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Time to curb payday lenders
February 1. 2008
Low-income earners who live from paycheque to paycheque have few places to turn when they hit a financial rough patch.
Major banks have pulled out of many poor neighbourhoods, and those that remain are often reluctant to lend to customers with unsteady incomes and spotty credit histories.
Into that vacuum have rushed "payday lenders"– storefront operations that cash cheques and extend short-term loans to borrowers who might not qualify for credit from mainstream lenders. But their services come at a steep price. A Star investigation in 2004 revealed that interest rates and fees can jack up the annualized cost of payday loans to an astronomical 1,000 per cent, well above the 60 per cent limit on usury in the Criminal Code.
In the process, low-income earners are trapped in a ruinous cycle of borrowing from which many cannot escape.
These predatory practices have rightly drawn the attention of politicians at Queen's Park, especially after the federal government last year gave the provinces the power to regulate payday lenders. The McGuinty government has since enacted rules forcing payday lenders to post prominent signs disclosing the full cost of borrowing.
On the opposition side, NDP MPP Cheri DiNovo is doing her best to make sure the issue stays at the top of the agenda by announcing this week that, when the Legislature resumes sitting next month, she plans to reintroduce a private member's bill that would establish a licensing regime and cap annual interest rates at 35 per cent.
That could put them out of business. In Quebec, which already has a 35 per cent interest ceiling, there are no legal payday lenders, according to an Ontario government consultation paper released last year.
"To be biblical about it, this is chasing the money lenders out of Ontario, and that's what we're trying to do," says DiNovo, a United Church minister, who adds that clamping down on payday lending "is simply an ethical call."
But in any bid to regulate the sector, the province faces a dilemma. There is no doubt regulation is needed. But many poor people clearly depend on the short-term credit the payday lenders offer. A recent United Way study found that the number of payday loan and cheque-cashing outlets in Toronto jumped from 39 to 317 between 1995 and 2007, most of them in low-income areas.
The challenge for the government will be to strike a balance between protecting vulnerable people while ensuring they still can get credit when they need it, on terms they can afford.
A crucial part of that will be regulating payday lending, including capping interest rates, licensing lenders and barring back-to-back loans, measures endorsed by a number of community groups. People who use payday loans also need to be educated about the risks.
The government also ought to encourage banks and credit unions to return to low-income areas and develop creative credit and lending practices tailored to people living on the edge. That's an approach DiNovo is pushing.
At root, the payday loan industry is a symptom of poverty. But its dubious practices also worsen the plight of vulnerable people who fall prey to it. The McGuinty government could make an important start on its broader election pledge to fight poverty by cracking down on this sector.
By the Editor, The Star, Canada
Source
http://www.thestar.com/comment/article/299332
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