Toronto Star: Payday loan reports call for education, not regulation

Posted October 25, 2016



Our national campaign for Fair Banking targets the federal government to legislate the Canadian banking sector to  provide access to fair financial services to low income families, including:

  • access to low interest credit for emergencies
  • low interest overdraft protection;
  • no-holds on checks; and
  • lower NSF fee from $45 to $10

ACORN would like to see a national anti-predatory lending strategy that seeks:

  • ACORN members would like to see an amendment of the Criminal Code to lower the maximum interest rate from 60% to 30%.
  • create  a real time national tracking system (or database)  to stop roll over loans from company A to pay off company B for payday, installment, and title loans.
  • to harmonize federal and provincial anti-predatory lending practices and legislation looking at best practices; and dealing with inter-jurisdictional challenges and massive gaps in regulation on products like installment loans and title loans;
  • Reinstatement of a National Postal Bank


TORONTO STAR: Payday loan reports call for education, not regulation

Financial education — not regulation — is the key to protecting financially vulnerable borrowers who are unaware of the exorbitant costs associated with payday loans, according to two reports released Tuesday.
The Financial Consumer Agency of Canada’s survey of payday loan users found “worrisome trends” in the use of such short-term, high-interest loans of around $500 to $1,500. About 4 per cent of Canadian households are using the loans, it found.
The agency, which is funded by the federal government, surveyed 1,500 borrowers in early 2016 and found that just 43 per cent of respondents knew that payday loans are more expensive than a cash advance on a credit card.
Though the interest rate is capped in Ontario at $21 per $100, those payments usually become due two weeks to a month after the money is borrowed. Studies have shown that many consumers cannot pay within that time and fall into a cycle of debt.
Critics point out that Ontario’s interest rate cap, when calculated at an annual percentage rate, is about 500 per cent, much higher than the 60 per cent interest cap outlined in the Criminal Code.
One major problem is that many users lack access to more traditional types of credit, including bank loans or lines of credit, either because they are unaware of or ineligible for cheaper forms of credit, the agency found.
“And those who were more financially literate used these services less frequently,” said Jane Rooney, financial literacy leader at the agency, which has an educational, rather than regulatory, mandate.
“So we know that financial literacy is the answer.”
Another report released on the same day by the Conference Board of Canada and commissioned by the Canadian Consumer Finance Association, the payday loan industry’s lobby group, also suggested that more education, not regulation, is the answer to consumer issues with the industry.
The Conference Board said the industry provides a necessary alternative to illegal or unregulated lenders.
It found that nearly 4.5 million short-term loans were doled out to Canadians in 2014 at a value of $2.2 billion. It projected that payday lenders will approve 6 million loans in 2016 at a value of $3 billion.
In June, the U.S. federal government announced a crackdown on payday loans. Anti-poverty activists ACORN Canada urged the Canadian government to follow the U.S. government to protect borrowers from sinking into a debt trap.
The U.S. Consumer Financial Protection Bureau proposed regulations, including that lenders must conduct what's known as a “full-payment test,” requiring borrowers to prove they 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.
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 loan, 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, those decisions are left up to provincial governments.
“They say people use these services because they have no other resources which is true, people don’t use these services because they want to,” said ACORN spokeswoman Donna Borden.
“We support financial education, but with these kind of loans nobody understands how to calculate the interest. There’s no transparency at these companies.”
But the Conference Board’s report “Filling the Gap—Canada's Payday Lenders,” suggests that provincial government regulations provide enough safeguards for consumers and warned of the risk of overregulation.
“Having blanket approaches to regulating the industry could cause a lot of harm to a very significant portion of the population who is financially vulnerable and relies on these types of loans,” said the report’s author Sabrina Bond.
“It really boils down to empowering consumers and having a more targeted approach to regulating the industry and that can be done on an individual basis more effectively through education than it can through broad fee regulation or policy.”
Alberta lowered its payday loan cap to $15 for every $100 borrowed in August – the lowest rate in Canada. Ontario has said it is considering moving to a rate as low as Alberta’s.
Tony Irwin, president of the Canadian Consumer Finance Association, which recently rebranded from the Canadian Payday Loan Association, said he is worried about lower fee caps because the products are so expensive to provide.
“Our view on that is in rate setting the government take into account that there are costs involved in providing the product and that they set a rate that’s appropriate – that allows customers to access the product and for the industry to remain viable.”
Article by Sunny Freeman for the Toronto Star