Thursday, July 6, 2006

There are about 1,350 payday lenders in Canada.

About $2 billion in profits are seen by them each year.

All at the expense of people who borrow emergency cash to tide them over until their next paycheck and end up owing interest that, when calculated annually, can often be around 1,000 percent.

The problem, asserts Toronto's Eye Weekly, is that many people do not fully understand the rates and extra fees involved, leaving themselves in a cycle of consumer debt that's very difficult to break.

Despite the fact that Canada's Criminal Code limits interest rates to 60 percent annually, the companies routinely find ways around the laws. An Ottawa Citizen reporter took out one $300 cash advance loan from Money Mart and another from CashMoney to gauge their APRs.

He found, just three days later, that he owed Money Mart $339.41 (more than 300,000 percent annual interest) and CashMoney $375.00 (a whopping 61,000,000,000,000 percent annually).

Yes, that's the proper number of zeros. 61 trillion.

The industry counters by saying it provides a valuable service, but it's hard for critics to see how having hidden "service" fees and surcharges (that aren't officially interest but jack up the rate nonetheless) are in any way necessary.

"Real people are getting gouged," says Sharol Jason, secretary/treasurer of a local chapter of the Association of Community Organizations for Reform Now (ACORN). "There's a criminal code but there's no enforcement of the law. People are being gouged and no one's doing anything about it."

That may change this fall, if federal legislation to regulate the industry comes through. The government plans to hand regulatory power over to the provinces, which could set their own interest rates for short term payday loans and develop consumer protection legislation.

Manitoba has already written legislation to set rates and is waiting for Ottawa's approval. This is a pressing issue, with several class-action lawsuits pending against payday loan firms. Still, the feds' hints don't mean much unless the provincial regulations, once they are allowed to set them, establish strict interest rates that can seriously limit lenders' rates.

And that is far from a guarantee.

"Right now, we want the governments to do something. If they're downloading regulation, then do it so that the provincial governments will do something. We'd like to see some action that's fair," Jason said.

The issue is more pressing in some areas than others. Banks are moving out of low-income neighborhoods and payday lenders are moving in. In a 2004 report, ACORN noted that from 2001-2003, more than 700 bank branches closed in low-income neighbourhoods across Canada, which roughly corresponds to the locations in which faxless payday advance companies are opening.

An ACORN survey of payday loan users shows most have household incomes of $30,000 or less. Most take out small personal loans, usually hundreds of dollars, and many have steady jobs and bank accounts. But users are also unfamiliar with the hidden costs - processing fees, fees for post-dated checks - and can't calculate the interest properly.

Not because they're bad at math, but because the fine-print regulations with payday loans are so confounding in their complexity it seems as if they were designed to confuse people.

• Many have bad credit and don't think they can use a bank's services.
• Moreover, two out of three people surveyed said they would rather not use a payday loan service if they had other options.

ACORN isn't the only group that wants the industry regulated. The Canadian Payday Loan Association (CPLA) is also in favour of regulation, so as to define a set of standards and improve the industry's reputation. The group has set up a code of best business practices that it says its members adhere to, but since only two-thirds of Canada's payday loan businesses are members, there is a lot of room for the bad seeds to proliferate.

The only way to know what payday loan company is doing what and where is to walk the city streets. No one has hard data on how many companies issuing payday loans even exist, what their finances are or how many people have gotten into trouble from the loans. Many lenders claim different rates on their websites, in annual reports and in their stores.

"This is an industry that's hard to kill entirely. There has to be a better way," said Chris Robinson, a York University finance professor, who added that the proposed government regulations would alter the entire landscape.

"It would drive almost everybody out of the business," Robinson stated. "A payday lender wouldn't be able to compete with the rates banks and credit unions could offer. Banks have already got you. What they need to do is have no credit check for people who come in for overdraft protection. I think they could improve people's credit ratings cheaply, make a profit out of this and undercut the payday lenders."

One thing is for certain. Until something happens on a governmental level to regulate payday loans, ACORN and other consumer groups will remain vigilant.

This entry was posted on Thursday, July 6th, 2006 at 11:16 am and is filed under Canada.