Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 5 - Evidence - Meeting of February 3, 2005
OTTAWA, Thursday, February 3, 2005
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-19, to amend the Criminal Code (criminal interest rate), met this day at 11:04 a.m. to give consideration to the bill.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Good morning, ladies and gentlemen. I want to welcome you all to the second set of hearings with respect to Senator Plamondon's Bill S-19, an act to amend the Criminal Code. The proposal is a very simple one to reduce the criminal rate of interest from 60 per cent essentially to 35 per cent. It is an important and interesting issue. We want to welcome not only our witnesses but also the Canadian viewing public who will be watching us on CPAC and also on the Internet from coast-to-coast-to-coast.
First of all, I want to welcome the witnesses. We have given you a time slot from 11 a.m. to 11:30. We are starting a few minutes late so that will be until 11:35. I hope you will be relatively brief in your verbal comments. We will read your written comments with great care. They will be part of the public record and we welcome the esteemed Canadian Bankers Association. I take it, Mr. Law, you are the chief spokesman and you will introduce your colleagues.
Mr. Warren Law, Senior Vice-President, Corporate Operations and General Counsel, Canadian Bankers Association: Yes, I can assure you that I will be as brief as I can. Thank you and the honourable senators of this committee for giving the Canadian Bankers Association the opportunity to appear before the committee on Bill S-19. I am the Senior Vice-President, Corporate Operations and General Counsel of the CBA. With me today are on my left is François Hudon who is the Senior Vice-President, BMO Financial Group and on my right, Jacques Hébert, who is the Quebec Director of the CBA, representing the banking industry as we do.
The Chairman: Would he be related to a former colleague of ours, Senator Hébert?
Mr. Jacques Hébert, Director, Quebec, Canadian Bankers Association: I wish.
The Chairman: It was the same first and second name, a great name.
Mr. Law: Senators, we appreciate having the opportunity to put forward the views of Canada's Banks on the issues raised by Bill S-19. These are indeed important issues for all of us and they focus on a problem that requires our careful attention, namely the protection of borrowers from questionable or abusive lending practices. Needless to say, Canada's banks fully support the need to protect borrowers and in our minds the focus of these hearings should be on how this could be achieved. Should we use the criminal law in section 347 of the Criminal Code for this purpose or are there other steps that could be taken? These are the core issues that will be top of mind throughout these hearings. In this regard, we appreciate the opportunity presented by the tabling of Bill S-19 to put a particular focus on the extent to which, if any, our criminal law in section 347 should assume a consumer protection objective.
Where do the banks stand on the issue of the criminal law for this purpose? To start with, we have misgivings about using section 347. There are problems with section 347 and we are concerned that the proposed amendments to the bill as it currently reads could have a detrimental, unintended impact on the extent to which banks could extend credit; that is both credit to consumers and credit to business. This is the very situation that we all would like to avoid.
What are the difficulties with the section? The problems have been well documented elsewhere and in this regard I commend to you Professor Mary Anne Waldron's paper entitled, Section 347 of the Criminal Code: `A Deeply Problematic Law.' These difficulties are also summarized in our January 7 letter to the committee and as a result I will not spend much of the committee's time on them but I think it is important to make passing reference to them as follows. To underscore the reason why the section was first enacted, section 347 has not been used generally for consumer protection purposes. It has been suggested that this is why the consent of the Attorney General is needed to commence a prosecution under the section. Somewhat ironically, section 347 has been primarily used in the past as a shield in civil law suits to avoid paying the monies owed on a loan. Another problem is that the section makes no distinction between loans to individuals and loans involving sophisticated corporate parties.
Moreover, we note that section 347, even as it now reads, can play havoc with a broad range of short-term lending arrangements where fees or charges apply. Why is this? It is because of the overly inclusive definition of the word “interest” in the section. It is also because of the fact that the interest calculation must be done on an annualized basis in accordance with generally accepted actuarial practices. A loan of 5 per cent or 6 per cent could well end up on the wrong side of section 347 if it is for a sufficiently short term and has fees or charges attached to it. We understand there are studies underway in the system.
You posed two questions at the outset of your remarks, one of which was that criminalizing this is the wrong approach, and you quoted Professor Waldron's article. You then asked what we could do. I want to know what your answer is to that. Surely you people are sophisticated enough to give us the answer, to help Senator Plamondon couch her solution in a more pragmatic way.
Mr. Law: Outside of Bill S-19, the way to go is through more effective regulation. There is a constitutional issue here with respect to the extent to which the federal government can be directly involved. I applaud the work that the Consumer Measures Committee is doing. As you know, there has been an initiative underway to think of a way that these lending practices can be more effectively regulated. Is it through disclosure? Is it through the prohibition of certain practices?
I know that in the payday lending area there are rollover practices and requirements to take certain insurance coverage and that sort of thing. I am sure that the Consumer Measures Committee is looking at that as we speak. That is one route.
Also, our industry is very active in giving consumers the knowledge they need to make informed decisions. As an example, at the CBA we have been conducting a seminar program for the last few years, “There's Something About Money.” It is a way to teach young people how to manage their financial affairs, and it has been successful. I know that some of you have been involved in supporting this program at the local level. Almost 100,000 students have gone through this program over the last few years. It has been a tremendous success. We also do a very wide booklet program, as well as other seminars, all focussed on this key initiative that I think should be taken: how to make consumers more knowledgeable about their financial affairs.
I think that those are the two routes that should be explored more fully.
[Translation]
Senator Massicotte: In your introduction, you say: “Questionable or abusive lending is a serious problem in Canada.” Can you elaborate somewhat on the significance of the consequences before we look at solutions?
[English]
Mr. Law: These are things outside the banking industry, and I can only speak from what I have read. There are concerns that payday lenders have this practice of rolling over loans and building up the charges as they go along. That is a questionable practice. You would not see this in the banking industry. There are mandatory requirements with respect to insurance. We offer credit insurance on our products, but it is optional. Those are two abuses.
[Translation]
Senator Massicotte: Clearly, one of the solutions to the problem is more competition and other alternatives to these practices. Are banks the market for loans under $5,000? How much do those loans cost? Why not make it possible for those people to compete with Canadian banks?
Mr. Hudon: While I am here to represent the association, in our financial institution, I can identify four products available to a consumer to borrow less than $5,000, and it starts as low as $50. The principle is the same for someone needing a loan for just a few days. The facility is in place for an exceptional requirement during the year. If it is never used, they will never be fees. If it is used once or twice during the year, there will be fees linked to the transaction. It is not, in itself, a very cost-effective practice, but it is a service offered to clients. We have permanent protection on a bank account. Everyone is familiar with “overdraft protection” that it is used by thousands of our clients to cover their current expenses between pay checks. Then there are lines of credit for up to $5,000, subject to approval, and there are always credit cards. Clients just need to sit down with the banker. A large proportion of the people using bank services have access to and use these services.
Senator Massicotte: This bill targets a specific clientele that is perhaps less informed or less educated, at least from a financial perspective. In these four cases, does the client need to prequalify? Is that difficult? Are the people in our society who are the most vulnerable eligible for these four products?
Mr. Hudon: As access to credit increases, so do the criteria, in keeping with the risk taken. In the case of the first product that I mentioned, a very brief verification is in fact done to enable us to determine that you do not represent a completely unacceptable risk and that we can give you this $50 to $250 advance the few times during the year that you need it. If your credit record was really bad and that showed up in the initial verification, you might not have access to that product. Generally, we do not reject very many of those requests.
Senator Massicotte: Do you have many clients whose annual income is $20,000 or $30,000, who have received $50 or $100 loans?
Mr. Hudon: I cannot answer that specifically, because it is included in the number of clients to whom we have offered a service in the zero to $5,000 amount category. I was talking about that again this morning with a colleague. The penetration rate for our clients who use bank accounts is about 40 or 50 per cent. Many clients do not request that service. It is not because the other 50 per cent do not qualify. Many clients do not request it. We could perhaps look at it from an income perspective.
Senator Massicotte: We would greatly appreciate that information.
[English]
The Chairman: Senator Massicotte has raised a crucial issue. Most vulnerable in our society are not being properly or fully served by the normal practices, so we are trying to quantify how far the banks are going at this level. Any information you can give us about that would be useful. It is a key question in our determination about the nature and scope of this problem. That information is important to us, and the sooner you can get it to us the better.
Senator Callbeck: You said that if these two amendments are passed the extent to which banks could extend credit might suffer, and you gave some examples. You then went on to talk about the strict regulations that you have. You said that your lending practices are subject to a comprehensive regulatory regime, the cost of borrowing regulations in particular.
Is there a maximum interest rate stipulated in those regulations?
Mr. Law: No, there is not, senator. The thrust of the regulation is disclosure of all charges, but there is no maximum interest rate.
Senator Callbeck: What are you then controlled by?
Mr. Law: The market.
Senator Callbeck: Just the market?
Mr. Law: The competition in the marketplace is incredible. It imposes tremendous discipline on our members as it does on every other financial institution.
Senator Fitzpatrick: I am interested in the area of insurance costs. We talked about it yesterday, and the example that Senator Plamondon used showed that on her cost of money, which was a combination of interest and insurance, the insurance portion was some 50 per cent of the cost of the loan. You have said that insurance is scaled up with age, and I understand that.
I presume in some of these loans it is compulsory, but not all loans.
