Pay-day lenders facing new rules

Pay-day lenders facing new rules



By The Canadian Press - For Business Edge
Published: 10/13/2006 - Vol. 6, No. 21



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The federal government has introduced Criminal Code changes that would end the legal uncertainty over high-interest short-term lending by the booming pay-day loan industry.

The bill would give the provincial governments authority to regulate pay-day loans, which typically involve lending a few hundred dollars to get borrowers through to their next pay day.

Justice Minister Vic Toews says the proposed legislation gives provinces the tools they need to protect consumers from what he called "questionable business practices."

It is illegal under federal law to charge annual interest of more than 60 per cent.

Yet the effective rates charged by pay-day loan outlets on short-term borrowings can amount to 1,000 per cent on an annualized basis, once service charges are included. There also are fears that borrowers can be trapped in a cycle of revolving debts.

Meanwhile, the industry has grown into a business estimated to lend $2 billion a year to two million Canadian clients.

The Conservative government's proposed legislation would allow provinces that have legal protections for pay-day loan customers to permit interest charges above the Criminal Code's 60 per cent threshold.

Pay-day loan companies have complained that limiting small short-term loans to 60 per cent interest would not enable them to cover even basic administration costs.

The proposed legislation appears likely to get all-party consent and rapid passage through the Commons.

The Canadian Payday Loan Association, an industry group representing 850 of the 1,350 outlets offering these short-term loans, welcomed the bill, saying it "will ensure consumer protection and the ongoing viability of this important industry."

Michael Thompson, president of the association, said the group, which has been calling for government regulation, will work with the provinces as they prepare their rules.

The biggest operator in the business, National Money Mart Co., also welcomed the government's action.

Money Mart, a subsidiary of U.S.-based Dollar Financial Corp., added that the provincial regulations will have to "balance consumer protection with the continued importance and viability of this industry."

The Consumers' Association of Canada has expressed doubts about the proposed legal change, warning of a "hodge podge" of provincial regulations that would leave consumers in a worse position.

The association added borrowers are already protected by the existing Criminal Code provision, and suggested that the government enforce the usury law on short-term loans.