Licence to Print Money
Payday loan companies like Money Mart can now charge higher interest rates than ever before. Do they provide a valuable service to customers? Or are they legalized loan sharks, taking over the city one block at a time?
The Money Mart at 1414 Danforth Avenue—my local branch, you could say—inhabits a muscular concrete structure with faux-Ionic columns that used to be a bank. Inside, it resembles a fortified car rental outlet and smells of home-cleaning products. Cheerful posters depict models of indeterminate ethnicity waving cheques and gift cards, awash in Money Mart’s largesse.
It’s Sunday, and Money Mart is open for business, unlike the banks. A woman arrives on a motorized wheelchair to cash a cheque. A young man tops up his prepaid credit card for an afternoon on-line poker game. He’s followed by a Jamaican-Canadian in his late 40s, who sends money to Freetown via Western Union. Then a heavy-set guy, who’s left his well-groomed Labrador panting out the window of his SUV, comes to exchange U.S. dollars. I ask if he’s ever used Money Mart’s payday loan service before. He has. “But they’re expensive. Twenty per cent interest, or something.”
Actually, it costs a whale of a lot more than that. Hundreds, sometimes thousands of per cent more, when you calculate the annual rate. Confusion about just how much more—on the part of customers and policy-makers—has benefited the company since its birth as a cheque-cashing outfit in Edmonton in 1982. There are now 118 branches in the GTA and more than 460 across Canada, offering a dizzying array of fast, convenient, hassle-free financial products—think of them as a mash-up of bank, post office and loan shark. Its most controversial product is the so-called payday loan, a “fast cash advance” on your paycheque. If you require a few hundred bucks to tide you over until payday—and can prove employment by supplying your last pay stub and your most recent bank statement—Money Mart will provide you with a short-term loan based on a percentage of your pay, for a considerable price.
The size of the fees and how they are administered displeased many of Money Mart’s customers. In 2003, 264,000 Ontario-based customers—tens of thousands of them Torontonians—joined forces to launch a class action suit alleging that the company was charging criminally high interest rates. They took Money Mart all the way to the Supreme Court. And yet, despite the cost, the hassle and the negative press, Money Mart continues to thrive. In a peculiar twist, Money Mart’s legal troubles have motivated the company—and others in the industry—to lobby government for new legislation that will protect them from future lawsuits and enshrine their right to a profitable existence in our malls and on our main streets.
The ascendancy of the payday loan industry tells of a monumental shift in values. Canada was founded on immigrant sweat and Protestant working class ideals; even our major financial institutions largely stayed out of the global feeding frenzy that caused the Great Recession, mostly because of sober regulation and a Canadian distaste for rampant avarice. The abhorrence of usury is woven into the very DNA of our culture.
Aristotle described the birth of money from money as monstrous. The Bible insists, “If he lends at usury and has taken increase—shall he then live? He shall not live!” Christ himself bounced moneylenders from the temple; the Koran forbids interest entirely. In 5,000-odd years of recorded human history, usury has always been a dirty word. But lately, the business of short-term loans—once the province of loan sharks and gangsters—has gone mainstream. Usury has become a marketable financial product.
The rules of capital remind us that there is a price for borrowing and a benefit to lending. This is why we have established acceptable, regulated rates of interest. The question becomes: At what point does interest morph into usury? Interest regulations have at least a five-century precedent in Commonwealth law; in Canada, Section 347 of the Criminal Code dictates that it’s a criminal offence to charge anything more than an annual rate of 60 per cent.
The U.S.-based Dollar Financial Corp., which owns National Money Mart Company, also operates in the States and the U.K. Just over a third of DFC’s global outlets are in Canada, but our short-term loan regulations were, until recently, more lax than in those markets. This has meant awesome profits: in 2009, revenues from Canada constituted 44.7 per cent of DFC’s gross annual take.
The class action against Money Mart began with a customer named Margaret Smith from Windsor, who noticed that every time she took out a payday loan, the extra bells and whistles ended up costing her a relative fortune.
Until recently, here’s how it worked: you’d walk into a Money Mart to secure a loan of, say, $100 with payment due by your next payday at an interest rate of roughly 59 per cent annually. You’d write a post-dated cheque or approve a debit card withdrawal that would cover the loan, the daily accrued interest, a cheque-cashing fee of 7.99 per cent of the total amount and a $9.99 transaction fee. Running the numbers, it would cost you roughly $19 to borrow that $100 for 10 days, which, spread out over the course of a year, equals over 693.5 per cent—obviously well north of the Criminal Code’s stipulated 60 per cent annual interest.
Under the Criminal Code, any extras paid for a loan, including cheque-cashing fees, are considered interest; ergo, the claimants argued, Money Mart was breaking the law. Money Mart has never been charged with breaking any law; in other words, there has never been a criminal case against it. But that did not deter a cabal of law firms, led by Sutts, Strosberg LLP—of Walkerton E. coli and Maple Leaf Foods listeriosis class action fame—who took on the case as a class action.
