The provincial government maneuvered its way out of a legal tug-of-war with payday money lenders recently by giving itself the official authority on capping loan interest rates.

The payday loan industry offers small, short-term cash advances with high interest rates. They can be a dangerous debt trap for some, said John Silver, executive director of Community Financial Counselling Services, a not-for-profit agency which offers debt management aid.

“The worst problem we see is people digging themselves into significant holes.”

Most payday loan companies enforce interest rates well over 60 per cent, legally defined as criminal, yet they are normally not prosecuted.

The Government of Manitoba introduced legislation in 2006 that would regulate the payday loan industry and set a maximum interest rate.

The provincial Public Utilities Board (PUB) was charged with determining a fair rate cap and in April 2008, they announced a rate that, while still over the criminal limit, would arguably allow most lenders to continue operating.

However, popular lender Cash Store Financial Services claimed this decision would put many lenders out of business. In early January the firm was granted permission to argue its case to the Manitoba Court of Appeal. It was also granted a stay of the PUB decision until a court ruling.

But on Jan. 7, the provincial government committed to designating itself as the official source on capping interest rates for payday lenders, effectively overruling the legal process.

“The purpose of the legislation is to protect consumers from exorbitant rates as well as to protect them from questionable business practices,” said Nancy Anderson, director of the Manitoba Consumers’ Bureau.

The province is also implementing further regulations which will come into effect after March 9.

Cash Store Financial Services declined to comment due to their involvement in the ongoing legal proceedings.

Not all community organizations are happy with the government involvement. Kimberly Weihs, executive director of the Manitoba Society of Seniors, is disappointed the government undermined PUB’s decision, in which they were involved.

“We want to make sure that… everyone has a say in how rates are decided,” she said.

While the PUB has a well-respected transparent decision-making process, Weihs fears the government’s process may not be as accessible.

She worries this shift will set a precedent for undercutting further PUB decisions.

Stan Keyes, president of the Canadian Payday Loan Association, representing 20 lenders including Money Mart, is glad the government is stepping in.

“We have been asking for strong consumer protection in balance with a strong competitive industry,” he said.

“When it comes to the rates, the PUB got it wrong.”

Keyes is concerned that the PUB’s low rate cap will drive small lenders out of business and create a monopoly, which is detrimental to consumers.

He is confident the government will take this into account when setting rates.

For Silver, all of these negotiations avoid the heart of the problem.

“There’s a potential to prey on people who can least afford to go into further debt,” he said.

For these people, “payday loans are the only place to turn because the current financial system doesn’t serve people who need payday loans,” Silver said. “There needs to be an alternative for people that can’t get credit.”

But Money Mart customer Dudley (last name withheld) doesn’t have a problem with loan rates as they are.

“If you need the loan then you need it,” he said.

Published in Volume 63, Number 17 of The Uniter (January 22, 2009)