Also, I do not think it is scaled down, depending on the size of the principal that is left for that loan. Presumably the reason for the insurance is if you die before you pay off the loan you get paid out. I do not know who provides this insurance. I do not think it is bank self-insured. Presumably you have an association with an insurance company that provides that. Can you tell us a bit more about the real cost of insurance and whether it is compulsory? Who owns these insurance companies that you deal with?
Mr. Hudon: Insurance is always optional because it is my understanding that it would be tide-selling if we were to force the consumer to take insurance. It is an element in the determination of risk and it is an opportunity for us, for example, to negotiate a different rate of interest if we know we have the added security of insurance. However, insurance is the absolute option of the consumer. If consumers feel that they are well insured outside of their bank borrowings or bank relationship, then many consumers choose not to take the product. It is a well-priced product which allows consumers to basically cover potential debts that they would not want to pass on to their next of kin.
Senator Fitzpatrick: What is the difference in interest rates? For example, if someone wanted to borrow $10,000 and they were a moderate risk and they took insurance versus not taking insurance, what is the difference in the interest rate they would be charged?
Mr. Hudon: In light of the insurance component, depending on the age of the consumer and the cost, it would be subject to whatever the marketplace allowed us to do. We would sit down with the client and discuss an interest rate which might be a variable rate based on prime. It certainly would not be the prime plus 35. In my 20 years, I have not had occasion to have that kind of opportunity put forward to me. We might say this is an interesting mitigant for us to offer you a slight discount on the rate of interest. How much would depend on the individual. In some cases it would not be a mitigant. It would be an offer of service that the client says, I am self-insured sufficiently. I do not want the product. We would then continue the negotiation based on the needs.
Senator Fitzpatrick: You would accept whatever insurance that person might have and say, therefore it is a normal loan without the extra risk attached to it.
Mr. Hudon: In actual fact we might do the loan if the client had no insurance at all. It is not compulsory or an obligation. It is responsible financial counselling to say if something were to happen to you, you do not want to pass on those debts to the next of kin.
Senator Fitzpatrick: If the loan amount goes down and you have taken out insurance, can you reduce the insurance coverage as the loan amount goes down?
Mr. Hudon: The insurance is generally pegged based on the amount of the loan outstanding, the amount of use on the line of credit.
Senator Hervieux-Payette: I have two short questions, one for Mr. Law and one for Mr. Hudon.
For Mr. Law and all the members of your club, we know that some banks are issuing credit cards to students, people who do not have regular income, salaries and so on. When you talk about the assessment of credit, how do you assess the credit and issue credit cards to students when really the only back-up they have is their parents?
My other question is for Mr. Hudon.
[Translation]
Since the reform in the banking sector, many banks have closed branches. At the same time, 1,000 lending institutions have been set up across the country, and their rates are much higher than yours. We wonder why you moved out of a sector that is so profitable, to such an extent that 1,000 offices were opened while you were closing your branches. As for branches in small communities, without interest rates at 35, 40 or 50 per cent, plus insurance and other costs, at rates that would certainly be more reasonable, you appear to have moved out of that area all together. It has been taken over by another group that clearly does not necessarily face the same regulatory requirements.
In consulting you, we need to know what should be done, because your four consumer products are certainly not meeting clients' needs, because there are 1,000 companies in the market at present, and you are not occupying that market. I would like to know whose evaluation recommended that you get out of small loans that represent more of a risk and for which you would have to charge more. We have asked that question in other circumstances for businesses, and we heard, for example, when we interviewed the BDC, that small businesses could not go to you to get a loan at 20 per cent, for example, because they represented a greater risk. So people are forced to go to the BDC rather than to the banks, but it seems to me that as soon as there is an additional risk involved it is as if you did not have the expertise or the interest to be involved, whereas others think that it is very good business.
[English]
Mr. Law: Senator, with respect to your question to me, it is important to remember that a credit is primarily a payment mechanism. Students, as with the rest of us, need to make payments from time to time, and the credit card provides an easy way to do this. In terms of the credit issues that go on with offering credit cards to students, perhaps Mr. Hudon is in a better position than I am to answer. Again, I would like to underscore the fact that a credit card is a payment card mechanism. Two-thirds of Canadians who have credit cards pay off their total balances without interest during the credit period.
Senator Hervieux-Payette: It is called a credit card.
Mr. Law: It is called a credit card. We will call it a payment card for the purposes of this meeting.
[Translation]
Mr. Hudon: As for credit cards, you are right, parents do not often have anything to do with that, but establishing credit as early as possible is important. With years and years of experience, we have determined that students, depending on their education, represent a favourable risk in the future. It is a matter of establishing a clientele.
As for the communities, the decision to leave a community is not easy. We are in business, closing a branch has never improved the business as such. At some point, depending on the environment we are living in, be it via the Internet or over the phone, people do a number of financial transactions outside the bank branch. Today, 85 per cent of transactions are done outside the bank branch. Has that created a market niche for specialists? That is very possible. We did not choose to play in the very high interest rate market; moreover, lending money with very high interest rates is generally not well received, because it is not always easy to defend the fact that one consumer receives a rate of 25 per cent, and another a rate of 10 per cent. That risk determination is not an exact science. If it were, there would never be any loan losses.
Mr. Jacques Hébert, Director Quebec, Canadian Bankers Association: The banking industry is not all that different from other industries. We must follow our clientele. If we look at what happened in Montreal in the case of service stations, over a seven-or eight-year period, more than 1,500 service stations closed, because the clientele was no longer there. Situations change dramatically in some areas; for example, in the past, you never saw dentists' offices in shopping centers, now you do. Streets in small villages are empty; the stores have all moved to the shopping centers. There is a population movement that must be respected, because clients' consumption habits vary in all sectors.
Senator Plamondon: I would like to thank you for your presentation. I introduced this bill primarily to help consumers who are in debt, who do not have easy access to credit and who are turning to finance companies. This bill targets that group. Along the way, we have seen the emergence of all of these payday loan companies, or whatever you want to call these services — if we can call them services — and at the same time, all of the corporate loans that I had not initially identified, I must admit.
The Canadian Association of Community Financial Service Providers — that is only community oriented in name — also includes finance companies. We have examined studies showing that their clientele's average annual income is $51,000. That clientele usually belongs to the banks.
Why would people earning $51,000 a year not go to the banks to borrow money? How can we explain that seven U.S. states have all banned pawnbroking? In the absence of this type of business in those states, how are the banks serving this clientele?
That is not all. What action will police forces be able to take if we do not preserve section 347 of the act that criminalizes loan-sharking? If this section is no longer included in the Criminal Code, what will police officers be able to do?
Finally, how do you explain that the Chase Manhattan Bank, one of the largest lending institutions in the United States, has just set aside funds to prevent the spread of this kind of practice?
What is your position on that? I note that you did not answer Senator Fitzpatrick's question about the link between you, the banks, and the insurance companies that you recommend to consumers. Who owns the insurance companies that you recommend?
[English]
The Chairman: I notice there are five questions, perhaps six, and they are all very pointed.
Senator Plamondon: I waited until the last.
The Chairman: They are all very important. Please respond to all of them, but as quickly as possible.
Mr. Law: I shall. I am sure my colleagues may have things to add.
With respect to the issue that Senator Fitzpatrick raised, as far as I know, I guess practices can be different from bank to bank, but they are arm's length insurance companies.
The last few years I have been interested in this topic because we have been involved in the issue of who should regulate creditor insurance, the federal or provincial governments. I am pretty up-to-date on this information.
Senator, you have raised interesting questions with respect to practices in the United States. This is the perspective that I would like to draw upon in answering. As you are probably aware, in the United States, usury laws are directed at the state level. A number of states have instituted legislation in that regard. For example, California has a rate that is basically 10 per cent. Let us take California as an example. There are two important points that I would like to leave you with. One, there is a specific exemption for financial institutions. The more general comment is the fact that when you are dealing with interest rates, it is all how you calculate it. That is the question. It is very often an apples-and- oranges comparison to look at another jurisdiction and say that Canada has an interest rate of 60 per cent, Senator Plamondon has proposed that it be dropped to 35 per cent, and look at California, it is 10 per cent. However, you must look at the way the interest rate is calculated. For example, in Texas, it has a usury rate of 6 per cent, but when you look at the legislation more carefully, there are situations in which interest rates of 309 per cent are allowed. You have to be careful. I would urge this committee not to make an apples-to-oranges comparison.
The Chairman: I think we agree with that, witness. Perhaps you might talk about New York State. New York State parallels two of our largest provinces. What would you say with respect to the legislation there? Are we apples and apples?
Mr. Law: I am not sure that we are. I would like the chance to look at it more carefully, but I am not convinced that we are.
The Chairman: The difference in the states is that the criminal law in Canada is federal coast to coast, and in the United States each state has its own state criminal law. There is that difference. My understanding is that some of this legislation is criminal in intent. I have not looked at New York State. However, that would be comparable for us.
Mr. Law: The problem we have in Canada in the Criminal Code is because of this overly inclusive definition of interest and the fact that you have to use generally accepted actuarial principles. That means, as I understand it, not being an actuary, you have to compound the interest on a daily basis, with the result that what seemingly is a low interest rate of 4 per cent, 5 per cent or 6 per cent can become an interest rate of 300 per cent, 400 per cent, 500 per cent. In my mind, it becomes meaningless when you use the definition in the Criminal Code and try to apply it to a consumer protection situation, because it just does not work.
The Chairman: To be fair, could you get back to the questions that Senator Plamondon raised? We diverted you a bit, and I do not want to divert you from her questions.
