Friday, March 1, 2013

Payday loan companies in government crosshairs ... - Financial Post

Once indulged as a necessary evil, payday loan companies are increasingly in the crosshairs of governments obsessed with consumers getting all tangled up again in loans they can?t repay.

Still bruised by the reckless lending practices of banks and irresponsible borrowing by consumers that sparked the 2008 financial crisis, governments in Canada, the United States and United Kingdom are cracking down on short-term loan providers for the way they operate ? and for trying to skirt the rules.

Canadian payday loan firm hit with proposed class action

The Cash Store Financial Services Inc., a publicly traded firm in the payday loan business, has been served with a proposed class action in four Canadian provinces.

Read full story here.

Earlier this month, the Ontario government took aim at the operating licence of Cash Store Financial Services Inc., an Edmonton-based company with 512 branches across Canada? and 25 in the U.K. Ontario wants to revoke Cash Store?s licence because it alleges that by charging fees, it allows the company to end run the province?s maximum borrowing cap of $21 per $100 lent.

Cash Store disagreed and filed for a judicial review. Meantime, the consumer protection branch of Ontario?s Ministry of Consumer Affairs, issued an ?alert? to consumers telling them of the investigation and reminding them of their rights.

It?s the latest imbroglio for Cash Store, which faced similar challenges in Alberta, Manitoba and British Columbia. Two years ago, the B.C. government? fined the company $25,000 and demanded it refund ?unlawful? fees paid by consumers. That hasn?t happened yet because Cash Store appealed.

Essentially, payday loan operators provide short-term funds or payday advances in small amounts, ostensibly to cover last-minute or emergency expenses. Typically, this type of loan is $1,500 or less for a maximum term of 62 days and the money is advanced in exchange for a post-dated cheque or some other form of pre-authorized payment.

On average, Canadians borrow $300 for a two-week term. According to Statistics Canada, about 3% of Canadian families have obtained a payday loan.

The bottom line: 1,350 players populate the Canadian industry that?s worth an estimated $2-billion annually. For a financially conservative country like Canada, that?s mighty big business.

Hence the hand wringing. Governments have never been comfortable with the idea that companies could profit by offering what amounted to predatory loans to a segment of society who can?t get a bank account or a credit card. Even so, the provinces decided to ring fence the payday lenders with a regulatory structure.

In the case of Ontario, where 750 of these companies operate, the Payday Loans Act was established in 2008, and amended in 2011 when the government worried lenders were getting around the maximum borrowing costs by charging fees.

Ditto for the other provinces ? except for Quebec, where payday loans are prohibited. Borrowing costs vary from province to province, for example, $25 per $100 in Nova Scotia, $23 per $100 in B.C., and $17 per $100 in Manitoba.

Interestingly, payday loan companies are under fire from provincial regulators just as giant U.K. short-term lender Wonga readies for its arrival in Canada. The online lender is in the initial phase of its Canadian launch and will primarily focus in Ontario and eventually branch out West.

By offering more flexible loans and terms ?uniquely built for Canada,? Wonga Canada CEO Mark Ruddock said in an email, the company? is ?committed to offering loans to those who have the ability to repay them.?

Over in the U.K., Wonga is among the group of 240 companies under formal investigation by the U.K.?s Office of Fair Trading after almost 700 complaints were filed last year.?Last November, the OFT said it is concerned about ?aggressive debt collection practices? and whether the companies are actually providing affordable loans. ?

In the U.S., 15 states have an outright ban on payday loans while others have been introducing stringent regulation to curb them. Even so, the measures have not stopped the sector from expanding. According to The New York Times, three million Americans obtained short-term loans in 2011, amounting to US$13-billion, more than a 120% increase from US$5.8-billion in 2006.

Clearly, the industry isn?t suffering even though lenders complain the borrowing limits are severely crimping profitability. That?s likely what?s spooking? regulators. Still, in the absence of default rates, it?s hard to gauge the extent of the problem, or if there actually is one. For now, the crackdowns appear to be motivated by consumer complaints.

And that may be the problem. Issuing public Buyer Beware alerts to consumers who are unlikely to see them, let alone heed them, won?t really fix much. Besides, at some point people have to be accountable and responsible for their actions ? and that includes reading the fine print.

Maybe the end game for governments is merely to send a message to payday lenders and the folks who use them. After all, having legitimized the business, all that?s left is to raise public awareness and hope for the best.

Source: http://business.financialpost.com/2013/02/27/payday-loan-companies-in-government-crosshairs/

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