Debt struggles spark concerns

Seven years after Donna Borden borrowed $10,000 from CitiFinancial, she says she had made $25,000 in payments — and was still no further ahead. She complained to regulatory authorities, went to credit counseling for help. But nothing seemed to make much of a dent in the loan. The interest rate on the loan was nearly 30 per cent, insurance premiums in excess of $2,600 were added to her debt, and Borden alleges the loan was then “flipped” numerous times for reasons she says are unclear to her.

“I was working seven days a week trying to pay these debts off. I realized it was physically impossible,” the 52-year old administrative assistant from Toronto said in an interview. So, she just stopped paying. That’s when she discovered there were hundreds of others like her and almost no rules to protect them, she says.

CitiFinancial, an arm of U.S.-based CitiGroup Inc., said it couldn’t comment on the specifics of Borden’s case. The consumer finance company said in an email that it operates “in the best interests of our clients often going to great lengths to ensure repayment plans cater to individual needs and that the terms and conditions are explicit.”

The company also refuted several of Borden’s specific allegations.

A grassroots citizen’s organization says it believes Borden’s story is evidence predatory lending practices, long associated with smaller payday-style loans, are invading this higher value loan market, including consumer, auto and furniture loans.

The Association of Community Organizations for Reform Now (ACORN) has fought predatory lending practices in Canada and the U.S., which is broadly defined as any practice that imposes unfair or abusive loan terms on the borrower. That can include high interest rates and fees or a disregard for the borrower’s ability to repay.

ACORN is calling on Ottawa to cap interest rates and financing fees on such loans, put an end to excessive loan refinancing, a practice that is used to add fees, and make it easier to report predatory lenders.

The most common victims are the poor, the elderly, minorities and the less educated, who are more likely to find they are unable to secure a conventional lower cost bank loan, due to poor credit history or lack of assets.

But borrowers from all walks of life can fall prey to abusive terms, ACORN says.

The organization cites a federal Competition Bureau investigation of two of Canada’s largest furniture stores, Leon’s and The Brick, for deceptive marketing practices. The retailers’ “buy now, pay later” programs can add as much as $350 in fees to the original $1,500 purchase price, the bureau alleges in a July 2013 legal action filed in the Ontario

Superior Court of Justice.

Leon’s, which owns both furniture chains, has denied the allegations and said it will vigorously defend its position in court. ACORN also points to emerging concerns about lengthening payback periods for auto loans, which leave borrowers with little equity in the vehicle. Debt rating agency Moody’s Canada has issued a warning about the practice, saying it leaves both consumers and lenders exposed if the car loan goes into default.

Borden’s story begins on June 16, 2005 when she took out a CitiFinancial loan to cover a mounting pile of debt, in part the legacy of her mother’s death. Her mother had been using credit cards in Borden’s name to make purchases. Borden says her own credit history was good but her regular bank wouldn’t lend her any more money, saying she already had too much credit. Her credit application with CitiFinancial in 2005 shows Borden owed $19,231 to various banks and retailers. She applied for a $10,000 consolidation loan, thinking it would help her manage and track her various bills, she said.

She also agreed to take out insurance to cover missed payments in case of job loss or disability. The premiums, at just over $2,600, were added to the loan.

She provided a list of assets as security, including a TV and some furniture, valued at $9,100. The interest on the loan was set at 28.99 per cent. The monthly payment would be $402.20 for 60 months. In comparison, a homeowner with a good credit rating can borrow a home equity loan for as little as 3.5 per cent interest. The loan would cost Borden a total of nearly $25,000 to repay over a five-year period, the documents show.

Borden said she soon began to have concerns about the loan and the repayment schedule. A series of CitiFinancial disclosure documents Borden provided to The Star show the terms and conditions of her loan changed four times over a two-year period.

In some cases the payback period changed from 60 months to 48 months and then back to 60 months. In other cases, the insurance premiums are removed and then added back in.

Some of the money is given directly to her, some is used to pay off prior accounts and some is paid to others on her behalf. She says she was told the payments made directly to her were interest overpayments, yet those amounts were then added to the loan.

Each of the documents bears her signature, is stamped with the word renewal but is assigned a different account number and indicates the loan will start the following month. Borden said she believes the new account numbers are proof CitiFinancial was “flipping” the loans – using the new one to pay off the old one.

The final straw occurred in 2007, when her loan ballooned back up to $25,000, including insurance premiums and a new slightly higher interest rate of 29.99 per cent.

Nothing made sense, Borden said. All she knew is she was making no headway.

CitiFinancial, which operates 214 storefront loan operations across Canada and provides personal loans and retail financing to 250,000 Canadians, says it meets the needs of an “underserved customer base.” The lender’s first priority is ensuring the customer’s ability to repay the loan based on verified income, the company said in an email response to The Star.

