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Buddy, can you spare a payday loan?

Thursday, April 7, 2005

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Written by Scott Piatkowski

Can’t pay your hydro or gas bill? Been hit by an unexpectedly large car repair bill? Need to buy some groceries, but can’t wait until pay day? Don’t worry, there are plenty of people who are willing to help you with your financial dilemma. All too often, however, the “help” offered by payday loan and cheque cashing companies causes even more problems for the debtor. Exorbitant interest rates, massive and often hidden service charges, and dubious insurance premiums combine to make the cost of short term borrowing by lower income people absolutely outrageous.

The Criminal Code makes it a crime to charge more than 60% interest per annum. In itself, that figure is ridiculously high, but there’s little evidence that it is even enforced. It has been estimated by NDP Finance Critic Judy Wasylycia-Leis that “a $100 payday loan taken out a week before pay day would be subject to $18.91 in interest, a cheque cashing flat fee of $12.99 to repay the loan, plus a percentage fee of 4.99% on the cheque to repay the loan ($4.99) for a total cost of $36.89, or $5.27 a day. As an annualized interest rate, that is 1923%.” Some studies have shown that the majority of loan recipients allow their loans to rollover (meaning that they take out another loan to help pay off the initial loan and then make it to their next paycheque), so their interest rate would be even higher.

In Wasylycia-Leis’ home province of Manitoba, the provincial government is doing something about the proliferation of these firms and some of their more unscrupulous practices. Manitoba Minister of Finance Greg Selinger announced last month that he planned to introduce legislation that would:

a.. License the industry (as is done in Saskatchewan and Nova Scotia)
b.. Ask the federal government for the right to regulate interest rates (since, says Selinger, “the federal rate is not enforced at all”
c.. Include all service fees when they advertise interest rates.
d.. Ban rollover loans
e.. Ban companies from confiscating the paycheques of people who stop making payments,

No such action is planned in Ontario, even though the firms “are popping up like mushrooms” (in the words of Selinger) here just as quickly as they are in Manitoba. Instead, Queen’s Park seems content to let those who are marginalized or abandoned by traditional lending institutions fend for themselves.

Some of the firms’ customers are already fighting back through the courts. A class action lawsuit was launched last year against Money Mart and its parent company. The lawsuit alleges that “the companies violate section 347 of the Criminal Code of Canada by charging and collecting fees and interest at an effective annual interest rate in excess of 60% on ‘payday’ loans which are repaid by personal cheque dated on the borrower's next payday or pension cheque deposit date…. (and that) all of the interest and fees charged and collected by the defendants on loans repaid by cheque on the borrower's next payday are ‘interest’ within the meaning of the criminal interest provisions of the Criminal Code of Canada.” The lead plaintiff in the case alleges that she “paid an effective annual interest rate on her loans of between 329% and 578%.”

In late March, an Ottawa judge ruled against two payday loan firms that were trying to collect money from 34 clients, awarding them only the original loan principle. Deputy Judge George House ruled that the companies operated “in bad faith”, that Affordable Payday Loans “engaged in an organized, consistent and concerted pattern of conduct designed to exploit the vulnerable” and that Stop’n’Cash charged “unconscionably usurious” rates of interest. House forwarded his rulings to the Ontario government “to allow a review and take whatever action those ministries deem necessary.” So far, there has been no response from Attorney General Michael Bryant or Consumer Minister Jim Watson.

This is not the first time that Stop’n’Cash has had its corporate knuckles rapped. Last year, Ontario’s insurance regulator ruled against the firm’s insurance scheme (which was registered offshore for the sole purpose of insuring Stop’n’Cash loans, but immediately paid 97% of premiums back to Stop’n’Cash). A separate class action suit alleges that the company’s mandatory insurance system is a “sham” designed to cheat customers.

This is not just a Canadian problem. According to Mother Jones magazine, “in 2000, some 8,000 companies in the United States made more than $9 billion worth of payday loans – a figure that [was] projected to double by 2004.” New York Attorney General Eliot Spitzer is suing one payday lending firm that offers “payday loans”, but disguises its excessive interest charges as payment toward mandatory “catalog sale” purchases. “This is a transparent attempt to evade New York laws that prohibit loan sharking” said Spitzer. “Consumers use these services out of desperation, and are invariably exploited to their financial detriment.”

The Ottawa-based Public Interest Advocacy Centre has asked the federal and provincial governments to take immediate action along the lines being taken by Manitoba. If Manitoba and New York can act, it’s not clear why the Ontario and federal governments feel they can continue to ignore the problems posed by payday loan firms. How many more people need to get ripped off before they will act?


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