Pitfalls of payday loans

What a rotten world when we allow predators to feast on our most vulnerable.

Take Susan:

Sadly, the 54-year-old divorcee became inflicted with crippling diseases, including diabetes, and she's now too sick to work.

Susan, who was employed as a caregiver, turned to Ontario's disability support program for help. She receives just over $1,000 a month in benefits, that includes a food allowance since her illness means a strict diet.

Problem is after she pays the rent on her one-bedroom Toronto apartment and clears off the household bills, she's often left in the red.

She asked her bank for overdraft protection, but was denied. And she won't dare get a credit card, after a bad experience with a retail store charge card that charged a whopping 28.8% interest on outstanding balances. She's still paying it off.

She also got rid of her cellphone, but the company charged her a gouging $300 to get out of the contract.

A friend told Susan about payday operators, who offer short-term loans.

"She said she's used them when she was short of cash," said Susan.

So, off she trotted to the Cash Store, and took out a loan for $400. When she was having difficulty paying it back, the same store gave her another $400.

With gouging fees and interest, the total owed hit over $1,000, and now Susan was using rent money to try to clear off the debt.

Then, an eviction notice arrived. Desperate, she went to another payday operator and borrowed another $400. Now, she's in so deep, owing up to $2,000, she doesn't know where to turn.

I suggested Credit Canada (creditcanada.com). Afraid others will fall into the same trap in this world of two-tier banking, Susan also joined ACORN (the Association of Community Organizations for Reform Now), that has been leading demonstrations to warn of the pitfalls of payday loans.

Believe me, this is not a new fight.

For four years, ACORN and others have been lobbying Ottawa to enforce the criminal code and lay charges against those who charge usurious rates of 60% and higher.

Sitting down? A study of payday loans by a York University professor uncovered alleged rates of interest of 300% to 1,000% in a thriving business worth up to $2 billion a year, with some 2 million Canadians borrowing every year.

Just last week, Edmonton-based Rentcash Inc., which owns the Cash Store, reported almost a doubling of its quarterly profits, raking in $2.5 million in the second quarter, up from $1.4 million a year ago.

Canada's criminal code is clear: "Interest means the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense or in any other form, paid or payable for the advancing of credit." Yet, even after Ottawa's Senator Madeleine Plamondon tabled a private member's bill to change the criminal code's rate of usury from 60% to just 35% above the Bank of Canada rate, now at 4.% -- Ottawa didn't clamp down.

It passed the buck to the provinces.

Many provinces have since clamped down through regulation, with some ruling maximum allowable rates for borrowing. But not in Ontario.

Here, all that's required is that payday operators hang prominent posters in their offices breaking out the cost to borrow $100. As well, customers must receive stan-darized information about their cash advances and must be given the cash immediately upon signing an agreement.

Susan claims she never knew the total cost to borrow until after she got the money.

Even the Canadian Payday Loan Association is urging Ontario to pass tougher laws.

Meanwhile, several class action suits have been launched by angry victims, who are seeking millions in dollars in damages.

This payday fight has no borders.

In the U.S., it's feared more and more cash-strapped consumers, who are losing their homes to the subprime lending madness, will be forced into mouths of payday operators, who raked in $4.2 billion US in excessive fees in 2005. At least 2.2 million households face losing their homes, with foreclosure filings up 79%.

Austin King, director of ACORN's Financial Justice Center in New Orleans, said expect more fallout as more mortgages come due for renewal and interest rates jump. "When people get hard up, they go to payday lenders," he said.

Another area of predatory lending, he adds, are tax refund anticipation loans, called RALs, which ripped off low-income Americans of $960 million US in excessive fees in 2005.

Democrat hopeful Hillary Clinton recently unveiled her plan of attack.

As in Canada, the federal government passed the buck. And some states have clamped down, like Florida which forbids a borrower from taking more than one payday loan at a time. But, according to Clinton, some payday operators argue federal laws allow them to avoid complying with state laws.

"Hillary will once and for all stop payday lenders from circumventing state consumer protection laws," she said in her Fair Credit for Families release, where she also promised a clampdown on RALs.

Bottom line is American presidents have warned of a banking system that puts profit ahead of people, who need access to fair banking.

One was America's seventh president, Andrew Jackson, who held office from 1829 to 1837, and who remarked: "If people only understood the rank injustice of the money and banking system, there would be a revolution in the morning." Well, here comes the revolution, with many families not just fearing the poor house, but no house at all.

AVOID FORECLOSURES

The fiesty Clinton is calling for a 90-day moratorium on subprime foreclosures, a five-year freeze in rates on subprime adjustable rate mortgages, and $30 billion in assistance to states and communities to fight foreclosures.

She also wants housing refinance agencies, like Ocwen Financial, to help tens of thousands of families refinance unworkable mortgages and avoid foreclosures.

So does ACORN, which is holding demonstrations throughout the United States.

One will be held here in Toronto tomorrow, when ACORN will protest at the offices of Global Servicing Solutions, a subsidiary of Ocwen. The demonstration gets under way at 2 p.m. at Global's offices at 111 Richmond St. W., suite 1202.

For more information, go to acorncanada.org.

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GOUGING PAYDAY LOANS

Here's how much you'll pay to borrow:

$300 loan for 7 days $60 fee + $2.25 interest TOTAL $62.25

$300 loan for 14 days $60 fee + $6.72 interest TOTAL $66.72

$500 loan for 14 days $100 fee + $11.20 interest TOTAL $111.20

Based on 59% interest rate, and $20 fee for every $100 borrowed.