[Translation]
Mr. Hudon: To answer the question about clients whose average income was $51,000, Senator Plamondon is absolutely right in saying the banks want to do business with that segment of the population.
Recently, I had an opportunity to meet with the owner of a pawnshop. His clientele is not limited to vulnerable clients, but also includes people who want to do transactions that are out of the ordinary, because they want to finance habits that are not necessarily regular or for which they would not get much sympathy from their banker.
The examples of people who do business with them are remarkable. Of course, there are vulnerable people who are doing transactions with that type of business.
Senator Plamondon: I do not really understand what you are saying.
Mr. Hudon: I am going to give you the example of someone who wants to borrow money for a very short period of time to go to a casino. In the case of someone going to his banker to borrow money to go a casino, the requirement is in itself a risk that would probably be seen as unacceptable at the bank level.
So the person would go to a pawnshop, leave his diamond ring as a guarantee, go to the casino, and then go back to the store to pick up the ring the next day. That is not the kind of situation we are involved in, but I have been told that it represents quite a large clientele.
Does that influence the average income of people who do business with those companies?
Senator Plamondon: I assume that is not the only example.
Mr. Hudon: There were other even more unpleasant examples.
Senator Plamondon: That is why the police want to preserve section 347 of the Criminal Code.
Mr. Hudon: The consequences of that section influence transactions that are perhaps a little more natural and legitimate.
[English]
The Chairman: If that completes your answers, I have a brief question. It seems that we are all in general agreement that this is a problem area. There is an agreement that section 347 is an instrument. Senator Plamondon's solution is following Parliament's solution, which is to amend the existing legislation.
If this area is a problem, and you obviously disagree, as Senator Angus has pointed out, that we have a problem, but what is your solution? Could you help us in this regard? In the United States, a number of the states have model banking and consumer codes, and they have provisions that the industry has worked out with their state legislatures. Have you given any consideration, as opposed to giving us some general advice, about specific pieces of legislation that you would like to see come forward to solve this particular problem, which we all agree now is a problem?
Mr. Law: I believe that the thrust has to be working with the provinces. Given the nature of the organizations that would be the focus of this legislation, you have to involve the provinces. It is a question of regulating. It is a question of looking at their practices, and perhaps a licensing scheme. I do not know.
The Chairman: Our problem with that — this is based on the evidence, and I am sure I am stealing some of Senator Plamondon's fire and frustration — is that we have had the uniform law commissioners look at this question or series of questions. That process is slow and arduous, and meanwhile the problem is not getting any smaller. Based on the evidence we have received in the last day or so, it is becoming larger in terms of quantum. The question is, how do we accelerate the process to come to some sort of solution, having in mind that we live in a jurisdiction that is federal and provincial?
Uniform law commissioners are moving slowly, glacier-like. The industry has a special responsibility to ensure that the banking practices are fair, adequate and appropriate. Your industry has gone a long way to deal with some of these problems. This is a fundamental problem and we are struggling, as Senator Plamondon is, to try to come up with a salutary answer that avoids some of the negative consequences but deals with the problem. Help us here.
Mr. Law: In a sense, I throw the question back to you. We do have a problem. Is that reason enough to bring the Bill S-19 changes into the law? My respectful view is no.
The Chairman: Based on the evidence we have heard so far, it is an egregious problem and it is growing. I do not want to prejudge the rest of the evidence, but this is the evidence in the last day and a half. There seems to be general agreement on that. If we have a problem in our society, we can use blunt instruments, which people will say may have negative consequences that will outweigh some of the benefits. However, if there is a problem, surely we are brilliant, complex and interesting enough, and with enough talent in the banking and financial institutions industry, that they can come forward with a model of some solutions for us.
Mr. Law: I think we would be the model in that regard. Given the cost of disclosure that we are required to adhere to in the banking industry and given the codes of conduct that we are required to adhere to under the jurisdiction of the Financial Consumer Agency of Canada, I think we are the role model in this. I urge all governments — federal, provincial and territorial — to look at how the banking industry is regulated from a consumer protection standpoint. You could not go wrong by following our examples.
The Chairman: I will allow the senator the last question and comment if there is one.
[Translation]
Senator Plamondon: Would you be willing to do everything the Chase Manhattan Bank is doing in order to counter the exponential growth of payday lenders? What is happening with credit unions in the United States? Have you looked at that in any detail?
[English]
Mr. Law: I am not familiar with it but I will say this: The banking industry supports financially a number of programs in this area. For example, are you aware that each year the banking industry gives $10 million to the credit counselling agencies in Canada?
The Chairman: We will dealing with that subject in another study that takes place immediately after this, and that is consumer protection elements and a review and oversight of those within the financial institutions. We will look at that specifically, and thank you for bringing that to our attention.
Mr. Law: We would be delighted to appear before this committee on this broader issue, where all these issues can be explored more fully.
The Chairman: One final comment, Mr. Hébert.
[Translation]
Mr. Hébert: You have to realize that people who go to payday lenders have to pay back their loan with a check. So they have a bank account or an account with a credit union. Why don't they deal with banks? Well, for several reasons. Our marketing people do not understand why people earning 50 000 $ do not deal with us, but would rather go elsewhere. If you have the answer, Senator Plamondon, a second career is waiting for you, since we would hire you right away. It is extremely hard for us to understand why.
[English]
The Chairman: We will suspend for one minute. Could the next set of witnesses take their place quickly? We are running behind and I have allowed a little bit more leeway because the evidence was so important.
Our next witnesses are from the Canadian Bar Association. Those of us around this table should declare our interests. I am still a member of the Canadian Bar Association. Please forgive me, members of the committee, but I hope that I will be able to lay aside my biases and prejudices to be as objective as possible.
Welcome, Ms. Thomson and Ms. Babe. I assume that you will be the spokespeople for this group. Please proceed.
Again, I apologize but we allowed more leeway with the previous witnesses because of the importance of their testimony. This is not to say that yours is not equally important, but we are running out of time. We only have 30 or 40 minutes. Please govern yourselves accordingly. We will read your text in full. I would appreciate it if you could just summarize it and then we will get to questions as quickly as possible.
[Translation]
Ms. Tamra L. Thomson, Director, Legislation and Law Reform, Canadian Bar Association: Thank you, Mr. Chairman. The Canadian Bar Association is pleased to speak today on Bill S-19.
The Canadian Bar Association is a national organization with 38,000 members, who are lawyers, throughout Canada.
One of our main objectives is improving the administration of law and justice, and that is why we decided to study this bill.
[English]
Our comments today are on behalf of the Canadian Bar Association's national business law section and national real property section. You have received our letter, which you have before you. I will ask Ms. Babe, vice chair of our business law section, to address you on the concerns that are raised in that letter.
Ms. Jennifer Babe, Vice-Chair, National Business Law Section, Canadian Bar Association: The consumer protection objective of Bill S-19 is laudable and extremely important for some of the most vulnerable Canadians in the marketplace. However, like the Canadian Bankers Association, we are most concerned that the Criminal Code is not necessarily the place to take consumer protection measures.
Counsel in the national business sections and real property sections act for both borrowers and lenders across Canada — both consumers and businesses. We have seen the paper from Professor Waldron endorsed by the Uniform Law Conference of Canada. She focused on business transactions. She left work for consumer protection to the Consumer Measures Committee.
Taking from her paper, and from the papers of other academics referred to her, it is clear that the existing law, section 347, is flawed. That is most notable in the fact that in the last six years there are three cases on section 347 that have gone to the Supreme Court of Canada. None of them dealt with loan sharking. All of them dealt with the interpretations of contracts declared by a party to be unlawful and void at law by reason of contravention of section 347 of the Criminal Code.
In Garland v. Consumers' Gas Co., which was a consumer situation relative to late payments on gas utility bills, the utility was charging a late payment as prescribed by the Ontario Energy Board. In Degelder Construction Co. v. Dancorp Developments Ltd., it was with respect to construction financing and the time period of a loan over 11 months versus over the several years it took to actually repay the loan. Finally, last year, in Transport North American Express v. New Solutions Financial Corp., the courts demonstrated the continuing problems in trying to enforce a contract made between sophisticated business parties who were independently represented by counsel, where there was an equity kicker or royalties' payment scheme, as well as traditional interest — bank charges charged by the financial institution. The courts worked long and hard in trying to determine contract interpretation rules between what is called the blue- pencil test of striking out offending sections, as opposed to what the Supreme Court did in notional severance. It reinterpreted the contract to bring it inside the 60 per cent per annum.
In three situations, we have had the Supreme Court of Canada try to deal with section 347 in the last six years. I am sure the members of this group know how rarely the Supreme Court of Canada deals with commercial contractual matters. To have that arise three times in six years is extremely rare and indicative of the problem of the flaws within section 347.
The Canadian Bankers Association has their view. For the Canadian Bar Association this is a day-to-day problem in dealing substantially with borrowers as most of our members do. They have to give opinion letters; time and cost relative to structuring business transactions; bridge loans; start-up businesses, new businesses and intellectual property that do not have traditional collateral to give and are high risk transactions; restructuring troubled companies; the Companies Creditors Arrangement Act; other people making proposals under the bankruptcy insolvency act who need higher risk lenders to step in and save the businesses as they restructure; and sophisticated parties like issuers of convertible and exchangeable debentures that have an equity or profit component in the business.
The issue of consumer protection is laudable, but if it goes forward as proposed in Bill S-19, there will be a compounding of problems for business borrowers in this country and their counsel unless some of the provisions are considered, as recommended by the Uniform Law Conference and some being suggested and recommended by the Canadian Bar Association.
