Payday Lenders Come under Fire
A few steps from one of the country's wealthiest shopping districts, a place in midtown Toronto where diamond sellers rub shoulders with high-fashion retailers, is an unlikely storefront: a Money Mart. Just across the street, a similar store, Cash Money. A little further down the block, a third, then a fourth, each advertising loans for anyone in need of fast cash. The stores, with their screaming yellow signs, are 24-hour-a-day beacons of the fast-growing payday loan industry, estimated to be worth $2 billion a year.
Once thought to be for down-on-their-luck types, payday moneylenders, specializing in small, unsecured loans, have proliferated over the past five years, penetrating every kind of neighbourhood and luring customers from every social strata. There is even a payday loan store in the Department of Finance building in Ottawa - an example not only of their pervasiveness but of the brashness of an industry that is, by some accounts, illegal and, according to both consumer groups and the payday industry's own lobby group, in dire need of government regulation.
The payday loan industry emerged in the 1990s, and quickly established itself as the fast food of the banking world: convenient, but unhealthy financially, with sky-high INTEREST rates and fees. The loans these outlets offer are really small advances, which average under $300. They are covered by a postdated cheque to be cashed on the customer's next payday, and always include a criminally high interest rate. "It is illegal: 24/7, 365 days a year, every single payday loan is in contravention of the Criminal Code of Canada and everybody knows it," says John Young, the head of the Vancouver-based public advocacy group the Association of Community Organizations for Reform Now.
The Criminal Code sets the maximum interest rate at 60 per cent. Payday loan companies routinely charge upwards of 1,000 per cent, after various fees are taken into account. While the payday loan industry maintains such rates merely cover the cost of offering short-term, unsecured loans (with a modest profit of about 15 percent), many say it's loansharking in the extreme. And CHARTERED BANKS have kept an arm's-length distance from the industry, despite its rapid growth and profit.
Now, after a decade of unchecked expansion that saw the industry grow from a handful of outlets to over 1,300, the industry has come under scrutiny in recent months. Several class action lawsuits have been launched against payday companies. In March, the Supreme Court dismissed an effort by Dollar Financial Corp., the large U.S. company that owns Money Mart, to halt one lawsuit. Then, two weeks ago, Manitoba Finance Minister Greg Selinger introduced legislation to license the industry and give the province power to set its own interest rates in order to clamp down on what he called "unscrupulous practices." The legislation requires Ottawa's approval, but in an interview Selinger said federal Justice Minister Vic Toews is amenable to the idea.
The move could end five years of federal-provincial wrangling over the issue. Efforts to regulate the industry have been complicated by the fact that the federal government oversees interest rates, while the provinces oversee consumer affairs. As a result, the payday loan question has become what Young calls "a game of federal-provincial hot potato." "It's an issue in many jurisdictions," says Selinger. "But we've decided to act on it."
Adding to the onslaught against payday companies, earlier this year Winnipeg police laid the first criminal charges in Canada against a payday loan company, Paymax Canada Inc., for criminal interest rates. Lead investigator Det. Sgt. Len Terlinski said police have not ruled out further charges, but are watching what happens with the proposed new law. "The industry is operating illegally," he says. "There's absolutely no regulation except a national umbrella organization. To call them self-serving would be an understatement."
Terlinksi is referring to the Canadian Payday Loan Association, set up by the industry in 2004 to try to clean up its reputation. "The emergence of the industry over the last decade has caught a lot of people by surprise," says Bob Whitelaw, the president of the group, which represents 850 payday stores and 35 companies.
Many people fail to understand the real cost of providing a small-sum, short-term loan, Whitelaw argues. If a company loaned $100 dollars over five days and charged a mere $1, the annual rate would still be 107 per cent, he says. Such a conversion is unfair, he says, much like asking a hotel to advertise the cost of a room for a year rather than just one night. "Technically, what they're doing is providing the loan interest rate at 60 percent, but then on top of that are fees and costs to provide that product and cover their costs," he says. This is in conflict with the Criminal Code, he concedes, because the law makes no distinction between fees and interest. "That's where we're calling on government to amend that federal law," says Whitelaw.
One of the group's biggest concessions was to outlaw "rollovers": interest and charges added to unpaid loans, effectively creating a snowballing loan difficult to pay off. Terlinski says such restrictions don't go far enough. "They say they don't do rollovers because that's against their industry ethics, but they'll loan you the money to pay off your first loan."
Traditional banks, meanwhile, have been criticized for neglecting the segment of the population that uses payday companies, by closing branches in low-income areas and not offering viable alternatives. Dollar Financial Corp., for example, describes itself as a company "serving underbanked consumers." "This product generally isn't available from CREDIT UNIONS and banks, but consumers from time to time do need this service," says Whitelaw. Some users can't get credit from banks, some don't have the financial literacy to understand the alternatives. Others enjoy the convenient hours and customer service.
Ironically, those who use payday companies have bank accounts - they're needed to get a loan, along with a pay stub. Studies also show that payday stores are increasingly locating close to banks, a further sign they're offering something banks do not. Canada's banks say they do provide services like overdraft protection and credit cards, which serve the same purpose as payday loans. But they can't explain why 1.5 million Canadians use payday loan companies each year. "If you have the answer we would hire you right away," Jacques Hébert, a director of the Canadian Bankers Association, told a Senate hearing looking into payday loan companies last year.
Given the risky nature of unsecured loans, it is no surprise that banks, and even most credit unions, are reluctant to offer them. "Banks have a responsibility to their customers (and to their depositors and shareholders) to lend responsibly," the CBA wrote in a submission to the Senate. Still, banks play an arm's-length role by providing credit to large payday companies. In some cases, all the money a payday company lends comes from banks and other blue-chip financial institutions, something the industry calls the "broker model."
If legislation like Manitoba's is successful, or if Ottawa eventually steps in and introduces its own, banks and credit unions might be more inclined to enter the payday fray, argues Young. The industry lobby, on the other hand, hopes legislation will help an already viable industry prosper. Either way, the two groups have been strangely united in their belief that Ottawa has let the industry go unregulated for too long.
Maclean's April 3, 2006