For decades it was a criminal offence to charge more than 60 per cent annual interest on a loan. It still is, unless it is a "payday loan." Following pressure by provincial governments and the NDP, payday loans were made legal in Canada. Payday loans can't exceed $1,500, terms to be set by each province.
Manitoba has the "toughest" terms. Nonetheless, Manitoba borrowers still pay a flat 17 per cent for a loan repaid on average in 12 days -- an annual interest rate of more than 600 per cent, 10 times the Criminal Code limit. The 60 per cent annual limit still applies for loans of more than $1,500 and for jurisdictions that have not legalized payday loans, such as Quebec.
Why were payday loans made legal? Despite their initial illegality, payday lenders were setting up shop across the country with few prosecutions. Borrowers desperate for the money didn't challenge the usurious terms and law enforcement ignored the practice. Governments were willing to sanction usury for the fear that if payday loans weren't legalized organized crime would fill the gap and with "rougher" collection methods.
While provincial governments were busy legalizing the practice, successful class-action lawsuits gradually appeared seeking repayment of interest paid in excess of the Criminal Code cap. The suits were successful, returning millions to borrowers and pushing some lenders towards insolvency. But, once payday lending was made legal, the industry's legal risks disappeared -- they became legitimate.
Early in my career, I was controller of the largest finance company in Canada. Avco had more than 400 branches in Canada and still more in the U.K. (You may recall the Avco Cup, provided to the winner of the World Hockey Association's playoffs.)
In those days, loans of less than $1,500 were governed by the federal Small Loans Act. The rates were prescribed. For loans between $1,000 and $1,500 the annual rate cap was six per cent. Thus, small loans were only made to gain customers, the objective being to entice the borrower into taking out larger loans, including mortgages, at rates around 24 per cent. High-priced life, disability and property insurance was added to the bill. Avco and its industry colleagues (Household Finance, Beneficial, and the like) were also active financing retail purchases, kicking back some of the gains to the merchants.
The insurance products were provided by Avco's sister companies, while its financing came from loans from Canada's main chartered banks and the issuance of commercial paper. While the mainstream financial industry turned up its nose to the finance companies, those same banks were happy to fund them.
The characters that populated the executive suites of the finance company industry were similar to those of AMC's Mad Men television series -- conspicuous consumption, sex, heavy drinking, smoke everywhere. While some rationalized their participation in the industry, others simply enjoyed the perks (one of our executives took a prostitute to a conference).
Despite excellent pay, incredible benefits (including foreign holiday trips) and a rich pension plan that only vested with those that stayed with Avco, I quit. Why? I couldn't stomach the difficulties that plagued Avco's customers.
When Avco began making loans at an annual interest rate of 48 per cent to recent English immigrants from Pakistan, while forwarding life insurance premiums generated in a Canada to an Australian subsidiary (at that time, Australia didn't levy income tax on life insurance companies), only to have the funds returned to Canada as a loan with interest, I left my job. (No wind bodes only misery, Avco's executive health plan included detailed annual screening, which saved my life -- a test revealed a congenital heart defect. If it hadn't been fixed, I would have been dead 30 years ago.)
Avco and the other big finance companies eventually merged into more acceptable financial firms, disappearing as the industry's customers learned that most of them qualified for lower interest rates from the banks that financed the finance industry. That said, the industry still exists. Now the firms are sub-prime lenders offering loans at rates well above the banks but well below those of the payday loan industry.
While payday lenders claim their customers are of the lower middle economic class enjoying average annual earnings, independent studies say otherwise. The industry largely serves the desperate, and their average customer goes from one payday loan to another, often having loans from more than one payday lender. Some lenders even offer their very costly loans to those on social assistance. If you are on social assistance and need $200 to tide you over for a week, are you likely to have $234 12 days later?
Most payday lenders are happy to lend their customers amounts beyond the $1,500 cap for payday loans. They offer larger bill consolidation, car loans and second mortgages -- at rates up to just below the Criminal Code limit of 60 per cent. The finance industry is still with us, having adopted a different name and now protected by the law thanks to "do-gooders" who lacked the common sense to see through the industry's propaganda.
Graham Lane is a retired chartered accountant. He was the chairman of the Public Utilities Board from 2004 to 2012. PUB provides the government with advice on payday loans.