Professor Mary Anne Waldron, Professor Jacob Ziegel and others have recommended the repeal of section 347 because it has not necessarily been used for loan sharking. In fact my librarian last week cited up section 347 for me. In the reported cases we found 395 cites. Only 17 referred to Regina versus someone as criminal prosecution. The rest used this section to deal with contract interpretation on the grounds of illegality. The suggestions from Professor Waldron and lauded by us are with respect to changes in the definition of interest, for example. If there is a problem with fees being charged, it should not be with respect to negotiated transactions between arm's length parties. Fees paid for government registrations, for example in a real estate transaction, surveyors, environmental reports, law firm charges to insure clean title to the mortgage —
The Chairman: Steady when you come to law fees.
Ms. Babe: Those things should not be interest. We also submit that interest should not include transactions where there is an equity, profit or royalty participation in business transactions. The fact that you are prepared to be the high- risk lender to what you hope will be the new Research in Motion by taking out shares that happen to come in at a high value should not bring you into a criminal transaction.
The recommendation from us is as follows. If you were going forward with Bill S-19 as a consumer measure to drop the rate of interest without some consequent amendments to the definition of interest, and possible definition of criminal rate, given its use as actuarial and its impact on short-term transactions, there will be a compounding of difficulties in the marketplace to structure lawful business transactions.
The Chairman: Thank you very much. Do you have anything further to add to that?
Ms. Thomson: We would be happy to hear your questions.
The Chairman: Our first questioner is the distinguished colleague from the Province of Quebec, Senator Massicotte.
Senator Massicotte: We are very privileged because we have some lawyers with us with a lot of experience. How would you redraft these laws to make them acceptable to your concerns?
Ms. Babe: If I had my personal view I would repeal section 347 and ask the Criminal Bar to consider how best to target loan sharking.
Senator Massicotte: What would the answer be?
Ms. Babe: I suspect it would be refused. However, if it will go forward, 60 per cent per annum. I do not know how the figure was picked. There is no more certainty in the law by bringing it down to 35 per cent per annum. Dropped to 35 per cent per annum without consequent definition changes for interest and criminal rate, it will have very severe consequences in the marketplace.
Senator Massicotte: The difficulty and challenge is that everyone acknowledges there is a real problem. It is a real problem to people who are not the best informed or in a position to pursue through the courts because of some vague wording. We are looking for something very simplistic where people can say, “This does not look right.” Everyone says it is wrong but no one is saying, “Here is how to fix it.” That is the difficulty.
I am not a lawyer and maybe that is the advantage I have. Say you exclude all loans, all commercial loans and all loans in excess of $1 million. You resolve all your business problems where you have all these complicated structures, convertible debentures and so on, by basically saying, if it exceeds “X” then bring it up to the minister but you allow the defence of costs because you always refer to the costs of action or risks. You allow basically a defence for the party. Would that not resolve it immediately? The consumer would say, “I am paying X amount, and I am going to file it with the minister.” There are only two issues, cost of transaction and equity that everybody raises. You allow that defence to the minister. Would that resolve the issue?
Ms. Babe: It would go a long way to resolving the issues.
Senator Massicotte: You are not saying yes or no, though.
Ms. Babe: There are still going to be the problems as raised by the Canadian Bankers Association on the bridge loan for the consumer. That will still be caught because of the actuarial definition of criminal rate.
Senator Massicotte: The reason they are charging so long is because it is a short period of time. They say, “It costs me X amount to do the deal, therefore I have to charge this amount, given it is a short period of time.” There are only two defences we always hear, cost to do the deal and risk. I say you allow that defence. At least the consumer who is not well informed knows the percentage is very high, therefore let the consumer complain.
Ms. Babe: It would be preferable if it was not a defence than if it was actually drafted in the legislation as an exception.
Senator Massicotte: I agree with that but you are asking the parties who are earning $20,000 a year to say, “I read this legislation, I've got all this defence, and I have to prove it.” It does not work. The flagpole is not high enough for them to attract lightning. The minister is well informed and the creditor is usually well informed. Eventually, in several years normal practices will be predefined and the issue will be resolved.
Ms. Babe: The difficulty with leaving it as a defence is that you will get qualified opinion letters from counsel to their borrowers. It will change the interest rates. The perceived risk —
Senator Massicotte: I appreciate that, but it is better than today whereby it is a criminal offence if the minister decides period, there is no defence. It is scary.
Ms. Babe: The third recommendation from the Uniform Law Conference is to ensure that the criminal section cannot be pleaded in a civil matter unless there is a criminal prosecution taking place as well.
The Chairman: There is a problem with that as well. The criminal law is meant to be — I do not like using the word — the public interest standard against which criminal sanctions, if we fall below that standard, are adopted. It also establishes a standard and that standard is both criminal, it has different consequences, and so on. By removing that as a civil aspect, does not that in effect remove the prophylactic that Senator Plamondon is trying to inject here which is to protect people below a certain line? It is a very complex area by saying I am going to waive a civil test with different onuses against a criminal standard where the onuses are different as well. It is a basic question of jurisprudence.
Ms. Babe: It is also a constitutional problem to try to use criminal law for consumer protection.
The Chairman: That discussion is to be continued.
Senator Angus: Senator Massicotte has delved into the point that I wanted to make. Allow me to ask just two questions.
Your first answer, which is your preference, is to repeal this section of the Criminal Code without referring to the criminal bar. Let us assume that one of the amendments we raised would be to repeal that section. Are there currently any other remedies for loan sharking or is that the only recourse available? I was taken by your comment that only 17 of the references in all of your research of section 347 were cases of R versus someone.
We had a large case in Montreal last week that received a great deal of publicity because a relative of the defendant is the goaltender for the Montreal Canadians. His half brothers, I believe, have been charged with, prosecuted for and convicted of loan sharking. I have not checked to see whether this was the basis. Is there another remedy for loan sharking? I know you are not a criminal lawyer and I am not one either; that would make it easy.
Ms. Babe: Certainly, it would make it easier. I suspect there are other provisions in the Criminal Code relative to extortion and violence. I understand the victims of these unscrupulous people are not prepared to complain.
Senator Angus: That is a social problem. We are trying to address an economic situation. In the words that were used yesterday, this is not a matter for the chartered banks. Senator Plamondon said that she is not out to interfere with debenture issues and sophisticated commercial transactions of the kind that are levered up to interest rates in the hundreds.
The chartered banks will not deal with those kinds of situations. There is an underground, or, I believe, a crocodile industry, of payday loan boutiques that number in the 100s or 1,000s. This is a problem that has evolved because the established lending institutions cannot deal with the borrowers. Do you have any solutions to this for the committee to consider because we find ourselves on the horns of a dilemma.
Ms. Babe: It is a nasty dilemma. Clearly, vulnerable Canadians are being abused. I am afraid I do not know the answer, from a consumer protection regulatory regime. I do know that on behalf of business borrowers, 35 per cent would be a problem.
Senator Angus: We hear you. Thank you.
Senator Harb: For the past day or so it has been made known rather obliquely that currently there are legitimate businesses that are lending legitimate sums of money to other businesses or to other individuals for short periods of time and charging legitimate fees as well as other costs.
If we were to apply section 347 to those institutions, we could get many people in trouble as it stands now.
Ms. Babe: Yes.
Senator Harb: Could you elaborate on that, please?
Ms. Babe: Yes. In the bridge, or short-term, financing situation, because of the existing definition of “criminal rate” in section 347 and the use of the actuarial method, you can reach absurd percentages extremely quickly on a short-term payout. For example, I have a client in financial difficulty who partook of an arm's length transaction loan with one of the chartered banks on a demand basis. As an example, imagine if you will, the many farmers in Alberta and Saskatchewan in the cattle industry who are in such a situation because they are faced with the current sudden downturn in the economy and their subsequent financial demise because of changed circumstances. My client's demand loan lasted three months. If you work it out an a actuarial basis, rather than on a prime-plus-one-per-cent basis, it would be over several times 100 per cent because the bank loan lasted only 90 days. It is the actuarial definition and criminal rate that catches this.
Senator Harb: I am interested in your opinion on the hypothetical scenario. I know there is a need for a long-term resolution to this matter. However, in the interim, as the Canadian Bankers Association suggested earlier, to solve the immediate short-term problem, suppose we exclude federally regulated financial institutions, Caisse Populaires and others from section 347 and proceed with Bill S-19 as it exists. It could be used as an interim measure. In the long term, regulations are required, perhaps at the provincial level, to deal with consumer protections.
I am interested in your thoughts on that and whether you think the recommendation of the Canadian Bankers Association is a viable solution. Should the committee take steps to respond to the CBA? Prepare the amendment to the section in the interim, excluding the CBA and other regulated financial institutions, and deal with the recommendation as proposed by Senator Plamondon?
Ms. Babe: It would be a partial solution. It would not solve the problems from the perspective of the Canadian Bar Association. Not all honourable lenders are regulated. However, they all comply with provincial cost-of-credit disclosure legislation. For example, companies such as GE Capital and CIT Financial are not banks, trust companies or credit unions but they certainly comply with consumer protection and they certainly have sophisticated borrowers on commercial transactions. Merely exempting one class of lender will not solve the problem in terms of the definition of interest, including all the fees, charges, equity kickers and the actuarial method of calculating interest.
[Translation]
Senator Plamondon: The letter has been signed by only two sections of the Canadian Bar Association. Since I am not familiar with the Canadian Bar Association, can you tell me how many sections there are?
