loan customers repeatedly use the service.
"My credit card is only 35 per cent (interest rate), but my payday loan is 350 per cent (based on an APR). Maybe you should max out the credit card, as unpleasant as that may be," says Lawford, who also suggests finding alternatives such as family or friends.
- with files from The Canadian Press (Laura Severs can be reached at laura@businessedge.ca)