The Canadian Payday Loan Association (CPLA) this week applauded the British Columbia government for passing important personal cash loan legislation that will regulate the industry and balance consumer protection with a viable industry.
The new provincial legislation follows changes to the Criminal Code in May 2007 that now allow provinces - for the first time - the authority to regulate the payday loan industry as long as they meet the criteria of passing consumer protection legislation and setting maximum allowable fees.
The CPLA has been working with the British Columbia government over the past two years towards effective legislation and regulation on cash advances.
British Columbia’s new law includes many elements of the CPLA’s ‘Code of Best Business Practices’ - introduced two years ago and monitored by an independent Ethics and Integrity Commissioner to ensure adherence among CPLA members.
“The Government of British Columbia has shown great leadership in wanting to protect consumers and allow for a viable payday loan industry,” said Stan Keyes, President of the CPLA. “The CPLA will participate actively in all consultations on regulations and rate setting on behalf of our members.”
British Columbia’s new law effectively harmonizes the province’s approach to regulation with recent legislation in Saskatchewan, Manitoba and Nova Scotia. The governments of Alberta, New Brunswick and Ontario are expected to move forward with their own faxless payday advance legislation or regulations in the coming months.
The Canadian Payday Loan Association (CPLA) just released the first statistically-relevant survey ever completed of payday loan customers in Manitoba.
Here are results from it:
Demographics of Payday Loan Customers
Contrary to conventional assumptions, the average payday loan customer is employed, educated and is not representative of “low income” households.
- The average personal cash loan customer is 38 years old
- 77% of customers are currently employed full-time
- Almost half (46%) have completed post-secondary education
- Overall household income reported for payday loan customers tends to be either on par with - or ahead of - the general Manitoba population. Notably, only 13% of payday customers reported household income of less than $25,000 compared to 28% of the general Manitoba population. 39% of payday loan customers reported household income in the $25,000-$50,000 bracket compared to 30% of the general Manitoba population.
- Another 39% of cash advance payday loan customers reported income of $50,000 or more compared to 42% of the Manitoba population with the same household income.
Personal Credit Profile
Although some have suggested people use payday loans because they have no other option, the surveys demonstrate that customers have access to a wide variety of credit products, however still choose a payday loan for short-term, small-sum borrowing.
- Customers owe an average of $24,357 to various financial institutions, excluding mortgages.
- Customers have access to a variety of credit options, but choose a payday loan over a line of credit, credit card, retail card, overdraft or other forms of credit largely due to the “convenience” of the payday loan product, “ease of use” and “long hours of operation.”
- Only 15% of customers indicated they used a no fax payday loan because they had “no other option.”
Alberta will not be joining four other provinces which have introduced new legislation or regulations governing instant payday loan companies until at least next year.
Provinces have had the authority to regulate payday loan companies since last October when Parliament introduced legislation giving them that power.
Earlier this month, the Manitoba government unveiled rules, which will take effect next winter, that will force instant cash stores to post signs saying that Payday Loans are High Cost Loans, and detailing the cost of a two-week loan.
Nova Scotia, British Columbia and Saskatchewan all have similar legislation.
The industry of faxless payday loans has been under fire for its charges, which amount to high annual interest rates. For instance, according to the loan calculator on Money Mart’s website, a $300 loan for two weeks costs $57.90, an effective annual rate of over 500%.
Cam Traynor, spokesman for Service Alberta which deals with consumer issues, said the government will start consulting with consumer groups and the loan industry this fall.
“It takes time to get it right,” Mr. Traynor said. “It’s not regulated provincially and we’re starting from scratch.”
Traynor said it is too early to say whether it would require legislation or just regulations, which would be a less onerous process. He also couldn’t say whether there would be limits on the interest rate that cash advance payday loan stores should be able to charge.
About 40% of the cash stores are represented by the Canadian Payday Loan Association, which is headed by former federal Liberal cabinet minister Stan Keyes. He said last week that the industry is looking for respectability, and it welcomes regulations to weed out the bad players.
“It’s been mired in a bad reputation because of hundreds of companies that have bad business practices,” Keyes said.
He added that there has to be a balance between consumer protection from gouging and giving the no fax payday advance stores a reasonable income.
His association has a voluntary code that includes a 31-day, $1,500 limit on loans and no “rollovers,” or compounding the interest after the term of the loan expires. He couldn’t say what a reasonable rate of interest is, but because they are short-term and high-risk with no credit check and a 20% default rate, it would have to be higher than banks offer.
Two-million Canadians use fast payday loans every year. Mr. Keyes said it is a necessary service in a society where so many people live from paycheck to paycheck.