Ms. Thomson: Thirty-one or thirty-two sections.
Senator Plamondon: Why didn't the other sections sign the letter?
Ms. Thomson: Because this issue is of interest to only two sections. The citizenship and immigration section is not interested in this subject.
Senator Plamondon: So this brief is not presented by the Canadian Bar Association, but rather by two sections of the Canadian Bar.
Ms. Thomson: Yes, that is correct.
Senator Plamondon: It says « Canadian Bar Association » on the letterhead and I did not know how many sections there are. So two sections out of 31 signed the letters and the other 29 sections did not sign their approval. Is that correct?
[English]
Ms. Thomson: It may also be of interest to know the approval process that the letter would go through for the two sections. The members of these two sections have the expertise and greatest knowledge of the subject matter. The letter is reviewed by an oversight committee of legislation and law reform, by our executive officers — the president, the vice- presidents, the treasurers and the executive director — for final approval. However, it is in this name of the two sections.
[Translation]
Senator Plamondon: It is because I did not see the signature of the president of your association.
Have any members ever been prosecuted under section 347 of the Criminal Code? Can you give us any examples? Did you want to help us understand the issue better when you gave us the example of the case involving natural gas or something along those lines? Is there a ruling in that area?
[English]
Ms. Babe: Yes, the answer to that is there are at least 395 reported decisions where Canadian lawyers have obviously been involved relative to these sorts of transactions. That is only the tip of the iceberg to get reported.
[Translation]
Senator Plamondon: Do you agree with the Supreme Court in the Garland decision, which said that the apparent objective of section 347 is to prosecute loan sharks. However, what the provision clearly states, particularly with regard to insurance charges, overdraft protection fees, official taxes, property taxes, and so on, is that all these fees are basically an interest rate.
[English]
Ms. Babe: The Supreme Court of Canadian's initial problem in the Garland case was whether granting services by way of providing utilities was in fact an extension of credit being caught by section 347. The court concluded that, yes, it was. I am not sure that the supply of goods and services typically takes in utilities in that way since it is a regulated industry.
[Translation]
Senator Plamondon: So you do not agree with the Supreme Court.
[English]
Ms. Babe: I have to follow their decision.
[Translation]
Senator Plamondon: I am not used to defend businesses or the industry, but I thought of an example which may affect small businesses. Let say a small business applies for a loan and the owner of the small business endorses the loan. This means that it is an individual who is applying for a loan. If commercial loans are excluded, it means that the individual who has endorsed the loan is not protected.
[English]
Ms. Babe: That would be true because a guarantor or an indemnifier of the corporation or business loan would sign a contingent obligation to pay if the business fails to pay and it would be subject to the same charges and interest rates as the business accepted.
[Translation]
Senator Plamondon: So, it seems that businesses are excluded, but this means that, at the same time, individuals who have been asked to endorse that business loan, are also excluded. Is that correct?
[English]
Ms. Babe: Technically, yes, but the reality would be that business borrowers are almost always represented by counsel and they have informed decisions before they sign on the bottom line.
The Chairman: Just a short question. This is a comparative law question that was raised earlier. You have raised serious objections to this recommendation. You have talked about criminal, as well as civil consequences. Like the law reform commissioners, you say that one of the amendments should be to restrict any prosecutions to violating the criminal provision; leave it aside. I understand that.
The largest financial centre in the world is in New York State. It seems to me that this is one of the things that we have to take a look at, in comparative terms. The evidence we have — we do not have full evidence yet — is that they do have a restriction on the amount of interest that is much lower than the proposal made by our colleague, Senator Plamondon. We have heard already an explanation from the Canadian Banking Association about not comparing apples and oranges with respect to California. However, we did not have evidence and we do not have evidence with respect to the comparability of New York state legislation that limits interest rates more severely, with obviously no dire consequences to their financial institutions compared to the proposals of section 347.
Have you done any work on that or could you do some work on that, to give us some comparative analysis because it would be very helpful?
Ms. Babe: I do not know the answer to the question today. I can see if we can find the answer for you.
The Chairman: If it were done, would it be done quickly. We would appreciate that very much if we could have your views about that. We thank these witnesses for their very helpful evidence. We ask the next set of witnesses to come forward and move very quickly because we are running out of time.
The committee is finding this evidence very interesting, so I do not want to unduly restrict them. Welcome Mr. Whitelaw, President and CEO, and Mr. Bishop, Secretary, of the Canadian Association of Community Financial Services Providers. We appreciate your providing us with evidence. Please proceed. We have your written comments. We would appreciate it if you can give us a brief summary of your written comments which we will read with care, so that we can leave more time for questions and answers.
Mr. Robert A. Whitelaw, President and CEO, Canadian Association of Community Financial Service Providers: Mr. Chair, we appreciate the opportunity to be here and will take your instructions in terms of summarizing. You have all our material in advance.
Honourable senators, thank you very much for the opportunity of providing the Canadian Association of Community Financial Service Providers, CACFS, with an opportunity today to comment on Bill S-19 in the context of the work of our association.
I am the President and Chief Executive Officer of the association. With me at the table today is Norm Bishop, Board Secretary. We have also invited Peter Tzanetakis, who is associated with Ernst and Young LLP, and contributed to a just completed study of the cost of payday loans, and Dr. Patricia Cirillo from the Cypress Research Group. Dr. Cirillo has extensive experience with conducting surveys of customers of payday loans in the United States and is currently advising our association on a survey that will shortly be done in Canada. They are available to answer questions as well.
The association is a newly formed association representing almost 50 companies in approximately 750 locations that provide small-sum, unsecured, short-term credit to Canadians.
Our membership represents approximately 75 per cent of all payday retail stores operating in Canada. We do not represent Internet payday lenders.
We serve approximately one million Canadians per year. Contrary to general perception, our customers are ordinary Canadians. Our customers, as you have heard, have an average household income of $51,400 per year. Only a small percentage would be classified as low income. Almost all have a high school education and many have completed college or have a university degree.
In fact, the demographic of our customers is very similar to that of typical Canadians as a whole. We provide these Canadians with small-sum, short-term credit. These loans are unsecured. We do not require title to cars, television sets or homes to provide the credit. As you look around, you can see our stores at Bank and Laurier just around the corner, Yonge and Bloor in Toronto, at the entrance to the Macdonald Bridge leading from Dartmouth to Halifax, Blanchard Street in Victoria where the store at the Blanchard Street in Victoria is right opposite the Ministry of Provincial Revenue office, as well as in new suburbs in our communities from coast to coast. This is where our customers, ordinary Canadians, live and work.
The average loan requested by our customers is $279, and the average term of the loan is 10 days. Our customers also use other services provided by our members, including money transfers to friends and relatives, cheque cashing and foreign money exchange. We are in the payday loan business because there is an established need for such loans. As you heard earlier today and yesterday, larger financial institutions do not offer these loans to Canadians. Without our industry, the only alternative for some Canadians needing such loans would be pawn shops, Internet loan providers and title loans. All these options cost more and subject Canadians to lending practices that most of us would rather avoid.
Like any industry, of course, we have some bad apples. I can assure you that this minority does not reflect the best business practices that all of our members represent. That is why our members joined together to form the Canadian Association of Community Financial Service Providers. The formation of our association was supported by federal, provincial and territorial governments.
We started last April-May. Even as a very young industry association, we are actively engaged with government, particularly the Consumer Measures Committee, and you heard from Michael Jenkin with regard to that yesterday. We are involved in a broad process to review the practices in the industry and to make recommendations to the provinces and the territories about setting up a regulatory arrangement that will improve customer protection.
You heard yesterday from Michael Jenkin about the Consumer Measures Committee and the meeting of ministers, and some key words were put forward: code, rollovers and cost to the industry.
One of the first association initiatives was to establish a code of best business practices with which our membership must comply. That is in the briefing books you received in advance and is in the store now. Consumers in the public area can see this.
We are also actively engaged in reviewing other actions to improve customer protection. The most significant component of the code is the prohibition of rollovers, that is, the practice of allowing customers to extend their loan for additional fees and interest rates.
As I sat here watching your proceedings, the rollovers were constantly raised as an issue. That stopped effective January 1. The ban on rollovers began at the beginning of the year and will go a long way to encouraging responsible borrowing. It will also be of interest to senators that some of the largest companies in our association have never allowed rollovers.
As with any industry, we are faced with critics who spread misconceptions about what we do, why we do it and who our customers are. We have sometimes been the subject of misleading comments by critics who have not researched the facts. The law needs to address the reality of the cost of providing small-sum, short-term loans. This is very different from financial institutions that grant loans for much larger amounts for a year or more.
A recent study by the respected firm of Ernst & Young, LLP found that it costs us approximately $44 just to provide the average loan that I referred to of $279 for 10 days. Our customers are made aware of our fees when they apply for a loan and receive a copy of every document they sign. Surveys of customers have indicated that not only do they believe our fees are reasonable but upwards of 90 per cent said they were satisfied with their experience in getting that loan.
I thought it was important today to lead with some of these comments, Mr. Chair and honourable senators. We need to dispel the many myths concerning the payday loan industry before offering the association's specific comments on Bill S-19, which I will do in my final comments.
In short, we agree with Senator Plamondon that section 347 must be amended. When that section was put in place, our industry did not exist. The need for small, short-term unsecured loans is, however, clearly in evidence here today.