“We place a heavy emphasis on responsible lending focused on transparency and ensure all terms and conditions are reviewed with the borrower at the time of signing. Loans are only renewed with the customer’s full consent,” according to the email attributed to Troy Underhill, Citi Canada Public Affairs.

CitiFinancial does not charge additional fees at the time of signing, the email also says. Disclosure documents provide the borrower with information related to all payment terms. This includes the specific time required to repay a loan, provided no payments are missed. Customers are also able to prepay personal loans without extra fees, the email also said.

In 2008, Borden says she entered a debt repayment program at Credit Canada, a non-profit agency that helps customers manage their finances. By then, she owed $30,000 to various creditors. Credit Canada negotiated repayment terms on her behalf. Most lenders will agree to waive their remaining interest charged on a debt, said Laurie Campbell, executive director of Credit Canada. However, the decision is voluntary. Documents Borden provided show CitiFinancial agreed only to reduce its interest rate to 15.5 per cent. It also extended her loan to 2015.

Campbell called the practice of allowing lenders to sell insurance and fold the premiums into the loan “outrageous” – adding such policies are usually so tightly written borrowers rarely get to collect on them.

People struggling to carry their debts are never better off borrowing more, particularly at high interest rates, Campbell added. She says they should seek advice first from a reputable credit counseling organization.

While in credit counseling, Borden says she agreed to pay $675 a month toward meeting all her obligations. It meant working two jobs, seven days a week, plus overtime, for nearly four years. By 2012, she had wiped most of her record clean. All except for her debt with CitiFinancial.

Borden says she calculated that by then she had paid CitiFinancial $25,000, including $9,000 while in the program with Credit Canada.

She decided enough was enough. She stopped paying.

After several months of harassing phone calls from collection agencies, Borden said, the company that by then owned her loan took her to court. CitiFinancial had sold her debt to Razor Capital LLC, a U.S.-based buyer of delinquent consumer receivables. The statement of claim filed on Nov. 21, 2013 in the Ontario Superior Court of Justice said Borden owed $9,417.78 for an outstanding loan with CitiFinancial, plus interest at 18 per cent and $950 in costs. That’s when Borden discovered there were hundreds of others people in the Greater Toronto Area being sued by the same company – and almost no rules to protect them.

“I would have been better off going to a loan shark in a back alley,” she said. “At least, then, I could have called the police.”

Very few countries have usury laws, which set the maximum amount of interest a lender can charge. Or, if they do, specialty lenders are frequently exempt from those limits. Canada’s Criminal Code makes it an offense to charge more than 60 per cent interest on a loan, a level many anti-poverty groups consider excessively high. In Ontario, so-called payday loans, of $1,500 or less are exempt and thus can charge more. Any additional regulations governing companies like CitiFinancial would be the responsibility of the provinces, a spokesperson for the Federal Consumer Agency of Canada said.

In Ontario, a complaint about false, misleading or deceptive practices would fall under the provincial Consumer Protection Act of 2002, a spokesperson for the consumer ministry wrote in an email. In cases of misrepresentation, the consumer can withdraw from a contract by writing to the business within one year. As well, if a lender fails to disclose or improperly discloses the cost of credit, the borrower is not liable for any costs above the appropriate amount, the ministry said. None of that would have helped Borden, whose signature was already on the papers. Indeed, she says she was told there was nothing the ministry could do for her. The ministry said it’s not aware of a consumer issue in the mid-sized loan industry and has not received any complaints about companies including CitiFinancial in 2014.

Toronto lawyer Kevin Klayman represents Razor Capital in the case against Borden. The Bloomington, Minnesota-based firm describes itself as a buyer, seller and broker of delinquent consumer debt.

“That’s kind of a new thing, especially in Canada. In America, it’s huge. But Canadian credit grantors – the banks – really don’t sell their debt the way American financial institutions do,” Klayman said. He is referring mainly to credit card debt.

A recent search of the public records at the courthouse at 393 University Ave., reveals Razor Capital is suing 481 people, most of them individuals owing around $7,000, Klayman said he couldn’t talk specifically about Razor’s business, but he described how the process works. A credit grantor, like CitiFinancial, will sell delinquent debt to a buyer, like Razor Capital, usually as a last resort after other collection efforts have failed. The debt buyer will pay cents on the dollar and then renew attempts to collect on it. There’s a two-year limit on the time frame to launch a lawsuit. The debt buyer usually wins a default judgment as very few debtors file a statement of defense.

The judgment allows the debt buyer to obtain a writ of seizure and sale against the debtor’s property. If the debtor’s financial situation improves, the debt owner may get a chance to collect. In the few cases where debtors file a statement of defense, it becomes trickier as the debt buyer usually doesn’t have the resources to dispute the defendant’s claim, he said.

With the help of a legal aid lawyer, Borden filed a statement of defense.

She hopes that’s the end of her case. But she’s not giving up the fight.

Borden is hoping that by going public with her story others will be encouraged to come forward and that their collective voices will drive change.

“Canada has virtually no laws on predatory lending,” she said.