Friday, May 4, 2007

Ontario is determined to enact a law to protect users of the instant payday loan industry, according to the minister of government services.

The challenge, says Gerry Phillips, is to do so without increasing the cost for those vulnerable consumers who have no other ready source of cash for an emergency.

“We have to do what we think is right for the consumer,” he said yesterday in a telephone interview, dismissing criticism that Ontario has dragged its feet.

Other provinces had legislation on the books, or ready to introduce, once Ottawa has cleared the way by offering an exemption from criminal-interest-rate laws. None has yet to set maximum charges for the short-term loans, estimated at $2 billion a year across Canada.

Phillips said Ontario deliberately held off because, like some consumer groups, the government was until last week pushing for a harmonized national approach to regulation. Instead, the federal government passed and is about to receive royal assent – as soon as today – for legislation that would hand the duty for regulation to willing provinces.

Bill C-26 would waive the 60 percent annual rate of interest limit set out in the Criminal Code in those provinces that ask for a designation, enact legislation to protect users of supposedly cheap payday loans and set limits on the cost of those loans.

As a first step, Ontario will use its existing authority to require by August that payday lenders display prominently and simply in their offices and contracts the total cost of a $300 loan over 14 days, expressed as a cost per $100 borrowed.

Surveys suggest that 37 percent of users of the bad credit payday loans are under the mistaken impression that the costs are equal to or less than credit-card interest. Some lenders charge the annual equivalent of up to 1,200 per cent, arguing that calculation is not relevant to short-term loans.

Phillips said his ministry will undertake a public consultation process over the next few weeks, and legislation could be introduced by the end of the year, after a provincial election.

The Canadian Payday Loan Association, representing operators of about 500 of nearly 1,400 no fax payday advance offices in Canada, is urging Ontario to get on with regulation of the industry. The province has about 700 payday loan offices.

“For the first time, provinces will be given real authority to regulate the best players in the industry while putting the worst players out of business,” said Stan Keyes, a former Liberal member of Parliament who now heads the association.

“This is great news for consumers and great news for the serious industry players who are often tarnished by the bad reputations and bad business practices of some unscrupulous operators in the industry.”

Legislation would play to the advantage of the larger companies, such as National Money Mart Co., that already operate by a code of ethics that would satisfy legislation other provinces have in mind, said Keyes. Such companies tend to have lower overhead costs, and offer more than just cash loan services. A new law could actually give the companies a seal of approval for them to raise their charges.

A discussion paper released by Phillips’s ministry points out that virtually every American. jurisdiction that has set a cap on interest and charges has found it becomes the standard rate for 90 percent of loans.

“We are desperately trying to see if we can build in some competition,” Phillips said in a telephone interview.

The cost of a regulatory regime is also a concern. A cost of $2.1 million a year would add the equivalent of $3,000 to the operating cost of each of the 700 cash advance offices.

Any regulatory regime is likely to allow interest, administration or insurance charges that would have an effective annual rate much higher than the most expensive credit cards. A charge of $1 a week for a $100 loan works out to an annual percentage rate of 107 per cent, too little to cover the cost of staffing and operating an office, said Keyes.

Quebec has no payday advance lenders because it has set a 35 percent equivalent annual percentage rate of interest limit. Some payday lenders in other provinces charge the equivalent of 1,200 per cent.

In January, the Ontario Superior Court of Justice certified a class-action lawsuit that alleges National Money Mart Co. charges criminal rates of interest. Money Mart has 197 outlets in Ontario.

This entry was posted on Friday, May 4th, 2007 at 6:22 am and is filed under Canada.