Section 347 must be amended to reflect the reality of our industry and the millions of Canadians who have used these services since we first arrived on the scene. There are a variety of ways to recognize the realities of this industry at the same time as ensuring consumer protection. This has been accomplished in other jurisdictions around the world. For example, more than 35 states of the United States have put in place legislative and regulatory regimes that permit companies to offer payday loans and charge the fees needed to recover the cost. Several European countries do the same.
I thank you, chair and honourable senators, for the invitation to appear today. We would be pleased to respond to any questions.
The Chairman: Thank you very much, Mr. Whitelaw.
Senator Angus: Gentlemen, welcome and thank you for your very interesting remarks. I did not realize that you folks already have an association for this industry.
You said that you have 50 members?
Mr. Whitelaw: That is correct. Until this past year, the companies were speaking with individual voices and they wanted to have a unified voice. A call was put out to about 1,000 retail stores operated by a number of companies to invite them to form an association. The association put the code in place and we have recently completed a full compliance code. Membership in the association is a privilege. You cannot simply buy a membership; you earn it and you maintain it. We monitor members annually and they must sign the compliance agreement to the code.
Senator Angus: We understand.
The Chairman: We have a copy of your code of conduct.
Mr. Whitelaw: It is available in both English and French in the briefing book we provided.
Senator Angus: This is what we call a self-regulatory association. It is a good start, and it may be enough. However, we would all like to have an idea of who the members of your association are. Are these household names; big public companies? Who are the operators of these stores?
Mr. Whitelaw: The code is in the store of our members; they are branded. I will ask my colleague, Mr. Bishop, to respond to your question regarding the companies that came together.
Mr. Norman J.K. Bishop, Board Secretary, Canadian Association of Community Financial Service Providers: There is a diverse range of companies ranging from one- and two-member outlets to larger companies. The largest is National Money Mart Company, which is owned by a public U.S. corporation. The next largest is a company called Rentcash Inc. which is based in Alberta. They are a public company on the TSX. The next largest company is called Instaloans, which I believe is also based in Alberta. They have approximately 100 outlets. From there it goes down to companies with 50 or 60 outlets and then down to one, two or three outlets, so it is a wide range.
Senator Angus: Right, except that it is a relatively new industry. It is very popular in the U.S., I gather; is that correct?
Mr. Bishop: I believe so.
Senator Angus: You said one positive thing about the bill that we are examining and that is you agree that the Criminal Code needs to be amended. Do you consider this bill to be an appropriate amendment or is there another amendment you would like to see?
Mr. Bishop: It is a good start. It highlights the need for change of 347. We have heard that from other people today. The Consumer Measures Committee has been looking at these problems from a consumer protection point of view for several years. It is a complex problem. While we think it is good that the Senate has come forward with this, it is a complex issue.
Senator Angus: Finally, I know you have been listening to some of the other evidence. Is there something in the U.S. legislation that you have referred to in the 35 states that have some kind of regulatory framework — as opposed to a voluntary compliance regime — that would be helpful to us? We could see what can be done rather than waiting for the consumer measures group and all these other organizations that seem to take forever to come forward?
Mr. Whitelaw: I will respond to the first part, and Mr. Bishop to the second. We support government regulation in Canada in some form. There is no question about that. We have always been on the record as supporting that. What we did in the interim is design the self-regulation code of best business ethics as a first step toward our industry compliance. Publicly, from day one, we recognized and supported the need for government regulation. That needs to be heard today.
On the U.S. matters and the comparative situation, Mr. Bishop will respond.
Mr. Bishop: Not only the U.S., but also countries in Europe, Commonwealth countries, have dealt with this issue before. We have material to hand out to you on the specific states. I think it is closer to 37 or 39 states that regulate in a manner that permits a viable industry. An example given yesterday was California and their interest rate. They have a 10-per-cent interest rate, but they also recognize payday loans or small short-term loans. For a loan of less than 45 days, you are permitted to charge a certain per cent of the loan as a fee. They have carved that out recognizing that when you have a short-term loan, such as Ms. Babe was talking about, and a small loan, you have to deal with it separately. That is generally the way most of the states have gone.
My information is that there is a broad range of legislative models in the states. Mr. Law was talking earlier about how the market works and how Canadians actually have the lowest fees for payday loans. There are some states, such as New York, that prohibit payday loans. The problem with that is that the majority of the population of New York is right in the southern tip. You can go across the bridge to New Jersey and get a loan. More of a problem is that you can get a loan over the Internet or with telephone banking where the lender is set up in a regulation-free environment. If you are in New York and you want a loan, you do it over the telephone; it is not a solution.
The Chairman: I take it from that answer that, in the United States, in order to catch the Internet, the issue really goes from a state legislative issue to an interstate commerce issue. It has to be really federally regulated; is that so? Is that the rationale for having an Internet service in a state jurisdiction where payday practices are prohibited?
Mr. Bishop: Although I am not a complete expert in that area, the problem with the Internet is that it is not federal, either. It is very hard to regulate the Internet.
One of the points Mr. Whitelaw made is that we as an association represent the bricks-and-mortar stores. We feel that as long as they are there, customers will use them and you can regulate bricks-and-mortar stores.
We did a little research and put together a booklet of about 25 Internet lender websites that we could find. In the majority of them you could not tell where they are or whether they were offshore, for example, in Costa Rica or in the United States or some place like that. If this industry was not here, it would be serviced over the Internet.
The Chairman: I do not mean to interrupt Senator Angus's train of thought, but in New York, as you pointed out, payday loans are prohibited. New Jersey is considering legislation.
What happens in New York State now to this vulnerable group of people that are desperately in need of short-term loans based on their payday and so on? What happens to that market which is burgeoning in Canada and obviously has been exempted or restricted in New York State? What happens? What is the practice there?
Mr. Bishop: First, I wish to point out that the perception is that this industry targets the vulnerable or low-income segments of the population, which is a misconception.
The Chairman: I misspoke myself. I am talking about servicing this segment of the industry that utilizes your services.
Mr. Bishop: This is an industry, where there are 1,000 outlets and 1 million Canadians who use them. It is high time for regulation. That is the best way that you protect the consumers in those sectors that are disadvantaged. A good example is rollovers. We as an association have prohibited rollovers. You read about rollovers in the press. The two largest companies in the country do not do rollovers and had not done rollovers. As an association, our difficulty is that our members do not do rollovers. We have no control over the people who are not members of the association. That is a good example where regulation could come in.
Senator Callbeck: You mentioned that members in your organization prohibit rollovers. Are there other practices that have been stopped since this organization was formed?
Mr. Whitelaw: Yes. You will see in the code, senator, stopping the rollovers was the big turning point, then fair collection practices, full disclosure information, privacy protection, and a 1-800 complaint line. Those other areas are right out front with the public.
There is then a section on education and awareness. We are putting pamphlets and brochures in our member stores that talk about the importance of the payday loan and how to use it appropriately. We are then putting out pamphlets on the code.
In the next few days we will obtain from the credit counselling groups their brochures to make them available in our stores as a piece of consumer awareness. We already have their telephone numbers. We have gone out to ensure that education and awareness of our consumers who come into the stores exceeds expectations.
Senator Callbeck: Will you follow up on this? I realize you are a young organization, but what if a member does not follow these practices? Do they lose their membership?
Mr. Whitelaw: That is the ultimate. Let me back up here. There are a number of sanctions along the way. First, there is a compliance agreement and it is posted. You will see in the section on our code, a member-to-member complaint requirement. This is somewhat atypical in the industry. Members are required to report other members who are not complying with the code. We are very public about that. In addition, we will review the membership annually. There is a sticker on our member doors now “Valid 2005.” That must be renewed and reviewed each year.
We will be tough on this. The compliance has the teeth. Ultimately, we look to the consumer to be educated and to be aware of which business they wish to deal with, whether it is a member complying with the code or a person outside the membership, a business.
Did I answer your question?
Senator Callbeck: No. I am wondering how tough you will be and if there will be a follow-through. If someone is not abiding by what you have laid down, will they really lose their membership.
Mr. Whitelaw: They will lose their membership; that is the ultimate sanction. There will be a number of categories along the way; cautions and warnings. We already have complaint letters out and we are watching for responses.
We are taking complaints and sending them to the non-member stores. If a consumer calls in and says, “I have a problem,” and we identify it as a problem with a non-member, we are not saying we cannot do anything. We are taking action.
Just yesterday, I was involved with a credit counselling group that identified a firm that is not a member. We are taking the next step to invite this firm to take corrective action even though it is not a member because it is of benefit to the industry.
That is where we come to the need for regulation in the industry, supported by our self-regulation work.
Senator Angus: What is your membership fee?
Mr. Whitelaw: The membership fee is graduated. For one small shop, it is about $300 a year and then it graduates up on a per-store basis.
We want to be able to allow the small, independent store operators to feel as much a part of the membership as the large companies referred to without feeling that there is an economic impact directly on them. It is more important in our opinion that they comply with the code, that they demonstrate that and that they feel a part of the association.
Senator Angus: I would think these complaints against non-members that come to your attention would be a great recruiting mechanism for you.
Mr. Bishop: We hope so.
Senator Angus: Slip us $300 and we will fix your complaint.
The Chairman: We are back to Senator Callbeck.
Senator Callbeck: That is fine. I will pass.
Senator Harb: I have a couple of questions about your one million Canadians. I am interested in knowing if you count a repeat customer as another customer who walks in the door or if those one million are individual, separate Canadians.
