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Is Cash Store Financial exploiting a loophole?
Despite the fact most provinces in Canada have introduced laws governing payday lenders, Acorn Canada has raised warning bells that some payday loan companies have developed a new product that seeks to bypass the rules.
Cash Store Financial, which operates Cash Store and Instaloans outlets, has recently added a line of credit product which has raised concerns among regulators, poverty advocates and even from the Canadian Payday Loan Association (CPLA) (of which they are not a member).
“It’s just a different name but they’re doing the same thing,” says Teresa Dettling of Acorn Canada.
Cash Store and Instaloans, which has two outlets in New Westminster and five locations in Burnaby, offer a Mastercard that can be used in $200 increments up to $2,000. The interest rate is 40 per cent annually, and though that’s nowhere near the 60 per cent limit outlined in the Criminal Code, it’s much higher than most conventional credit and retail store cards’ rates of 10 to 30 per cent.
What may come as a bigger surprise is the “monthly maintenance fee” for the card, which is $49.95.
A representative of Cash Store Financial who spoke with the NewsLeader agreed the costs are high, but that it’s necessary as the customers they serve are a higher risk for defaulting on the debts.
The company, he said, is moving away from payday loans with this line of credit product, and wants to position itself as a “bridge” for consumers between payday loans and mainstream banks.
He cites concerns raised by the Bank of Canada regarding record levels of household debt, and the need to bring high-risk borrowers into the banking fold. Payday loans are restrictive, he said, as they must be paid back quickly, resulting in a higher likelihood a person will default. As well, payday loans cannot be used to improve a person’s credit score.
“It doesn’t give the consumer a lot of flexibility,” he said.
The advantage of the line of credit is that it gives a person a longer time frame to pay back the debt.
Also, Cash Store says its line of credit allows people to build a positive credit history, and to that end has begun to offer a tiered interest arrangement that allows customers who pay on time to receive a declining interest rate.
“They would have a credit score—that would make them bankable,” he said. “They would have rehabilitated their credit. The customer should be able to graduate to a mainstream bank.”
Consumer Protection BC, which enforces the laws and licences payday lenders, is giving this new line of credit close scrutiny.
“We are aware that lines of credit are being offered… and we’re assessing these products,” said Manjit Bains, vice president of corporate relations for Consumer Protection BC, adding that they are reviewing the situation.
“We’re at a stage now where we’re not able to confirm our position.”
Once they do, Bains said they will communicate with the businesses involved.
“We would also provide information to consumers to help them make informed decisions in the marketplace.”
Asked about the fact the payday lending rules do not apply to Cash Store Financial’s line of credit product, the company’s representative said, “Cash Store is not looking to evade regulations.”
The company anticipates new rules are coming that will apply to this product, he added.
“We are in discussions with regulators across the country… as to how regulators will capture it.”
For its part, the Canadian Payday Loan Association (of which Cash Store is not a member) wants immediate action, and is calling on provinces to ensure the rules governing payday loans also apply to the line of credit.
“We are law-abiding companies that follow the regulations, and in fact work with government to provide the regulations we’re now following,” said the CPLA’s Stan Keyes.
“It’s hard for us to watch a company provide a payday loan-like product where they don’t follow the regulations. They’re unrestricted on their rates—and to that end the companies are laughing at provincial regulations. Frankly they’re laughing all the way to the bank.”
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MORE IN THE SERIES:
• Can banks do more to serve the poor?