When is a dollar not a dollar? When it's borrowed from a payday-loan company at an astonishing interest rate
It may be true that crime doesn’t pay. However, stretching the letter of the law to its very limits certainly has proven profitable for Canada’s payday lending industry over the past decade. Since migrating north from the U.S. in the mid-’90s, payday lending has grown into a $2-billion business, largely on the strength of sky-high fees that violate both the intent and the integrity of federal interest-rate laws. With no regulatory framework in place and little appetite in Ottawa for cracking down on abuses, payday-loan companies have been free to charge what they want and to engage in business practices that critics say can trap borrowers in an endless cycle of debt. But after 10 years on the untamed frontier of Canada’s financial-services sector, payday lenders have finally come face to face with the long arm of the law. Last fall, under pressure from consumer groups and growing concern about unethical practices from within the industry itself, the federal government passed a bill requiring the provinces to regulate payday lenders. Instead of being subject to federal laws prohibiting annual interest rates in excess of 60 per cent, as they were previously, payday lenders are now to be governed by separate provincial legislation crafted specifically for their industry. The federal bill, passed in October 2006, makes it mandatory for the provinces to impose consumer-protection measures and, in consultation with industry stakeholders, set rate caps for payday lenders. So far seven provinces have moved on Ottawa’s directive. Manitoba, Nova Scotia and Saskatchewan passed new laws within months of the federal bill, while Alberta, New Brunswick and Ontario are expected to introduce payday-lending legislation this spring. B.C., with the highest concentration of payday-loan outlets in the country, passed its payday lending legislation in November, although many of the details remain to be worked out through a negotiation process that has not yet been defined. Faced with a growing number of class-action lawsuits accusing companies of charging criminal interest rates, most payday lenders accept the need for a major regulatory overhaul. But while there’s support within the industry for beefed-up consumer-protection laws, the prospect of a cap on fees has triggered an uneasy mix of reactions and highlighted simmering tensions between the country’s two largest competitors, one of which is based in Victoria. The biggest fish in Canada’s payday lending pond, Victoria-based National Money Mart Inc., owns 437 of an estimated 1,250 payday-loan outlets across the country, including more than 80 in B.C. Not far behind is Ontario-based Rentcash Inc., which operates 362 stores under the Cash Store and Instaloan brand names, including 70 locations in B.C. Three years ago, amid growing public criticism of lending practices that were seen as usurious, Rentcash, Money Mart and a host of smaller companies formed the Canadian Payday Loan Association (CPLA) to lobby for regulatory change. The rivals worked together on a mandatory Code of Best Business Practices for all CPLA members, appointed an “ethics and integrity commissioner” to monitor complaints and demanded changes to the existing laws. But last fall, when the federal government decided that strict limits on fees would form an essential component of new regulations, that foundation of goodwill began to crumble. In early October 2006, CPLA president Michael Thompson left his full-time position with the association to work for Rentcash. Two weeks later, Rentcash abandoned the CPLA, alleging that Money Mart had hijacked the organization’s agenda. “The CPLA was founded by Money Mart, and the board of directors is majority controlled by Money Mart,” says Thompson, now VP of investor relations and government affairs for Rentcash. “The association was pursuing a mandate that was not necessarily promoting our view.” Money Mart president Patti Smith acknowledges that her company accounts for about four-fifths of the CPLA ’s 501 members but denies that Money Mart is calling the shots. “That is simply not true. We are one of 23 companies in the CPLA. We are obviously a large contributor, because we are the largest member,” she says. The rift between Money Mart and Rentcash underscores bitter divisions in the industry that have widened as opposing factions move to shield themselves from the impact of new regulations. On one side, Money Mart and the remaining CPLA members argue that only government legislation can restore the industry’s credibility. On the other side, Rentcash and its sympathizers claim that self-enforcement is sufficient and feel that government-imposed rate caps are an affront to free enterprise. And with rate-cap hearings already underway in Manitoba and Nova Scotia – the B.C. government is still working out the details of its process – there are millions of dollars at stake for both sides. CPLA president Stan Keyes welcomes the wave of new legislation and says a regulated market will result in a “viable, competitive industry and provide for real consumer protection… Industry players will operate viably, and regulations will prohibit bad business practices and excessively high fees.” The Rentcash camp is not so trusting of government interference. “We’re still lobbying for consumer-protection legislation, but we don’t think the government should be getting into the business of setting rates,” Thompson says. “If we’re forced to do it, then we’ll participate. But right now… we’re saying leave it to the market to decide.” Rentcash isn’t the only company to leave the CPLA amid concerns about new regulations. Keyes blames the CPLA code of ethics for the departure of several smaller operators over the past year. And in August, the CPLA lost Cash Money Cheque Cashing Inc., the nation’s third-largest payday lender with 102 stores. Cash Money president Dave Hews told BCBusiness he has no quarrel with the CPLA’s strict policies on regulation and rate caps. However, he acknowledges that Cash Money decided to leave the organization in part because of “personal business reasons to do with the [new] standards.” Critics delight in portraying payday lenders as glorified loan sharks who have lined their pockets by brazenly ignoring the laws of the land. A more generous description would be that the industry simply found a creative way to exploit a vague statute that was written to deal with back-alley loan sharks, not legitimate storefront shops specializing in two-week cash advances. Under section 347 of the Criminal Code, it’s illegal to charge more than 60-per-cent interest a year. Yet even a low-cost payday loan – the standard rate these days is $20 to borrow $100 for two weeks – equates to more than 500-per-cent interest when pro-rated over an entire year. Money Mart co-founder Stephen Clark, who opened the country’s first cheque-cashing outlet 25 years ago in Edmonton, says the arrival of payday lending in the mid-’90s presented the company with a dilemma. On one hand, Clark saw a growing need for short-term cash loans to help people with no other access to credit to cover utility bills, car repairs and other unexpected expenses. “I really saw it as a genuine need of the consumer,” says Clark, who now runs CashLine ABM Inc., the Victoria-based ATM company he founded after selling Money Mart to U.S.-based Dollar Financial Corp. in 1996. “You look for a $100, $200 or $300 loan from a financial institution; it just doesn’t exist.” On the other hand, Clark hesitated to get into the lending business because he was worried that his competitors were lending money at rates that appeared to violate the Criminal Code’s 60-per-cent ceiling on interest charges. “Some of our competitors were just blatantly [offering payday loans], but I had concerns about Section 347… It’s very confusing and unclear,” Clark says. “I dragged my feet, trying to figure out a way to do it and still stay within the guidelines.” The solution for Money Mart and its competitors was to charge a modest interest rate and levy additional service charges to help pad the bottom line, a practice not specifically covered by the legislation. As long as the interest charges themselves didn’t exceed the legal limit, lenders could claim they were operating within the law. In a properly regulated environment, that argument has its merits. But with few regulations to hold them back, unethical operators went from bending the rules to twisting them beyond recognition. For too many companies, a $20 fee on a $100 loan became the tip of a very large iceberg. The standard interest rate is an additional 16 cents per $100 per day, which alone adds up to 59 per cent a year, just under the federal limit. But there can also be insurance fees, set-up fees and a cash-card fee if the money is being issued on plastic, an increasingly common practice. And most lenders charge delinquent customers a default fee in the $25-to-$40 range.