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ACORN Canada
ProtectingCanadians’Interest
Reining in thePayday Lending Industry
ASpecial Report by:November 2004
ACORN Canada207 West Hastings St. #1012, Vancouver, B.C. V6B 1H7o) 604.688.4071 - f) 604.688.4079acorncanada@acorn.org - www.acorn.org
Protecting Canadians’ Interest
Reining in the Payday Lending Industry
A Special Report by:
ACORN Canada
November 2004
TABLE OF CONTENTS
Executive Summary
.................................................................................................1
Introduction
..............................................................................................................5
What’s the Problem?
...............................................................................................7
The ABCs of Payday Loans
..................................................................................10
The Players
.............................................................................................................12
Mapping the Money
...............................................................................................15
What Government Is and Isn’t Doing
..................................................................24
The Regulatory Agenda
.........................................................................................26
Conclusion
...............................................................................................................29
Appendix 1 – What Is ACORN?
..........................................................................30
Appendix 2 – Karp Actuarial Services Ltd. Report
...........................................32
ACORN Canada Report: Reining in the Payday Lending Industry
– Nov. 2004 Page 1
Executive Summary
he payday lending industry is unique in Canada. In most of the country, this billion- dollarbusiness is completely unregulated. And it makes money by openly breaking the law againstcriminal interest rates. While the Criminal Code clearly states that annual effective interest ratesmust not exceed 60%, payday lenders typically charge between 300% - 900% and, notinfrequently, more than 1,000%. And yet, in spite of this flagrant violation of the law and theharm done to those who regularly borrow from Money Mart and its less well-known competitors,virtually nothing is being done to crack down on this rapidly growing industry.It’s estimated that there are more than 1,200 payday lending “stores” across Canada. Some havemore reprehensible lending and collection practices than others. But all of them share the samecore business practice of breaking the law every single day.In no small part, the payday lending business has undergone explosive growth as a result of thebanks (and other traditional financial institutions) abandoning the small loan market and closingliterally hundreds of branches. This report contains a series of innovative maps which overlaywhere bank branches have closed with where payday lenders operate. The maps go on to fold inthe income, linguistic (immigration) and family status characteristics of these neighbourhoods.The story told by the maps is striking and confirms that payday lenders target particularcommunities as they ply their unregulated trade.Both the federal and provincial governments have long studied the problems posed by thepayday lending industry. But all of the meetings, committees, reports and working groups havenot been translated into action. In light of the damage inflicted by the industry, the time for studyis over and urgent action is required.Implementation of the full suite of policy mechanisms listed below would result in an effectiveand reliable regulatory structure that would provide strong consumer protection. Until acomprehensive regulatory structure is in place, governments must enforce the law on criminalinterest rates and ensure that it applies fully to all small loans, including sham transactions usedto cloak loans; loans made via the Internet and other distance selling technologies; and loansmade in partnership with other financial institutions.
Interest Rate Caps:
This is clearly one of the most important issues in developing an effective regulatory structure.
No Rollovers, Extensions, Back-to-Back Loans:
As important as the interest rate cap, strict regulation of repeat payday loans is pivotal inpreventing more and more Canadians from falling victim to the debt traps set by payday lenders.
Rollovers to be prohibited
Loan extensions (for a further fee) and back-to-back loans without a cooling off periodalso prohibited
Cooling off period must be longer than one pay cycle
Regular and aggressive prosecution of rollover violations
T
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