New rules in several provinces are supposed to protect consumers from sky-high interest rates and fees at payday loan companies, but a consumer lobby group says they will likely won’t prevent the poor from becoming trapped by crushing debt.
Manitoba has become the latest province to unveil detailed rules that payday loan companies will soon have to follow. Regulations will require payday loan companies to post large signs near their doorways that detail the full cost of borrowing $300 for two weeks.
The signs must reveal the loan rate and fees and read in large letters Payday Loans are High-Cost Loans.
The aim, the province says, is to make borrowers more aware of how much they are paying for quick cash advances.
“That will make them in a position to make a more informed decision as to whether they want to take out the loan,” said Donna Tardi, manager of dispute resolutions with the Consumers’ Bureau branch of Manitoba’s Finance Department.
“It also would allow them to check out the cost from location to location and then decide which business they want to deal with.”
But the Consumers Association of Canada says this will not deter low-income earners, who cannot get credit at the big banks and therefore need instant payday loans.
The real answer, says vice-president Mel Fruitman, is to enforce the maximum interest rate under the Criminal Code — 60 percent a year.
People looking to take out a Canadian payday cash loan now in Ontario have a clear picture of the true cost of their decision.
New rules covering the industry took effect this week. They include:
- Payday advance lenders must now disclose all charges, including interest rates, brokerage fees and, check-cashing fees for all loans over $100.
The new rules were brought in to protect consumers from sky-high interest rates charged by some payday loan lenders.
“The legislation does not strike a fair balance between consumer protection and fostering a competitive lending environment. In fact, the bill as presently drafted is bad for consumers, as it will restrict the range of product offerings available to them.”
- Gordon J. Reykdal, Chairman and CEO, Rentcash
Those are the words of a British Columbian payday loan provider, opposing the possible legislation regulating quick cash loans.
And it looks as if, at least for now, lawmakers in the Western Canadian province concur with his assessment.
Canadian instant payday loan provider Rentcash applauded the Government of British Columbia for its decision not to advance Bill 27 - The Payday Loan Act - as the legislative session ended.
“Many operators in the online payday advance industry - including Rentcash - were disappointed with several features of Bill 27 about which they were not consulted prior to introduction of the Bill,” said Reykdal.
Along with many other providers of fast cash, he believes that payday loans are best regulated by lenders themselves - by setting fair criteria and enforcing existing laws.
“The government now has the time to consult directly with industry operators and should amend the Bill based on their input.”
“There is precedent within Canada’s federal and provincial legislatures for broad stakeholder consultations following first reading of a Bill,” the cash loan provider said.
“The government should act on this precedent and reach out to all of its stakeholders before advancing Bill 27 in the next legislative session.”
Rentcash currently operates 62 payday advance outlets in British Columbia under The Cash Store and Instaloans banners.
The payday loan agency is a leading advocate of consumer protection measures for the payday advance industry, and was one of the first firms in Canada to ax rollovers from its product mix.
They are popping up all across Hamilton. You pass half a dozen of them walking along King Street East between Wellington and James streets: storefront operations with flashy signs promoting “Instant Cash! Money Now! Cheque cashing!”
Believe it or not, payday loan outlets in this city outnumber McDonald’s, Wendy’s, Harvey’s and Burger King restaurant franchises combined.
These instant payday loans are supposed to be short-term loans for small amounts - for emergency or one-time situations. The stores promote quick cash without a credit check.
According to Statistics Canada, the typical borrower is a person with lower employment income and limited or no savings to cover an unexpected expense. Borrowers often have few other options when they run into a financial problem — whether for a needed repair, higher than expected utility bills or a family emergency.
Loans are generally repayable at next paycheck.
To get a payday loan, an applicant needs to provide a post-dated check for the amount of the loan plus interest and any applicable service fees.
The problem is that because the loans cover such short time periods, when added up, the interest and service fees by far exceed the 60 per cent annual rate of interest allowed by the Criminal Code. In real terms it may mean paying $300 on payday to borrow $250 today — still a substantial amount.
Unfortunately, some borrowers are unable to repay the entire amount of the payday advance loan at their next paycheck. Some payday loan companies allow borrowers to renew the loan. It often leads to more interest and more fees - initiating a cycle of deepening debt.
Proponents of the payday loan/check cashing industry say they are filling an important consumer need - banks simply don’t offer small loan amounts. Some clients have bad credit and simply wouldn’t qualify for other financial assistance when they run into a “one-time” financial emergency.
Opponents call the personal cash loan industry predatory and their services a new type of usury.