The second question is about the average cost. You mentioned that $279 lent over 10 days costs $40 to support. That would bring it close to 500 per cent per year in terms of the percentage cost that you have to put out before you have charged interest.
Have you considered working with the Canadian Bankers Association to see about some of the best practices they have to offer? Have you considered the disclosure of the average cost to the consumers at the outset so that when they apply for a loan, they know what the cost is at the outset?
In the province of Ontario, there is a cooling-off period. When someone fills out a form to get a mortgage from a financial institution, there is a requirement that allows that individual to rest on it for a day or so. Do you have something like that?
Mr. Whitelaw: Yes, we do. I will answer those questions immediately. Regarding the cooling-off period, our code provides for a 24-hour period. If you borrow money from a member and 24 hours later you decide, for whatever reason, you want to give it back, it is taken back without any interest, costs and fees, nil. We worked that out. That addresses the first question.
Concerning your question about the one million Canadians, we have reviewed the types of customers, their use, and projections from the past moving ahead. However, the specific information will be coming shortly as we conduct for the first time in Canada a survey of our customers. Environics has been engaged to undertake this study and I hope that by the next time we are invited back, we will have details of the findings of a national survey of our customers.
Senator Massicotte: The association was created when?
Mr. Whitelaw: In February, it was actually incorporated. We opened the office in April/May of 2004.
Senator Massicotte: It is fairly recent. You have 50 members, I understand?
Mr. Whitelaw: Fifty corporations and 750 retail stores.
Senator Massicotte: How many complaints have you received in the last nine months?
Mr. Whitelaw: We started our compliant line, December 1. In December, we received 23 inquiries and complaints, and 33 to the close of January. We are getting ready to do the analysis of the type of complaints and inquiries. That will be reported publicly.
We try to break out inquiries which are general questions about the industry versus complaints. I think at the moment, there are seven open complaints from January because we give stores a 14-day period to respond.
Senator Massicotte: In December, you had 23, you said?
Mr. Whitelaw: Yes.
Senator Massicotte: How many were complaints?
Mr. Whitelaw: Of that type, I think there were 10 complaints and the remainder were inquiries. To be very specific, the Ontario government tracks complaints. In 2004, they received 70,248 consumer complaints of all types, of which only 93 involved the payday loan industry; 14 were written and the others were inquiries. If we are dealing with percentages here, that is one one-thousandth of 1 per cent. In my four years with the Better Business Bureau, we did not receive any.
Senator Massicotte: Of the 10 complaints you received in December, they had 14 days to respond. What has happened after that? Are they valid complaints? What are the consequences of those complaints?
Mr. Whitelaw: The valid complaints, as soon as we contacted the management of the stores and it was the first indication that there was a problem, were corrected immediately. The best example is a Friday ago, we received a problem call from a credit counselling group in Hamilton at nine o'clock in the morning about a consumer-related matter. That was resolved at four o'clock in the afternoon.
The Chairman: It would be useful if you could give us that material in writing. You could also give us the material about your membership and the percentage of the total market that you serve so that we can have all that before us. It would be useful to get a breakdown.
Senator Massicotte: I also want to know specifically, what is the consequence of a valid complaint? You said there are many steps. How many days or months is it before the company gets disqualified from being a member of your association? How long before a company that is in default of a complaint or a second complaint becomes a non- member?
Mr. Whitelaw: This is all part of the work we are doing. The timing at the moment is 14 days. It would then be brought to a compliance committee for review. There are sanctions in place. The ultimate sanction is the withdrawal of membership.
Senator Massicotte: I appreciate that, but the problem with that answer is that it is so loosey-goosey, if you wish. You could have a serious complaint and three years from now, the company is still a member of your association. That would take away from what you are saying, which is that you are serious people who publish your guidelines and values system and should be trusted to follow them. However, if your system of discipline, which is self-regulatory and also obviously in your self-interest, is not stringent enough, then the consumer should not rely upon those guidelines. I would not mind knowing exactly what happens and how firm and strong are the consequences of complaints.
Mr. Whitelaw: Senator, this will be provided.
Senator Massicotte: In Quebec, how many stores do you have?
Mr. Whitelaw: None.
Mr. Bishop: None.
Senator Massicotte: Why?
Mr. Bishop: You have to be licensed in Quebec. There is a 35-per-cent interest rate cap in Quebec. It is not financially viable. The option for Quebecers is to get Internet loans or use pawn shops.
Senator Massicotte: If your guidelines, ethics and self-regulatory environment are structured so strongly, I presume you will be able to persuade the Quebec government to go back on its decision and allow you to operate there.
Mr. Whitelaw: That is the choice of the Quebec government. There are several provinces where you have to get a licence. This is not a totally unregulated industry. In Saskatchewan, Quebec and the Maritimes, you need a licence. If you are to be a member of our association, you need to have your lending licence if you are required to have one. No one in Quebec has a lending licence so they cannot be a member of our association. To my knowledge, there are no outlets that are.
Senator Fitzpatrick: My question is in two parts. First, you state in your presentation that a recent study by Ernst & Young, LLP indicated that it costs $44 for an average loan of $279 for 10 days. Can you give me that on an annualized basis? What percentage interest, or put it in the form of interest rate that would be on an annualized basis?
Mr. Whitelaw: Senator, I do not have that and I am wondering if I can refer to Mr. Tzanetakis, who was one of the authors of the report.
I would like to introduce Mr. Peter Tzanetakis, associate of Ernst & Young, who was one of the main authors of the Ernst & Young cost study report.
Mr. Peter Tzanetakis, Associate, Ernst & Young: Because the cost needs to be covered in a short period of time — a short maturity period over a small sized loan — it ends up being an interest into the several hundreds if it were converted into an interest rate. We give examples in the study, which I believe will be provided to this committee.
Senator Fitzpatrick: The second part of my question is you say that you have a survey of customers that indicated that they thought the fees were reasonable. Up to 90 per cent said they were satisfied with their experience. Can you tell me exactly what that question was? I can hardly imagine that people would think an interest rate of several hundred per cent on an annualized basis would be reasonable and that they would be satisfied with that kind of loan arrangement. What was the exact question in that survey?
Mr. Bishop: That survey was actually done by the Public Interest Advocacy Centre commissioned by Industry Canada. That is an example of these effective annual interest rates, the way they are calculated, sounding egregious, but in fact what is charged is very reasonable.
The Chairman: Do you have a copy of that study?
Mr. Bishop: Yes, we do.
The Chairman: Could you give us that study? We will take a look at that question. That is another important question. We are all familiar about questions and questions in polls.
Senator Fitzpatrick: This is a comment, not a question. Anything in that category of hundreds of per cent on an annualized basis, and I think that is what we are used to considering interest on, whether it is a mortgage or whatever, I do not find reasonable quite frankly.
Mr. Bishop: That perfectly demonstrates the problem because if you got a loan of $100 for five days and you were charged $1 then that would not seem unreasonable. Well, that works out to 107 per cent. There is a difference between what you are actually paying and how it is calculated that causes the problem and that is what we have heard today.
[Translation]
Senator Plamondon: I would like to begin by saying something. You said that New Yorkers could cross the border into New Jersey. Yet in the schedule you gave us, payday lenders are not allowed to operate in New Jersey. I therefore don't see why New Yorkers would go to New Jersey, if lenders are prohibited from operating in either state.
[English]
The Chairman: Senator, the information that is provided says that it is pending legislation in New Jersey. It has not been implemented yet based on their text.
[Translation]
Senator Plamondon: I was thinking of the schedule to the Consumer Federation of America, which was handed to us.
[English]
It states that it prohibited payday loans due to small-loan interest rate caps, usury laws.
[Translation]
But it refers to New Jersey. Is it allowed in New Jersey? That would contradict the other schedule.
[English]
Mr. Bishop: Quite frankly, I could not tell you. We can provide you with a list of all the states.
Senator Plamondon: I have a list here and New Jersey is in there on page 29 of your submission. That was just a comment.
[Translation]
You also said that you wanted to leave Credit Counselling Services brochures in your offices. I hope that the opposite is not true and that pamphlets from payday lenders won't be left in Credit Counselling Services' offices.
We know why you do not operate in Quebec. What kind of debate preceded the prohibition of payday lenders in the various U.S. States? Why have certain American States prohibited this practice?
[English]
Mr. Whitelaw: First, responding to the credit counselling material, it is a one-way street. That is why we are taking material into our stores for the benefit of the consumers and not the other way. There is a tremendous amount of divergence in the United States, state by state. As we indicated, 35-plus states have regulations allowing the payday industry to operate there. Other states I have revisited and, as I mentioned, the alternative is Internet lending and other options.
You questioned specifically the United States and I sense, Mr. Chair and senators, this is more information that you would like to obtain.
[Translation]
Senator Plamondon: It would help us in our deliberations to know why some states prohibit this type of activity. If you have the information and could give it to us, that would be greatly appreciated.
What worries me is that in your presentation, you talk about payday lenders, but not about finance companies. Finance companies are also members of your association. The example I used when I introduced my bill involved a finance company. Interest rates were calculated on an annual basis, because the case involved a four-year loan. As it turns out, the interest on the loan was 50.63 per cent.
Are there any finance companies which are members of your association, and what conditions do they have to fulfil in order to become a member?
[English]
Mr. Whitelaw: In our association we have the payday loan stores and companies that offer the small-sum, short- term loan unsecured. That is the only membership. People that provide title loans, or pawn shops or the Internet, are not members. The company that you refer to, I believe, is not a member. There are simply the 750 retail stores operated by 50 companies who are our members. The qualification to be a member is that you provide a small-sum, short-term unsecured loan, often called a payday loan.
