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. [pagebreak] Two years ago, Citytv in Edmonton surveyed three major chains and uncovered a startling disparity in pricing for short-term $100 loans. Money Mart, widely recognized as having the lowest fees, charged a brokerage fee of $16.75 plus $0.89 interest over eight days for a total of $17.64. Rates were slightly higher at Cash Money, with $1.29 in interest and a brokerage fee of $18.71 for a total of $20.00. But at Instaloan (owned by Rentcash), the cost of a $100 loan over an eight-day period topped $52.00, including $1.91 in interest, a $29.50 brokerage fee, $3.29 in insurance, an $8.00 cash-card fee and a $10.00 set-up fee. Money Mart’s default fee was $35.00, compared to $37.50 for Cash Money and a whopping $125.00 at Instaloan. Eventually, the inflated fees and dubious lending practices of a few came back to haunt the entire industry as a growing number of companies found themselves mired in class-action lawsuits. In 2005 the B.C. Supreme Court certified a class-action lawsuit against the Cash Store, with one plaintiff claiming to have paid $533 in fees over a four-month period to service a $300 loan. Cash Store, it was alleged, allowed the debt to “roll over” five times, resulting in $470 in brokerage fees along with $12 worth of transaction fees, a $10 cash-card fee and $40 in interest. An actuary hired by the plaintiffs estimated that if all those fees were counted as interest, the annual rate would be more than 1.1 million per cent. The case is still making its way through the courts. In 2006 Victoria-based A OK Payday Loans Inc. also faced allegations of illegal fee structuring. The court heard that A OK was charging borrowers about 19 per cent of the principal of the loan, plus 21-per-cent interest and a late-payment fee of $75. B.C. Supreme Court Justice Brenda Brown ruled that A OK’s lending practices were illegal and ordered the company to reimburse borrowers for any fees charged over and above 60-per-cent annual interest. A OK is appealing the decision. The “rollover” – the additional fees charged every time a repayment deadline passes – is among the prime targets of new payday lending laws. And there are few examples of rollover abuse more extreme than the case of Cranbrook resident Lexine Phillips. In June 2000, Phillips, who lives on a small disability pension, borrowed $150 from Instaloan for a flat fee of $37.50, or 25 per cent of the principal. Two weeks later, when she couldn’t repay the debt, she paid another $37.50. After paying the service charge every two weeks for a full year, Phillips increased the principal to $300, raising her fees to $75 every two weeks. By July 2004, Phillips had paid just over $5,000 in service charges on a debt that never exceeded $400. Her case is now part of an ongoing class-action lawsuit against Instaloan that’s being handled by Vancouver lawyer Mark Mounteer. “Lexine is like many of the borrowers we’ve seen who can’t afford to pay the balance of their loan, and it’s just not that easy for them to get out,” Mounteer says. Ontario lawyer Sue Lott, who studied the industry while working for the non-profit Public Interest Advocacy Centre prior to 2006, says the drive toward regulation has more to do with self-preservation than ethics. “The industry is scared to death of these class-action lawsuits,” Lott says. “There’s a huge amount of money at stake.” Adding to the woes of payday lenders has been the reluctance of courts to impose sanctions on customers who fail to repay their loans, Lott says. “There have been privately initiated lawsuits where, for example, Rentcash was going after people for non-payment and the judges were throwing them out of court,” Lott remarks. B.C.’s new payday lending law, Bill 27, will ban rollovers, prohibit companies from accepting personal property as collateral, put a lid on unfair government-cheque-cashing fees and forbid companies from “taking assignment of” a client’s wages to ensure repayment. Loans will be limited to a maximum of $1,500 for a duration of no more than 62 days. And, following Manitoba’s lead, rates in B.C. will be set following a series of public hearings this spring. According to an email from staff at the Ministry of Public Safety and Solicitor General, B.C. plans to allow payday lenders one transaction charge, one interest rate and one default charge. No other fees will be permitted.
