Written by Simon Grant and Adam W. Taylor
Providers of payday loans in Ontario, take notice—the Government of Ontario is seeking input on the implementation of new regulations intended to strengthen consumer protection which will have wide-ranging impacts on the regulation of the day-to-day operations of payday lenders.
Payday Lending and the Payday Loans Act, 2008
Payday lenders provide small amounts of money to borrowers on a short-term, often high cost basis in exchange for future payment, like a post-dated cheque or pre-authorized debit. Payday loans are typically the most expensive form of consumer credit, with the cost of borrowing in Ontario currently capped at $18 per $100 borrowed pursuant to the Payday Loans Act, 2008 (PLA). This cost will be lowered to $15 on January 1, 2018. The annual percentage rate of a 16-day payday loan at a rate of $15 per $100 borrowed is 342 percent.
Although payday loans can be an important source of credit under certain circumstances, their high-cost and short terms are perceived by the Government of Ontario to create financial risks for vulnerable consumers. The PLA was implemented in order to address the risks inherent to consumers of payday loans, regulating, among other things, the risks of repeat borrowing, the costs of payday loans and the disclosure of information to consumers. The Putting Consumers First Act (Consumer Protection Statute Law Amendment), 2017 amends the PLA to provide stronger authority to further address these risks. To aid in the implementation of the Putting Consumers First Act (Consumer Protection Statute Law Amendment), 2017, the Government of Ontario has released a consultation paper, calling for input on the proposed amendments.
Strengthening Protection for Consumers of Alternative Financial Services — Phase One
"Strengthening Protection for Consumers of Alternative Financial Services — Phase One" was posted by the Ministry of Government and Consumer Services on July 7, 2017. The paper outlines the proposed amendments to the PLA intended to: i) enhance information provided to consumers; ii) improve payday loan affordability; and iii) directly address the frequency of borrowing. If brought into force, these amendments will have significant impacts on regulation of the operations of payday lenders throughout Ontario. Specifically, the proposals include:
- Extending payment plans via installments where a payday loan company lends money to a borrower for the third time in 100 days.
- Requiring payday lenders to take the borrower's individual circumstances into account when determining the size of the payday loan. The proposed limit will be set at 40 percent of the borrower's net pay over the term of the loan.
- Instituting a mandatory 6-day waiting period between payday loans.
- Adding APR to existing cost of borrowing disclosures, and using a sample loan of $500 over a 14-day term for illustrative purposes.
- Provide information to potential consumers regarding credit counselling services provided by not-for-profit counselors.
It is proposed that the first phase of regulations will come into effect in early 2018, with the second phase addressing information disclosure to take effect in early 2019. In the face of impending change, payday lenders would be wise to re-evaluate internal lending procedures and prepare for impending changes to the regulation of their operations.