Posted June 3, 2016
A U.S. government clampdown on payday lenders has sparked anti-poverty groups to call for similar consumer protections in Canada, where regulation of what they call predatory loans falls to individual provinces.
The U.S. Consumer Financial Protection Bureau's proposed regulations, announced Thursday, seek to tackle a few common complaints about payday lending.
The CFPB is proposing that lenders must conduct what's known as a "full-payment test." Because most payday loans are required to be paid in full when they come due, usually two weeks to a month after the money is borrowed, the CFPB wants lenders to prove that borrowers are able to repay that money without having to renew the loan repeatedly. There would also be restrictions on the number of times a borrower can renew the loan.
Secondly, the CFPB would require that lenders give additional warnings before they attempt to debit a borrower's bank account, and also restrict the number of times they can attempt to debit the account. The aim is to lower the frequency of overdraft fees that are common with people who take out payday loans.
"Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt," CFPB Director Richard Cordray said in a statement.
ACORN Canada activists urged the Canadian government to follow the U.S. government in taking leadership to protect borrowers from sinking into a debt trap.
“Although some needed proposed protections — such as the requirement that longer-term loan payments consume no more than 5 per cent of a borrower’s monthly income — were dropped, this crackdown starting at the national level is desperately needed in the U.S. and Canada,” said ACORN spokeswoman Donna Borden.
Some of the actions ACORN wants the federal government to take include: creating a national database of payday loan users to stop users taking out a loan to pay off another, capping all payday loan fees at $15 on every $100 and amending the Criminal Code to lower the maximum interest rate from 60 per cent to 30 per cent.
In Canada, each province caps the rate lenders can charge borrowers in interest.
A federal Department of Finance official said the government is focused on raising awareness about the costs of and alternatives to high-interest loans and working with the provinces to “maintain the integrity of the payday lending framework.”
Interest on payday loans is capped at $21 per $100 dollars in Ontario for a two week period. When this is expressed as an annual rate, it comes to 546 per cent. That is well above Canada’s criminal usury rate of 60 per cent. The loans are supposed to be very short term — about two weeks, which is why interest rates are not required to be expressed as annualized amounts.
Many borrowers turn to payday loans for fast cash to cover bills when they are rejected by the banks. This allows payday lenders to take advantage of people who have nowhere else to turn, said Tom Cooper, director of the Hamilton Roundtable for Poverty Reduction.
The predatory nature of payday loans is a failure of the national banking system, which means they should be a federal responsibility, he said.
“The federal government really kicked the can of regulation down to the provinces and so we have a patchwork quilt of what provincial governments are doing in terms of regulating the payday loan industry.”
The Canadian Payday Loan Association said if similar regulations came to Canada they would effectively eliminate an option for consumers who are rejected by banks and would otherwise have to turn to illegal lenders.
“A huge number of Americans who rely on short-term loans who under these new rules will be unable to get them,” said the association’s president Tony Irwin.
“Those are people who need money now so if actions are going to be taken that are going to restrict the markets, you need to have alternatives in place, if not where are they going to go?”
The alternative is a federal government requirement that banks to have branches in low-income neighbourhoods that offer credit lines to lower-income people at the same rate they offer to others, said Duff Conacher, co-founder of Democracy Watch.
That, he said, would eliminate the need for payday lenders.
“The U.S. is trying to regulate this industry, but this industry should not exist.”
Article by Sunny Freeman for the Toronto Star