Canada's federal and provincial governments are looking at ways to regulate the country's payday loan industry and other non-traditional lenders so borrowers are protected like the clients of conventional banking institutions.
They are doing so under the auspices of the Agreement on Internal Trade (AIT), Canada's would-be NAFTA.
Industry Canada's Michael Jenkin, co-chair of AIT's consumer measures committee (CMC), says the CMC has assigned a working committee of federal and provincial public servants to explore ways to protect the alternative consumer credit client.
The action has been taken in response to explosive growth in alternative credit sources and controversy in the payroll loan sector.
Consumer advocates charge that clients pay excessive fees. The industry counters that it goes about its business in a manner in which complaints are scarce and that - fees notwithstanding - there is a strong demand and need for its service.
"We are working with lenders, consumer groups and other public-interest organizations to explore potential solutions," says Jenkin, director general of Industry Canada's office of consumer affairs.
The working committee, assembled several years ago, is co-chaired by Donna Chilton, an Alberta Government Services policy analyst, and Reg Faubert of the B.C. Ministry of Public Safety and Solicitor General's consumer policy division.
Lobbying by the Canadian Association of Community Financial Service Providers (CACFSP) and a Vancouver-based consumer advocacy group has put the payroll loans industry high on the committee's agenda.
The committee also is reviewing cheque-cashing outlets, instant auto loan companies, rent-to-own outlets and pawnbrokers.
Jenkin, of Ottawa, says its recommendations are to be forwarded to federal, provincial and territorial consumer affairs ministers who are to meet in spring 2005. Ultimately, legislative "templates" would be drafted for optional use by governments to pass regulations governing the activities of these enterprises. The aim would be consistent regulation across the country.
The No. 1 issue being explored at present is how the usury section of the Criminal Code of Canada can be amended so that payroll companies - which may technically be in breach of this law - are exempted.
In a paper prepared for Industry Canada's office of consumer affairs and the B.C. Ministry of the Attorney General, Osgoode Hall law school professor Iain Ramsay says clients generally pay fees of $15 to $25 per $100 for loans lasting up to 14 days.
Converted to an annual percentage rate, these fees equal 390 per cent to 650 per cent - far exceeding the maximum allowable 60 per cent under Section 347 of the Criminal Code, says Ramsay, of Toronto.
"It would not appear that Section 347 has had much impact in preventing the growth of payday loans," Ramsay writes.
"If there appears to be little enthusiasm for using Section 347. . . to protect vulnerable consumers in relation to this type of loan, then the section should be amended."
In an August 2002 consultation paper, the alternative consumer credit market (ACCM) working group distinguishes between "traditional" and "non-traditional" lenders. The former are subject to thorough regulation while the latter are not, the paper notes.
"While the ACCM provides credit to consumers who otherwise might not be eligible for it, concerns have been raised about the price of that credit and about undesirable practices . . . such as 'rollovers' or aggressive collection practices."
Last month, the CACFSP unveiled a best business practices code that includes a ban on payday loan rollovers, or refinancing - a practice that critics say can enmesh low-income earners in a web of spiralling fees.
Payday loan companies sprang up in Canada in the mid-1990s as chartered banks closed hundreds of branches in lower-income areas, and has grown to a thriving industry of 1,200 outlets, about 75 per cent of which are owned by CACFSP members.
Industry Canada's Jenkin says the working committee now is looking at a "regulatory framework" after having reviewed marketplace feedback on two ways payday loan and other similar companies could be distinguished from regular consumer loans under Section 347 of the Criminal Code: The suggestions, outlined in the 2002 consultation paper, are:
* Exempt "small-sum, short-term credit" loans such as those provided by payroll loan companies and pawnbrokers from the federal usury law, provided that the business is operating in a jurisdiction where such activity is regulated.
* Create a special provision within the code's usury section for loans up to a specified amount and a duration of fewer than a specified number of days, with a higher "criminal" interest rate and separate evidentiary requirements.
"Section 347 is not well-suited to enforcement within the alternative consumer credit market despite many ACCM credit products being sold at arguably criminal interest rates," the paper says.
The paper notes enforcement is difficult because of the scarcity of complainants willing to testify, the low level of harm done to clients, costly evidentiary imperatives and the unusual requirement for attorney general consent for prosecutions.
"Enforcement of Section 347 could shut down the ACCM industry - something that no one is advocating . . . " Comments Jenkin: "We haven't come to any final conclusion."
There is no question that there is a place for payroll loan companies. Even the industry's most vocal critic, the Vancouver-based Association of Community Organizations for Reform Now (ACORN), concedes it may play a significant role.
"What's needed are initiatives from lenders and support from government that (is) both fair and workable," ACORN said in a paper last month.
Concludes Osgoode Hall's Ramsay: "Public policy challenges remain the same - to attempt to ensure that the needs of vulnerable consumers are met in a less-costly manner . . . and to ensure that individuals in the alternative financial sector receive a similar level of consumer protection to middle-income consumers."
(Brock Ketcham can be reached at firstname.lastname@example.org)