Feds hunt for 'payday' loan alternatives

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Ottawa has joined the provinces to look for cheaper alternatives to controversial "payday" loans, as Canada's mainstream financial institutions largely ignore the fringe credit market for low-income workers.

An Industry Canada panel is examining ways that borrowers who rely on small, short-term loans from payday firms can get the same breaks as Canadians who use traditional credit, such as bank loans.

The work of the six-province group, which Industry Canada co-chairs with British Columbia, follows a review begun in 2000 that sought ways to regulate the payday loan sector that first appeared in Canada just five years earlier.

That review eventually led to Bill C-26, a Criminal Code amendment implemented in May 2007 that finally empowered the provinces to create regulations to keep payday loan companies in check.

Payday companies in Canada typically provide 10-day loans, worth an average of $280, on proof of a regular paycheque. The next paycheque is signed over to the firm, with fees, interest and insurance costs deducted. The transaction, with little red tape, may take 15 minutes.

So far, nine provinces either have restrictive payday loan legislation on the books or plan to pass laws, with Newfoundland and Labrador the only holdout.

The new rules, which in Ontario limit the cost of a payday loan to $21 for every $100 borrowed, appear to have driven many fly-by-night operators out of business while giving fringe borrowers more protection.

But the Industry Canada working group apparently wants to go further.

In May last year, the panel reviewed a landmark report it commissioned into low-cost credit products in the United States, France, Germany and elsewhere that provide cheaper alternatives for vulnerable consumers who might otherwise use payday loans.

"There is a surprising number and diversity of affordable loans schemes for vulnerable people in the seven countries studied," reported Jerry Buckland, an international development professor at the University of Winnipeg.

"The research identified the largest number of services and programs in the U.S., followed by Australia and the UK. Belgium, France and Quebec had a moderate number of programs, and Canada (outside of Quebec) and Germany had few identified services."

A detailed summary of the report was obtained by The Canadian Press under the Access to Information Act.

Mr. Buckland found that credit products for the working poor in the United States were among the most innovative, some of them subsidized by taxpayers or non-government organizations.

But other U.S. examples he studied involved financial institutions offering lower-cost credit on break-even terms or with modest profits and no taxpayer subsidies.

The report suggests the long absence of fringe-credit regulations in Canada may have kept the big banks and others out of the game.

"One reason noted was that the absence of regulation of payday lending acted as an obstacle for FIs (financial institutions) to get involved in small loans. This is changing now, as provinces unveil regulations," says the document.

A government spokesman declined to provide details about the activities of the working group, co-chaired by a senior policy analyst at Industry Canada, David Clarke, and Anne Preyde, B.C.'s director of consumer policy.

Industry Canada's Michel Cimpaye said only that the group "has no specific announcements respecting next steps."

A series of studies over the last decade has found that payday loan clients have low incomes, modest education, are young and tend to live in larger families with children. About a quarter use the service once a month, suggesting many are stuck on a credit treadmill. National surveys suggest up to eight per cent of the Canadian population has used a payday lender at some point.

Mr. Buckland said in an interview there's still a credit gap in Canada between payday loans and traditional loans.

Canada's financial institutions appear content to let credit cards and overdraft protection provide any short-term, low-dollar credit to vulnerable consumers, he said.

"It seems that financial institutions are not really interested in exploring alternatives," Mr. Buckland said. "People don't just want credit cards ... Sometimes people want a small loan with a repayment period."

He called Bill C-26 a "second-best response" to the problem of payday loans, suggesting Quebec could become a model for the other provinces.

Payday loans have long been regulated out of existence in the province and caisses populaires - similar to credit unions - have filled the gap.

"We should look at Quebec," he said. "They've taken a responsible approach to providing small loans to people."

A spokesman for the industry group representing the largest players in the payday loan sector said his members welcome any competition from traditional lenders.

"The more credit choices there are for consumers, the better," Stan Keyes, president of the Canadian Payday Loan Association, said from Hamilton. "Competition? Our members say 'Bring it on'."

The association's 23 member companies, which include 432 outlets of the giant Money Mart chain, self-regulated in 2005 and welcomed the new regulatory regime, said Keyes, a former Liberal cabinet minister.

He questioned whether traditional lenders would be able to offer quick, no-frills service as efficiently as the association's 588 member outlets.

Mr. Keyes added that Bill C-26, combined with the global meltdown since 2008, has had little impact on his members.

"There's been no appreciable or measurable effect," he said.

The association represents less than half of all the payday outlets in Canada which altogether have lent up to $2-billion annually.