The province's solicitor general was advised in 2007 that putting a cap on payday loans could "shield" lenders "from future class action suits for violating the Criminal Code usury rate." This, according to briefing note exclusively obtained by Public Eye via a freedom of information request. But a government spokesperson says that's not the purpose of regulations announced this week, which cap that annual interest rate at 600 percent.
Thanks to federal legislation introduced in October 2006, those regulations mean a national law criminalizing annual interest rates higher than 60 percent will no longer apply to provincial payday lenders as of November 1, 2009.
"We are not preventing class action proceedings under our regulations. What we are doing is establishing a regulatory framework for payday lenders in BC, allowed under the Criminal Code," a spokesperson said.
The briefing note was prepared for a May 2, 2007 meeting between national payday loan company executive Michael Thompson and then solicitor general John Les.
It also states The Cash Store Financial Services Inc. - had a number of "specific issues" with the legislation that made those regulations possible.
Among them: "the structure of the maximum charges" for such loans and provisions prohibiting companies from requiring borrowers to insure their payday loans and make wage assignments to pay off those debts.
Faced with the possibility of regulation, the note states "lenders now are citing the number of people they employ and the locations they operate in as reason enough for Government to accommodate the practices that make up their current business case."
Nevertheless, "other interests must also be considered, particularly those of the consumer."
The note also lists Patrick Kinsella, the provincial Liberal's powerful former campaign co-chair, as being scheduled to attend the meeting with Les.
Earlier, Mr. Thompson told Public Eye Mr. Kinsella did lobbying work for his firm "with respect to the regulation of payday loans in the province of British Columbia" in the "spring of 2007."
Although, in a subsequent interview with The Globe and Mail's Justine Hunter, Mr. Thompson clarified Mr. Kinsella wasn't at that meeting.
The following is an edited copy of the aforementioned briefing document. Please note the class action lawsuit against Cash Store Financial Services referenced in that document was recently settled for $3 million. But, according to a news release, "the settlement does not constitute any admission of liability" by the company, which operates "in compliance with all applicable federal and provincial laws."
MINISTRY OF PUBLIC SAFETY AND SOLICITOR GENERAL
CORPORATE POLICY AND PLANNING OFFICE
Information for meeting of Solicitor General with Michael Thompson of Rentcash Inc. and with Patrick Kinsella, Wednesday May 2, 2007
The BC Government is utilizing the new federal measures allowing a maximum charge that covers industry costs of issuing a payday loan. The federal-provincial framework results from years of national research and consultations. BC's Bill 27 also requires lenders to follow rules regarding disclosure, prohibitions against rollovers and limitations on other problematic practices. Further consultations with stakeholders will proceed after our legislation passes this spring, prior to developing the regulations needed to bring it into force.
Rentcash says that it had wanted to see our legislation before it was tabled in the legislature. No industry (or consumer) stakeholders saw the actual draft legislation prior to introduction.
Our measures are similar to those in legislation previously introduced by Manitoba, Nova Scotia and Saskatchewan, although BC's provisions are not a stand alone statute but are part of the Business Practices and Consumer Protection Act and may look more different. Some specific issues for Rentcash include:
- the prohibition against requiring or requesting that borrowers take out insurance for a payday loan (Saskatchewan prohibits the tied selling of insurance as a condition for payday loan; it may make sense to take out insurance for a 25-year $200,000 mortgage; payday loans are on average $300 for 10 days; still the consumer can take out insurance if she or he would like under the BC provisions)
- the prohibition on wage assignments (payday lenders assert their priority by requiring a post dated cheque that includes payment for the entire loan and all charges to be dated the same day as payday; "wage assignment" was covered during national consultations; Manitoba has a similar prohibition by setting out that wage assignments are not valid when applied to payday loans)
- structure of the maximum charges (in consultations last spring examples of structures and amounts developed through research were reviewed; our legislation anticipates that there will be a maximum interest rate that accrues over time plus another amount that covers the fixed costs of conducting in the loan transaction to be set in regulations).
