The Canadian Federal Government introduced and has passed Bill C-26 which gives authority to provinces to regulate the payday loan industry. Each payday loans is now able to introduce legislation to protect consumers and set a clear maximum on the cost of borrowing.
Canadian provinces are enacting new laws pertaining to payday loan companies. The province of Manitoba was the first and others provinces will follow. Payday loan firms offer short term lending services for people who need money before they receive their paycheck’s. Typically, these consumers have no source of available credit due to the fact they may be in the military, working at low wage jobs, or have bad credit ratings. They may be needing a short term loan for emergency financial situations, or simply want to purchase an item that has to be purchased right away.
The major Canadian banks aren’t in the business of serving these “low profit” consumers and thus many of them find they are subject to higher financing fees and or cannot get even the basic levels of credit. Banks have shifted their service emphasis away from consumers in the last decade. The consumer checking and savings accounts do not provide sufficient profit for them and they’ve turned to a focus on business and mortgage lending. Banks have consolidated and eliminated local branch locations in an effort to improve bottom line efficiency. The changed focus has resulted in huge growth in profits. Bank machine fees produced a record 154 million dollars in profit, and monthly business chequing fees are pulling in $4 to $35 per account per month.
Royal Bank recorded a record 1.5 Billion dollar profit for the first quarter of 2007 and Scotiabank became a member of the Billion dollar club as well with just over $1.02 Billion. The Windsor Star recently reported that small businesses are paying out more than $723 per year on banking fees. Despite these high fees from banks who are enjoying the benefits of a Canadian Banking charter, the public and the government are very quiet on the matter.
Strangely, new legislation has been drawn up and enacted against small payday loans firms. It is suggested that some of these companies are gouging low wage earning Canadians, similar to big Canadian banks. There are reports of some fly by night operators charging huge fees for these payday loan cash advance services.
The province of Ontario is passing a type of legislation that is unheard of in banking circles. The new regulations, introduced by Ontario’s minister Gerry Phillips, calls for lenders to provide advance payments to consumers immediately after signing the payday loan contract. Ontario payday loan companies will be required to use standardized contracts and hang large posters in their stores specifying terms. Payday loan companies actually face more risk in lending money in that applicants do not need a credit check and there is no collateral required. These types of lending practices fit consumers who may have bad credit or no credit rating at all and who may have no collateral to offer. Typically, these people go to hock shops to trade their possessions as collateral for payday loans. In these transactions, the hock shop retailer can valuate their possessions at whatever price they want.
The new legislation is being applied in a blanket fashion without consultation with the payday loan industry, although now after introducing the legislation, the government is asking the public to submit responses about whether the industry needs to be more tightly regulated.
The legislation is not going to affect the operations of legitimate payday loan advance loan providers, however it may have damaged the payday loan industry’s reputation.
The brick and mortar payday loan companies such as Moneymart suffer from high operational costs. Moneymart, Hockshop, and other advance loan companies have hundreds of retail stores across Canada, however their operating costs are high. The popularity of payday loan stores reveals just how important these services are to most wage-earning Canadians.
Newer breeds of payday loan providers such as Cashx.ca operate online or by accepting faxed applications, or via phone. Their operational costs may be lower and they can pass those lower cost savings onto their customers.
Although legislation is needed to protect Canadian consumers, all finance companies should be subject to profiteering and gouging practices, especially if they have a government charter that limits competition in a particular financial service area. Many payday loan companies are ethical and seek only to carry out a profitable business and not to gouge unwitting borrowers. As always, competition allows consumers to search out those providers with the lowest rates. If consumers are gouged on a particular small loan amount, they should not do business with that payday loans firm again.