Both groups acknowledge that the payday loan industry has been operating in a vacuum - without much oversight from government and without adequate protection for consumers.
That may be changing.
Stan Keyes, Hamilton West’s former longtime Member of Parliament, took many in the community by surprise when he accepted the position as president of the Canadian Payday Loan Association.
Keyes wants to change the image of the payday loan industry by pushing tougher regulations that would weed out the industry’s “black sheep” who “conduct bad business practices and charge excessive fees that bring disrepute on a legitimate business.”
The head of the association that represents 23 instant payday loan companies in Canada is concerned that legislation to regulate the industry might not pass before the end of the spring legislative session.
“Bill-43 (the Payday Loans Act) should be a priority of the Saskatchewan government,” said Stan Keyes, president of the Canadian Payday Loans Association. “Only then will consumers be protected; only then will industry players be able to operate viably; only then will legislation and regulation prohibit the bad business practices and excessively high fees that come with an unregulated industry.”
“Now I’m troubled that the [payday cash advance] legislation may not get passed in the next few weeks before the (legislature) breaks for the summer,” he added in an interview Monday.
The bill requires 20 hours of debate before it can be passed and, with the session scheduled to prorogue next week, the legislation could die on the order table.
Payday loans online are short-term, high-interest loans that are typically repaid to the lender by the next pay period. According to the association, which represents 500 of the 1,350 payday lender outlets in the country, two million Canadians use payday loans every year.
The federal Conservative government recently passed legislation to exempt payday loans from Section 347 of the Criminal Code, which prohibits loans with interest rates in excess of 60 percent.
A typical 14-day, $300 payday cash loan would cost the borrower $50, which would equate to an annual rate of interest of 435 percent.
But Keyes said payday loan companies can’t be compared with conventional loans offered by chartered banks and their annualized percentage rates (APRs). “It’s the wrong measure for payday lenders. We deal in short-term, small-sum loans.”
Keyes said a typical $20 fee on a $100 payday loan includes $5 for defaults, which occurs with 20 to 25 percent of the cash advance loans.
The provincial legislation, which was introduced March 12, would set maximum limits on payday loans, allow consumers to cancel loans without penalty the day after the loan was made, prohibit more than one payday loan per customer and prohibit lenders from making claims on future wages and making loans contingent on purchase of other product or service.
Keyes said he hopes Saskatchewan will join Manitoba and Nova Scotia in passing the legislation regulating the cash advance payday loan industry.
“If you want to ensure you’re offering maximum protection for the consumer, the only way you do that is to pass legislation, then begin to work on regulations,” Keyes said.
Justice Minister Frank Quennell said Bill 43 is a “specified bill” and, as such, must be passed in the current session, which ends May 17.
“So there’s no danger of the bill not passing,” Quennell said. “It’s one of the bills the government had the opportunity to specify as a bill that had to pass in the session. Therefore, it will pass.”
Here is a recent editorial from a Canadian newspaper:
Payday loans will soon be seen for what they are - a pitfall for vulnerable users -thanks to the Ontario government.
The Dalton McGuinty Liberals, empowered by recent federal legislation allowing the provinces to put some restraints on the payday loan industry, introduced measures last week to force lenders to disclose all fees and interest rates charged.
Payday advance lenders are now required to post a 61-by-76-centimetre sign inside their shops which clearly explains the interest rates, brokerage fees, check-cashing fees and additional costs incurred when a customer borrows $100.
Payday lenders, which first came on the scene in the early 1990s, have run with little governance up to now.
Under the Criminal Code, it is illegal to charge annual interest rates of more than 60 per cent, but the law is not often enforced. And, according to news reports, some supposedly cheap payday loan lenders hide the high interest rates by saying fees above the legal maximum are “service charges.”
And, while Ontario is off to a good start, the province could take further steps to rein in such businesses by following the examples set by other provinces.
Manitoba and Nova Scotia have passed laws capping the interest rates and fees bad credit cash loan lenders can charge. New Brunswick, Saskatchewan, Alberta and British Columbia are in the process of enacting similar legislation.
In British Columbia, for instance, the province is conferring with consumer and industry organizations to establish reasonable fees for consumers, “but sufficient to cover the industry’s administration costs.” Fees will then be set by regulation.
The legislation will also prohibit lenders from requesting an assignment of wages, lending more than a regulated percentage of a borrower’s take-home pay, or requiring borrowers to sign documents transferring ownership of property, such as a vehicle.
These are all steps Ontario could and should implement to better protect the consumers who are at risk from no faxing payday loans - in most cases young, low-income families.