But while other provinces have moved swiftly to implement consumer-protection measures, B.C. has decided to hold off on enacting its new consumer standards until hearings have been held to determine rates. Victoria-Hillside MLA Rob Fleming, who introduced a private member’s bill on payday lending two years ago, says the Liberal government’s new law lacks detail and leaves too much up for negotiation. “Almost all of the key elements of the bill are to be decided in the hearings,” says Fleming. “We wanted them to start a licensing process immediately.” With so much left undecided, companies in B.C. have formed a counter lobby in hopes of striking a better deal. Last March Rentcash’s Michael Thompson spearheaded the creation of the B.C. Payday Loan Association (BCPLA), which claims to represent 142 stores across the province, more than half of them owned by Rentcash. Money Mart and the CPLA are pushing for a basic rate of about $20 on a $100 loan, while Rentcash and its supporters in the BCPLA are hoping for a number closer to $30. Thompson claims that Money Mart, with the highest volume and the lowest rates, is using the CPLA to squeeze its competitors out of business. “The smaller players can’t afford to operate that way,” he says of the CPLA’s push for rock-bottom rates. In a thinly veiled reference to Money Mart, the BCPLA’s website states that the organization opposes rate caps that would “unfairly favour lowest-cost providers or lead to regional monopolies or near monopolies.” While Money Mart refuses to comment on its competitors, CPLA president Stan Keyes had no trouble accusing Rentcash of price gouging during a senate hearing on the issue last March. “Rentcash is not worried about market competition or monopolies. They are worried about rate caps that prohibit $30, $40 or $50 for a loan,” Keyes said. “It is profit instead of consumer protection. When the rest of the industry charges in the teens and mid-20s, I say we must protect consumers from companies that will gouge them with high fees.” Thompson questions the motives and the timing of Keyes’s outburst, but acknowledges that some Rentcash operations have been guilty of overcharging in the past. He says Rentcash is in the process of replacing its old fee structures with a $25 loan fee and a flat default fee of $25 in hopes of gaining a competitive edge. “We’re going to have the lowest rates in the industry,” Thompson claims. Rentcash’s recent lobbying efforts have drawn criticism from B.C. solicitor general John Les. After the B.C. government’s payday lending legislation was shelved last spring due to time constraints (before finally passing into law when legislature resumed in the fall), Thompson wrote a letter to all Ontario payday lenders claiming the BCPLA had been instrumental in “blocking” the bill. Les responded with a letter of his own to Ontario lenders, dismissing Thompson’s claim as “unequivocally false” and reaffirming B.C.’s intent to proceed with the bill during the fall sitting. Les declined to comment for this story. Thompson stresses that Rentcash continues to support consumer-protection legislation despite its opposition to rate caps. But he stops short of calling for an industry-wide ban on rollovers. “Rollovers are a corporate decision about how you want to manage,” he says. Scott Hannah, president of the Credit Counselling Society of B.C., says he’s disappointed at the split in the industry. “The CPLA, I believe, has taken a higher stance in terms of operating standards,” he says. For now the big question is, how much should a payday lender be allowed to charge for a $100 loan? That’s the mechanism bureaucrats, politicians and the industry have agreed to use as a baseline during rate-cap discussions. Manitoba, the first province to pass payday-lending legislation, held three weeks of rate-cap hearings in November under the auspices of that province’s public utilities commission. Nova Scotia will hold similar hearings in January, with B.C. expected to follow suit in the spring, although no firm timetable has been set on the West Coast. The CPLA is basing its $20 proposal on economic studies showing that the average cost of lending $100 is about $17. And if Rentcash had its way, there would be no rate caps at all. But Thompson’s pledge to slash prices is a sure sign that, love it or hate it, the industry recognizes there’s no escaping the new era of regulation. Manitoba’s rate-cap discussions, and those that follow in other provinces, will be watched intently by payday lenders across the country, says Kevin Isfelt, co-owner of nine Speedy Cash franchises in Western Canada. “I think what happens in Winnipeg will be precedent-setting for the rest of the provinces,” Isfelt says. “If my costs are $17 and I have to charge $20 instead of $21, that’s 25 per cent of my profit. One dollar makes a huge difference on the bottom line.” Cash Money president Dave Hews says $20 might work for his company but suggests adding some flexibility to protect those who don’t have the scale to offer a lower rate. “I could see a maximum of $26 or $27. If the cap’s too low, you could force a quasi-monopoly,” Hews says. Keyes says there will be some wiggle room as rate-cap discussions get underway in various provinces, but he predicts that few will be willing to go much higher than $25. “There’s not a single province in Canada that would say, we’ll give you $30,” Keyes says. Like many smaller operators interviewed for this story, Isfelt sees regulation as a necessary evil that will at least let him make an honest living under a consistent set of rules. “This should have happened three years ago,” Isfelt says. “That fact is, if you’re doing business at all right now, you’re breaking the law.”