Commerce abhors a vacuum. Canada's chartered banks demonstrated this immutable law in the mid-1990s when they began closing hundreds of branches in low-income areas across the country.

A report by a Vancouver-based consumer group that speaks for low- to moderate-income consumers, the Association of Community Organizations for Reform Now (ACORN), discusses the consequence this trend has had on those among us who struggle to make ends meet.

The void was filled by fringe banking - namely, so-called payday loan companies in Canada and the United States that have been accused by ACORN of charging usurious fees.

The ACORN report, Protecting Canadians' Interest: Reining in the Payday Lending Industry, contains the following criticisms of this largely unregulated industry:

* The fees per $100 lent, translated into effective rates of interest, have an interest rate equivalency as high as over 1,000 per cent. The Criminal Code of Canada prohibits interest rates any higher than 60 per cent.

* Clients who struggle from paycheque to paycheque often are sucked into a "debt trap" through repeat or rollover loans or loan extensions.

"Payday loans companies clearly appear to be breaking the law," says ACORN Canada executive director John Young, whose association launched a campaign last month to convince provincial governments to crack down.

But industry spokesman Bob Whitelaw of Ottawa says there is no need for any crackdown because the volume of complaints received by regulatory agencies is negligible and the industry is voluntarily banning rollovers.

"The payday loan industry is providing a service to Canadians," says Whitelaw, president of the Canadian Association of Community Financial Service Providers (CACFSP). "This is a short-term loan repaid in two weeks time.

"Canadians want it. They're using it. There's a need. They (payroll loan companies) are filling a major gap on Main Street Canada for short-term emergency funding before payday." Ernst & Young, a payroll lending industry consultant and auditor for Berwyn, Pa.-based Dollar Financial Group Inc. which has 311 Money Mart outlets in Canada, says it does not make sense to express payroll lenders' fees in annualized interest terms.

Such lenders must cover all their operating, capital and bad debt costs per loan over a small capital base (the average payroll loan is $279) and a short maturity period (two weeks for most loans), the firm says in a report to the CACFSP.

"These costs . . . cannot be covered simply by applying the 60-per-cent-per-annum interest rate permitted by the Criminal Code," says the October report, The Cost of Providing Payroll Loans in Canada.

An Ernst & Young chart, based on a 2004 sample survey of an estimated 1,200 outlets across Canada, shows how a $50 fee would translate into annual interest, given loan sizes from $100-$25,000 and loan maturity periods from two weeks to five years.

Simply put:

* A $50 fee on a $100 loan would translate to 1,300-per-cent interest over two weeks, 600 per cent over one month, 50 per cent over one year and 10 per cent over five years.

* A $50 fee on a $1,000 loan would translate to 130 per cent over two weeks, 60 per cent over one month, five per cent over one year and one per cent over five years.

* A $50 fee on a $25,000 loan would translate to 5.2 per cent over two weeks, 2.4 per cent over one month, 0.2 per cent over one year and 0.04 per cent over five years.

What these numbers illustrate is that 1) the shorter the maturity period on a flat-fee loan, the higher the effective rate of interest, and 2) the higher the amount of the loan, the lower the interest.

The total cost of providing a payday loan in Canada is $20.66 per $100 lent, the study found. The borrower must have a steady job, paystub and a bank account because the loan is paid back on payday with a post-dated cheque.

Lenders typically issue loans of up to 30 per cent of the borrower's net pay for a period of one to 14 days.

Many have allowed the loan to be rolled over or extended for an additional fee if the borrower is unable or unwilling to settle at the due date. But this practice is coming to an end.

The CACFSP recently unveiled a membership code that bans rollovers.

Whitelaw estimates that 75 per cent of Canada's outlets are owned by members of the association. "Our customers are typical Canadians. They have a job. They have a paycheque. They have a bank account." These customers have incomes of $35,000-$50,000 a year, he adds.

Dollar Financial Group's 2004 annual report, filed with the U.S. Securities and Exchange Commission, says Money Mart's typical short-term loan customer in Canada is male (60 per cent), 25 to 44 years old and employed in the services sector.

"Our core customer group generally lacks sufficient income to accumulate assets or to build savings," says Canada's dominant payroll loan company. "These customers rely on their current income to cover immediate living expenses.

"We believe that the under-banked consumer market will continue to grow." At present, Money Mart faces class-action suits in B.C., Ontario, Alberta and Manitoba that allege usury and unconscionable business practices. "We intend to defend the claims vigorously," the annual report says.

Among ACORN's recommendations are calls for licensing and a ban on rollovers.

Whitelaw says the industry has taken decisive action through its new code. "Financial institutions don't offer this product," he says. "The growth in the industry has been phenomenal."

BEST PRACTICES Best Business Practices include:

* Cost-of-credit disclosure.

* Consumer education. Borrowers must be told about credit-counselling services.

* Right to rescind. Borrowers must be allowed the right to cancel at no cost up to the end of the following business day.

* A ban on false or misleading advertising.

* A ban on loan rollovers.

* Compliance with privacy laws.

Next Brock Watch: What provincial governments are doing.

(Brock Ketcham can be reached at brock@businessedge.ca)