Ontario caps payday loans charges
- PUBLICATION: Bankrate.com
- BYLINE: Michelle Warren
- DATE: Wednesday, April 29, 2009
The Ontario government is introducing a slew of new rules and capping the interest chargeable by payday loans companies at $21 per $100 borrowed in response to ongoing friction in an industry often accused of dubious lending practices and outrageous fees aimed at people who can least afford them.
The legislature passed an act to regulate the industry in June 2008 and set up an advisory board to consult with all interested parties. In addition to the cap, the province's Ministry of Small Business and Consumer Services' new rules include:
- requiring payday lenders and brokers to be licensed.
- allowing borrowers a two-day cooling off period to cancel the loan without reason or incurring penalty.
- prohibiting certain practices, such as rollover loans when customers get a second loan from a lender before the first is repaid.
- establishing an Ontario Payday Lending Education Fund to be paid for by licensed lenders.
- ensuring lenders include the total cost of borrowing a customer is required to pay when entering into a payday loan agreement.
Province seeks balance
Harinder Takhar, Minister of Small Business and Consumer Services, says the rules reflect a balanced approach to payday lending that ensures the service is there for people who need immediate financial assistance, while offering protection from certain lenders and damaging lending practices.
"Enforcement of the new rules will also benefit the responsible, ethical members of the industry who provide a high quality of service to consumers. The new rules will level the playing field by removing the ability of less responsible operators to profit from using predatory practices and trapping customers into a cycle of debt."
Lenders applaud new rules
Stan Keyes, president of the Canadian Payday Loan Association (CPLA), welcomes the changes. "The CPLA and its membership have been asking for stronger consumer protection that would allow for a viable competitive industry."
The average payday loan is about $300 for a term of two weeks, which under the new cap will cost the borrower $63; the interest rate, annualized, amounts to about 600 percent per year. The Maximum Total Cost of Borrowing Advisory Board recommended the maximum amount after consulting with and hearing from more than 20 community advocacy groups, industry representatives, financial experts and academics.
Caps are already in place in other provinces, including Manitoba at $17 per $100 borrowed, British Columbia at $23 and Nova Scotia at $31.
Who stands to benefit?
Payday loan companies tend to service people who don't have or qualify for credit, many of whom are living paycheque to paycheque and are unable to cover expenses or face unforeseen costs. However, John Lawford, counsel for the Public Interest Advocacy Centre (PIAC) in Ottawa, says studies show usage "is creeping into other income brackets. Anything unexpected can put people over the edge (financially)."
Lenders say it's a risky business and they charge high fees (as compared to most banks and other lenders) to protect themselves from people who default: there are no credit checks and few means to ensure borrowers don't simply walk away. Most lenders require customers to show pay stubs proving three months of continuous employment, proof of address and have an active chequing account. In exchange for the money, borrowers provide a post-dated cheque, a pre-authorized debit or other payment.
While current fees range widely, the CPLA says the average fee in Ontario is $25 per $100. Keyes notes the $21 cap is going to put pressure on some of the smaller players with just one or two storefronts. "There's no question that many of the lenders are going to have to tighten their belts and get costs under control."
Critics maintain $21 cap is too high
PIAC, however, is condemning the $21 on $100 lending rate as "astronomically high," arguing the rate will hurt those most vulnerable during this economic downturn. The group has long lobbied for licensing of the industry and a halt to rollover or back-to-back loan practices.
Lawford says that while the new regulations have some teeth, notably the two-day cooling off period, he's not impressed with the fee cap. "The rate just leads people into revolving debt… it's quite a dangerous (economic) time for borrowers."
He also has questions how the new regulations will be enforced and by whom. He's concerned about policing dubious lenders who he says are known to frighten those who bounce cheques (and even their family members) by harassing people at work, visiting them at home to demand payments and making empty threats of prosecution.
New registrar to enforce rules
The rules are to be fully in effect by July 1, when the province will have the power to prosecute violations and discipline lenders.
Takhar says approving licence applications and enforcement will fall under the mandate of the Registrar of Payday Lending in the Ministry's Consumer Protection Branch. "The registrar will have inspectors in the field to monitor the practices of lenders, inspect their records and premises for compliance, and respond to consumer complaints."
Those who fail to comply with the Payday Loans Act, 2008, and its regulations could face fines, licence suspension or revocation and prosecution.
Keyes is confident, however, the regulations and licensing will go a long way in boosting the industry's reputation, adding that CPLA members already follow a code of best business practices and the organization has a Customer Response and Resolution Bureau.
"There are unscrupulous lenders out there who do take advantage of borrowers." That said, he believes the industry serves a valuable purpose. "Without the payday loan product, where do these individuals turn; pool halls, pawnshops or unscrupulous lenders?"
That was the norm up until the early 1990s when payday loan companies first appeared in Canada. The industry grew rapidly, and today, there are about 1,350 payday loan storefronts in Canada, with about 750 operating in Ontario. Loans are also available by phone or on the Internet. The total payday loan volume is estimated at about $2 billion per year, with the average storefront lending $1.5 million and making about 5,000 loans.
Michelle Warren is a freelance writer living in Toronto.