WINNIPEG (CP) - New rules in several provinces are supposed to protect consumers from sky-high interest rates and fees at payday loan companies, but a consumer lobby group says they will likely do nothing to prevent the poor from becoming trapped by crushing debtloads.
Manitoba has become the latest province to unveil detailed rules that payday loan companies will soon have to follow. Regulations approved by the NDP cabinet this month, which are expected to take effect next winter, will require payday loan companies to post large signs near their doorways that will detail the full cost of borrowing $300 for two weeks.
The signs must also reveal the loan rate, including any fees, and must read in large letters "Payday Loans are High-Cost Loans".
The aim, the province says, is to make borrowers more aware of how much they are paying for quick cash.
"That will make them in a position to make a more informed decision as to whether they want to take out the loan," said Donna Tardi, manager of dispute resolutions with the Consumers' Bureau branch of Manitoba's Finance Department.
"It also would allow them to check out the cost from location to location and then decide which business they want to deal with."
The Ontario government recently enacted similar rules, and Saskatchewan and other provinces are preparing to follow suit, in the wake of complaints that some payday lenders charge rates and hidden user fees that work out to more than 1,000 per cent a year.
But the Consumers Association of Canada says revealing the full cost of loans will not deter low-income earners, who cannot get credit at the big banks.
"They are not going to react to a sign that says 'It's costing you 100 per cent' or 'It's costing you 5,000 per cent,' association vice-president Mel Fruitman said in an interview from Toronto. "They're just looking at ... (what they) need to keep going."
Interest rates are so high, Fruitman says, that some borrowers who roll over their loans for another week or two quickly find themselves with a spiralling debt they cannot pay off.
The real answer, according to Fruitman, is to enforce the maximum legal interest rate under the Criminal Code - 60 per cent on a one-year basis. But the industry has said it cannot make money at that rate for short-term loans. A payday lender would have to charge less than $1 interest on a $100 one-week loan, for example, to stay within the existing limit.
The federal government passed legislation this year to allow the provinces to set their own rates for short-term loans.
Manitoba Finance Minister Greg Selinger has said he recognizes the rate may have to be higher than 60 per cent in order for payday lenders to survive. That's why he and some other provincial ministers are letting arm's-length utilities boards determine what rate is appropriate. In Manitoba, public hearings on the issue will start this fall.
The Canadian Payday Loan Association, which represents about 40 per cent of payday loan outlets across the country, says it provides an important service that many Canadians need.
The group also says regulations are needed to ensure everyone is scrupulous.
"Those companies which have bad business practices ... will either have to comply with the new regulations or they'll be out of business," said group president Stan Keyes.
The new regulations approved by the Manitoba government will also require payday lenders to pay a licence fee of $5,500 a year for each retail outlet. The regulations also provide for fines starting at $1,000 for a first offence, for companies that break the rules.
The province has already implemented other payday loan rules, to prevent lenders from seizing the paycheques of borrowers who default, and to prevent lenders from charging borrowers extra fees for taking out a new loan to pay off their initial one.
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