[Translation]
Senator Plamondon: So you are telling me that finance companies are not members of the Canadian Association of Community Financial Service Providers.
[English]
Mr. Whitelaw: That is correct.
[Translation]
Senator Plamondon: You have also said that there are companies which are headquartered in the United States. You said there are companies belonging to American interests. Not only are there companies from Alberta, but also some which are based in the United States. Is that correct?
[English]
Mr. Whitelaw: Senator, the answer to your question is that one of the companies, National Money Mart, is owned by a U.S. company. The company referred to in Edmonton is a Canadian company. One is a public company, Rentcash, and there is a private company.
[Translation]
Senator Plamondon: But I want to ask a question with regard to the confidentiality of information under the Patriot Act. As you know, under the Patriot Act, the American government can request information on companies located outside of the United States, but belonging to American interests. Are any such companies members of your organization?
[English]
Mr. Bishop: That would be dealing with U. S. legislation. We could not comment on that.
[Translation]
Senator Plamondon: Obviously, but at the same time, this could involve information on Canadians. If you don't know the answer, I'd like to ask you another question.
[English]
The Chairman: Senator, I am looking at that time clock. We have another witness. The Senate, as you know, prohibits us from having a hearing while the Senate is sitting. Let me deal with this dilemma. We do not want to be unfair to the witnesses and certainly I do not want to be unfair to the senators. If there are further questions, I hope that we can send them to you in writing and you can respond to the committee. I really feel it is unfair of us to bring you here and then to short-circuit what we consider to be very vital and important information.
[Translation]
Senator Plamondon: I could ask my questions and we could get the answers in writing later on.
I'm interested in knowing about your collection methods. Since you don't do rollovers, in the case where rollovers can be done indirectly between one place and another, that is, between one branch and another, one branch could not do a rollover, but you could send clients to another place, which comes down to basically the same thing. I know there have been raids. Can you tell me whether Paymax and Money Instantly Services are among your clients? There were articles about these companies in the papers recently.
[English]
The Chairman: I have two other questions. I will put them on the record. You will respond to them in writing. Again, Senators, I am looking at the clock. It is the Senate's requirement that we be in the Senate at 1:30. I would like to say to the witnesses, we will start your evidence and we will call you back when we renew our hearings on this because I do not want to be unfair to you.
Senator Fitzpatrick has a short question. Senator Moore has a short question.
Senator Moore: Are any of your retail stores owned by Canadian banks or Canadian insurance companies?
Mr. Whitelaw: Senator, no.
The Chairman: Again, other senators have questions, and I know they do. We will give them to you in writing and hopefully you will respond promptly. Thank you so much for coming forward on such short notice. This has been very important and valuable information. We do have a number of other questions.
Mr. Whitelaw: We welcome those questions and we will respond to them immediately because this provides you with the answers you are seeking directly.
The Chairman: Thank you. If the next set of witnesses could take the chair. We will suspend for 30 seconds, allow you to withdraw and allow the next set of witnesses to come. We will allow them to commence their evidence, then we will postpone. We do apologize to both sets of witnesses. We are constrained by our mandatory requirements of the Senate. We must stop sharply in eight minutes to allow senators an opportunity to get to the Senate chamber on time.
I hope that this will not inconvenience you. I know that some of you come from near, others come from far. We will give you proper notice to allow you to come back for a fuller opportunity. Please start.
Mr. Roger Sauvé, President, People Patterns Consulting, Vanier Institute of the Family: I am accompanied by Dr. Bob Glossop of Vanier Institute. About a year ago “The Current State of Canadian Family Finances Report” concluded that a growing number of households were living on the edge and that they needed to act now before it was too late. In our new report released last week, of which hopefully you have a copy, we continue to hold that view. Even more so than a year ago, we believe that households need to rein in some of their spending, pay off some debt and build a bigger cushion against the possibility of a slowing economy and/or rising interest rates. This is not a doomsday scenario, but one of caution and reassessment.
Real disposable income for households has, on average, remained near the $54,000 level during each of the last four years. From a longer term perspective real incomes are up by less than four per cent since 1980; rather miniscule by any standard. This flattening out has occurred in spite of the record number of dual-earner households bringing in this income. In addition, the income equality is worsening with the richest families gaining ground at the expense of the rest.
According to the latest census there are now about 1.5 million full-year, full-time workers with before-tax earnings of $20,000 or less. These are definitely our working poor. Family incomes were flat from 1980 to the mid-1990s for those aged 25 to 34 and those aged 35 to 44. Those aged 45 to 54 also had no growth in earnings from the late 1980s to the mid-1990s.
These trends are not only interesting, they have also had significant and measurable impacts on the well-being of different generations. Home ownership rates advanced strongly for those aged 55 and older. In contrast, home ownership rates fell for all age groups below the age of 55. Net worth also declined for all age groups, except those aged 55 and over, during the 1984 to 1999 period.
The poverty rate soared for those aged 25 and under and fell sharply for those aged 65 and over. This is definitely a generational problem. For savings rates, 20 years ago the typical household was putting away about 20 per cent of its disposable income. The personal savings rate has now dipped to zero. Even worse, households in half the provinces had negative savings in 2003, with British Columbians recording the biggest negative savings rate of minus six per cent. Many people are now living in expensive housing where they may be house-rich but cash-poor. Not everyone is even this lucky. Households now hold, on average, about $66,800 of debt. Total household debt is now equal to 121 per cent of disposable incomes, compared to 86 per cent in 1980.
Record-low interest rates have made this debt manageable for most but not all households. In our 2003 report we estimated that if interest rates rose by just two percentage points, the level of interest and principle payments on household debt would have returned to the 1990 peak and brought many more households much closer to the edge. About 84,000 people went bankrupt in 2004, which is close to the record set in 1997, and compares to only 21,000 bankruptcies in 1980.
Those in the age group 25 to 44 are the most prone to go bankrupt. In 2003 there were 611 bankruptcies per 100,000 people aged 25 to 44, or more than triple the rate in 1987. There are too many arguments used to counter the opinions of those like myself who believe that households are getting closer and closer to the edge. The first argument suggests that, on average, households have been able to manage their finances due to record-low interest rates. We agree. However, there is no promise that it will stay that way.
Second, so the argument goes, the ratio of debt to net worth of households actually improved over the 1990-to-2004 period. This is also true and is discussed in our 2004 report. Much of this improvement is due to a recovery in the stock market and rising house prices. Ownership of stocks, directly or indirectly, continues to be very unevenly distributed relative to housing. The home-ownership rate has fallen for everyone under the age of 55. The young and not-so-young generations are already struggling to buy the overpriced homes of the 55-and-over crowd. This will be even more difficult when interest rates rise. Our major conclusion is too much debt is indeed a big and growing problem for more individuals, households and families. The debt problem is due to a growing imbalance between income, spending, savings and debt. This is especially so for those on the disadvantaged side of the pillars of financial health.
The Chairman: We have three more minutes. I would like to get to Ms. Ross, if we could. I apologize for the intervention because your evidence is startling and important and gives us a great explanatory understanding of what is going on.
Ms. Ross, if you could speak for a few minutes. We will waive all questions and we will undertake to have you both back.
Ms. Henrietta Ross, Executive Director, Ontario Association of Credit Counselling Services: I would love to come back and speak further and answer all your questions. I encourage that.
The Chairman: We deeply appreciate that.
Ms. Ross: On behalf of the Ontario Association of Credit Counselling Services we appreciate the opportunity to be here. We were established as an association 35 years ago in 1970 and we represent 26 professional and not-for-profit credit counselling agencies. Of these, 25 are in Ontario, and the other is in Newfoundland and Labrador, a new member of ours. Our member agencies offer confidential services, and the services focus on the fundamentals of money management, budgeting, credit use and debt repayment programs. Our agencies represent approximately 70 per cent of the not-for-profit credit counselling agencies in Canada.
Our agencies have established their credibility by offering realistic and unbiased financial assessments, and effective and efficient management. We offer our comments from the perspective of member agencies that work closely with consumers to see first hand the impacts of credit cost and affordability. Last year our agencies provided help to almost 40,000 clients. We have seen an increase in clients of about 60 per cent since the year 2000. The total personal debt of our new clients served was almost $600 million in 2004, as compared to just under $200 million ten years ago. In 2004, the average consumer debt, not including mortgages, of new cases that we saw was $22,773. The average family income of clients served in 1995 was just over $26,000, as compared to just over $30,000 ten years later. Over one decade, the family income of clients has increased only 15 per cent, while the average debt increased by almost 60 per cent.
We support the efforts of the bill. We specifically want to add that we respectfully ask the Senate to consider mandating interest relief for pro-rate debt repayment plans that we support clients to do and that are administrated by us. When credit granters cease charging interest when we have a pro-rate debt repayment plan, it will provide important relief and help the viability of plans for consumers. Not charging interest is part of the consumer proposal legislation under the Bankruptcy and Insolvency Act. However, that is not mandated with our clients and our programs, and we see that as an inconsistency that we would like to have changed.
The Chairman: Thank you for your evidence, Ms. Ross. Your written material will be looked at with great care. When the committee reconvenes, after a short period of time while we await comments from the provinces and the territories, we will conclude the hearings. Perhaps we could ask that you appear before the committee at that time. We will ensure that you are high up on the schedule so that we can have ample time to hear your complete testimony, after which senators will pose their questions.
The committee adjourned.