Payday lenders draw more scrutiny as weak economy spurs fear of gouging

Canadian authorities are stepping up scrutiny of payday lenders over fears they are preying on vulnerable customers at a time of record household debt and rising unemployment in oil-producing regions.
The payday loan industry has come under increasing scrutiny in the current economic slowdown. (CBC)

Canadian authorities are stepping up scrutiny of payday lenders over fears they are preying on vulnerable customers at a time of record household debt and rising unemployment in oil-producing regions.

Payday lenders have surged in popularity in Canada with more than 1,400 stores now open, according to the Canadian Payday Lending Association (CPLA). It said around 2 million Canadians a year take out loans meant to tide them over until their next paycheck.

The industry had only a handful of stores when it emerged in the mid-1990s, according to the Canadian government. Payday lenders have grown in popularity because they offer quick access to cash without the extensive checks that banks make and are prepared to lend to borrowers with damaged credit records who may have struggled to pay back loans in the past.

Such access to money, however, comes at a cost. Consumer groups say the interest rates charged by payday lenders- typically as high as 600 per cent on an annualized basis - can leave borrowers trapped in crippling cycles of debt.

Those concerns have led Canada's financial consumer watchdog to launch an investigation into the industry, while several provinces are reviewing regulations. Their action mirrors clamp downs in other countries. Britain introduced new rules two years ago which capped the interest payday lenders could charge.

And U.S. authorities are looking to stamp out abusive practices by lenders. "From my perspective it's always been a concern," said Brigitte Goulard, deputy commissioner of the Financial Consumer Agency of Canada, which will publish the findings from its investigation on payday lending this year and is working with provinces to understand the industry's impact on consumers.

Alberta's left-leaning NDP government has proposed legislation to end what it termed "predatory" lending. Cabinet minister Stephanie McLean said she worries the tough economy is causing more hard-pressed Albertans to resort to payday loans. Oil-rich Alberta suffered 19,600 job losses last year and also saw a sharp hike in consumers defaulting on bank loans as the severe drop in crude prices pushed the province's economy into recession.

"There is a unique vulnerability at the moment given the economic environment and predators take advantage of such vulnerability, so I do have significant concerns about an increase in the uptake of these loan products," McLean said in an interview.

A typical consumer loan from a bank would charge a single-digit rate of interest, with the best rates at about 2 percentage points above the base lending rate. Most personal loans would be in the 3 percent to 5 per cent annual interest range if the customer has a good credit record.

Credit cards have much higher rates at around 20 per cent. Although payday loans are often taken out by people with lower incomes, credit counsellors in Alberta say they are increasingly dealing with oil industry workers who got into trouble because their income dropped and they are "maxed out" on credit cards and bank loans.

Nadia Graham, who works for the Credit Counselling Society in Calgary, said one recent client had a well-paid job with one of the world's largest oil companies, but got into trouble after his bonus was slashed. "We're seeing people who are professionals, who are aware of the interest rates and are not naive, and they're going to payday lenders anyway out of sheer desperation," she said.

McLean said Alberta is considering cutting the current maximum permitted cost-of-borrowing rate and looking at ways to restructure loans to allow customers to pay back in instalments. Lenders can now charge as much as $23 per $100 borrowed. Nova Scotia last year cut the maximum interest that could be charged.

New Brunswick and Ontario are reviewing regulations. Parts of British Columbia have either banned new payday lenders or placed severe restrictions on store openings.

Tony Irwin, chair of the Canadian Payday Loan Association, said lawmakers should be careful not to impose regulation upon the industry that is so onerous it forces lenders to shut down, warning that the alternatives could be worse.

"If they can't get to a licensed, regulated payday lender they will find credit some other way. And the evidence is that void is filled by unlicensed, unregulated Internet lenders," said Irwin, adding that unregulated operators charge even higher rates.


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