The other option would have been not to use the federal carve out. Quebec, so far, has indicated that it will not permit payday lenders in its jurisdiction. Quebec had pre-existing licensing requirements which includes the charging of "conscionable" rates (35% per annum or less) as a condition. Consumers in Quebec, with emergency need for a small loan, can work through local community organizations and local branch of the financial institution (Desjardins caisse populaire) and may receive both the loan and money management advice,
Rentcash and companies owned by it (Cash Store and Instaloans) have been named in class action suits for issuing payday loans at rates that are [allegedly] in violation of the Criminal Code. There are a number of such proceedings launched against payday lenders across Canada. A BC Court of Appeal decision last week upheld the original decision that a payday loan company (in this case, A OK Payday Loans) violated the Criminal Code as well as provincial consumer laws prohibiting unconscionable trade practices. A new maximum charge under BC law may shield payday loan companies from future class action suits for violating the Criminal Code usury rate.
Government has been seized with the issues raised by payday loans for several years. Three critical concerns are:
- the rates charged exceed the maximum allowed by the Criminal Code usury rate of 60% effective annual rate;
- other abusive or unfair practices such as rollovers that lead to a rapid increase in the debt, causing financial difficulties for the borrower; and
- a sudden proliferation of such lenders, first in BC then in other jurisdictions in Canada.
The volume of activity and the small sum of the loans made it impossible to enforce either the Criminal Code or other consumer protection standards in provincial law. The Government also had to contend with the fact that there was an apparent demand for short term emergency financing of this nature. Some borrowers do not have access to other forms of credit (payday lenders do not do credit checks), while others prefer structured loans despite their comparatively high costs of several hundred precent per annum.
These structured or discrete, small, short term loans could not be made available by independent money lenders at rates that complied with the Criminal Code. Consequently, a federal-provincial-territorial initiative, led by BC, undertook to do research, consultation with industry and consumer representatives, among others.
The working group assigned this project reported to Consumer Ministers in January 2004. Ministers directed that a legislative framework be developed to address key concerns, including rollovers, habitual use and concurrent loans and that research by undertaken to determine maximum charges that would permit a viable industry.
The legislative framework developed after further stakeholder consultations on key principles. In the fall of 2006, the federal government introduced legislation that would enable provinces to regulate payday lenders. However, it did not take this "carve out" lightly and has stipulated in the amendments to the Criminal Code that provinces set maximum charges and required licensing, if they intend to make use of the amendment.
After hearing submissions from Rentcash and others, the Senate passed the bill but had reservations given the nature and growth of the industry. In passing the bill it urged provinces to limit rollovers and back to back loans, ensure participation in mandatory compliant resolution, full disclosure of contract terms and acceptable debt collective practices, and provide cancellation rights. BC's legislation includes these measures either directly or permits them by regulation.
Over the years media reports have also expressed concern about this industry, the rates charged but also other practices that have led to sudden high debt loads. Consumer surveys have indicated that users of payday loans are younger, with children, rent instead of own their homes and have lower than average incomes. Consequently, they may be able to afford a payday loan for emergencies, but not very often. Researchers into this subject also identified that these consumers may not know how expensive these loans really are or have good financial management skills. All these attributes make many payday loan consumers vulnerable.
The Criminal Code limit has not served as a deterrence to the members of this industry and they have operated virtually unregulated in Canada. Given the consumer interests that have been harmed by payday lenders, as documented in various media stories, non-compliance with the Criminal Code as well as with consumer protection laws, is not a mere technical violation. Competitive market forces have not served to moderate the industry respecting charges or other practices, perhaps not just because of the nature of some industry players but also of a certain segment of consumers.
Provisions in the legislation will look harsh to payday lenders who see their business and relationship with consumers as any other industry would. Lenders now are citing the number of people they employ and the locations they operate in as reason enough for Government to accommodate the practices that make up their current business case. However, other interests must also be considered, particularly those of the consumer.
PROCESS and TIMING
Some lenders wanted to be heard at this stage in the passage of BC's Bill 27. While the Senate and possibly other jurisdictions conduct public hearings at Committee Stage debate in the passing of legislation, BC does not - for any of its bills.
The payday loan amendments will be passed this spring. Subsequently, we will ask stakeholders for further information to review, before the development of the maximum charges and other regulations.
Contact: Anne Preyde
Manager of Legislation
Date: May 1, 2007