In 5,000-odd years of recorded human history, usury has consistently been a dirty word. But now, the business of short-term loans, once the province of loan sharks and gangsters, has gone mainstream
By 2006, the payday loan industry was deluged with similar litigation (Sutts, Strosberg has also launched multimillion-dollar class action suits against Premiere Cash Advance and Stop ’N’ Cash). National Money Mart’s chair, Sydney Franchuk, and other industry players, along with the PR juggernaut Fleishman-Hillard and a phalanx of lawyers, launched a formidable counterattack. On the legal end, they tried to quash almost every motion that came before the courts. Harvey Strosberg, the lead counsel on the case, told me, “They were as tough an opponent as you could ever imagine.”
Money Mart’s second line of defence was more significant. In 2004, it teamed up with more than 90 other industry players to form the Canadian Payday Loan Association, in the hope of spit-shining their tarnished image. The CPLA had one goal in particular: to convince policy-makers that there is a significant cost and risk to short-term lending, and that they should therefore be exempt from the 60 per cent cap (and allow payday loan fees to be capped on a per loan basis instead of being calculated as an annual interest rate).
Stan Keyes is a former federal Liberal MP and now president of the CPLA. “A hotel posts its room rates at $150 a night, not $55,000 a year,” he argues. “It doesn’t make sense to list annual rates for a weekly product.” They enlisted accountants-to-the-stars Ernst and Young, who, with supplementary work from Deloitte and Touche, determined that it costs Money Mart and friends anything from $15.35 to $21.22 per $100 transaction, mostly due to operating costs and bad debt.
The hotel room analogy now shows up in government reports on the payday loan industry, which means policy-makers took it seriously. Sure enough, in May 2007, the feds exempted licensed payday loan companies from Section 347—as long as the provinces agreed to enact consumer protection regulation. The CPLA snapped into action, province-hopping and lobbying policy-makers on their new regulation recommendations. In 2008, an Ontario advisory board was established to assess what the new interest cap should be, and the Ontario Payday Loans Act came into effect on July 1, 2009. After what we’ll assume was a judicious studying of the facts, they effectively increased the amount payday loan companies could charge some of their customers for short-term loans. No more annualized interest rates: the province set the cap on lending at $21 per hundred—federal regulation stipulates that the loans must be less than $1,500, for no longer than 62 days—which, when calculated annually, works out to 766.5 per cent on a 10-day loan. This was an enormous victory for the CPLA.
The Payday Loans Act does include some new measures to protect the consumer: payday loan companies can no longer roll over customers’ loans, and there’s a two-day, penalty-free cool-off period after taking out a loan. In addition, legislation required the establishment of the Ontario Payday Lending Education Fund, presumably to teach us about the drawbacks of payday loans. (This, of course, follows the lead of cigarette companies warning on their packaging of the dangers of smoking and casinos posting signs about where to find help for gambling addiction. It’s the government saying, Hey, we warned you about the risks; don’t blame us.)
Money Mart’s product development department is now rolling new products off the line: Cash for Gold and pawnbroking. Newly regulated, the industry is fully sustainable and no longer vulnerable to lawsuits under Section 347, like the one launched by Margaret Smith.
Stan Keyes is, not surprisingly, extremely pleased with the association’s success. When I asked him for his personal take on the business of payday loans, he told me that he is 57 years old. His generation worked hard, saved money and bought what they could afford. “The question,” he said, “is whether consumer credit has come to drive the North American economy. That’s what you have to ask yourself.”
In June 2009, after three visits to the Supreme Court of Canada, four trips to the Ontario Court of Appeal, 18 days of trial and 10 hours of mediation (led by the former Supreme Court justice Frank Iacobucci), the plaintiff in the class action suit settled for $120 million—the highest amount Strosberg believed his side could reasonably get out of Money Mart without bringing the whole company down and ending up with much less. “I would have preferred to try the case rather than settle,” he said, “but I was faced with the reality of having to settle.” Money Mart made no admission of criminality.
Customers who took out a payday loan between August 19, 1997, and December 15, 2009, will be repaid a portion of the interest. They’ll receive their due in a combination of cash, vouchers and debt forgiveness, the last item alone amounting to more than $56 million.
No doubt the claimants will be glad to receive the money; people who use Money Mart are not flush. StatsCan data from 2005 shows that low-income families were twice as likely to use payday loan products, that more than half were in the bottom fifth of all earners, that one in five had visited a pawnbroker, and that four in 10 spend more than they earn.
The Canadian Payday Loan Association, eager to dispel the perception that its members prey on the weak, hired the polling and research firm Pollara in 2007 to conduct a province-by-province survey. They emerged with a new profile of a typical user. That person—and by all means read the following in horror movie trailer voice—is you. The average Ontario payday loan user, according to Pollara’s findings, is a 39-year-old who likely has a post-secondary education and is employed full-time. But here’s the kicker. The average amount that the typical payday loan user currently owes financial institutions, excluding mortgages, is—wait for it—$23,579.
In other words, Money Mart lends to those of us squeaking by on our ever-shrinking pay packets, maxed out on our Visas, living hand to mouth, payday to payday. This vast middle ground—once the bulwark of Toronto’s scrimp-and-save, waste-not-want-not ethic—has become reconciled to debt and inured to the cost of paying for it.
There is no one reason that so many Canadians use payday loans—some have medical emergencies, others have gambling addictions, still others want that brand new plasma TV. (The average loan at Money Mart is $280.)
Old definitions of the middle class are eroding fast, and what we are left with is an expanded definition of the working poor. They—we—are Money Mart’s customers, and may well be for life.