A key feature of Ontario’s consumer protection framework for users of payday loans is a limit to the total cost of borrowing. To this end, the government of Ontario has established the Maximum Total Cost of Borrowing Advisory Board (the “Board”). This is an independent, expert Board whose mandate is to provide a recommendation to the Minister of Small Business and Consumer Services on an appropriate maximum to the total cost of borrowing for payday loan agreements in Ontario. The Board may also recommend whether different total cost of borrowing ceilings should be provided for different classes of borrowers.
The purpose of this consultation paper is to solicit input on this very important consumer protection initiative. Your answers to the series of questions in the following pages will help guide the Board to a total cost of borrowing recommendation that protects the interests of Ontario borrowers and permits licensed payday lenders to provide for the short-term credit needs of borrowers.
Payday Loans
A payday loan is a short-term, unsecured loan, intended to address a cash shortfall until the borrower’s next payday. The average payday loan in Canada is approximately $300 with a term of 10 to14 days. Borrowers are required to provide a post-dated cheque or pre-authorized debit to cover the principal amount and all interest and fees. This would be cashed on their next payday.
To qualify, lenders generally require the borrower to provide proof of three months of continuous employment, produce a recent utility bill in their name to establish address, and provide three months of their bank records. Payday lenders do not require a credit check or assessment of the borrower’s ability to repay. While the principal amount of a payday loan varies with the individual borrower and the lender, studies indicate that the norm in Canada is a maximum advance of 50 percent of the borrower’s net pay.
The cost of borrowing associated with payday lending is many times higher than the credit products provided by banks and credit unions. Payday loan rates, normally expressed as a dollar cost per hundred dollars borrowed, when annualized are often in excess of 750% and sometimes over 1000%. The chart below illustrates how payday loan charges translate into very high annual percentage rates.
Other short-term loans or loan substitutes available to consumers are typically less expensive with modest monthly or annual charges. At major banks, overdraft protection might bear a $5 charge in the month that the account holder is overdrawn and interest of approximately 20 per cent per annum until the amount is repaid. Personal lines of credit are less expensive and are based upon the borrower’s credit standing. The most expensive is a credit card advance with annualized borrowing costs approaching 30 per cent.
The Payday Loans Act, 2008
For a number of years, the practices of payday lenders have drawn the attention of poverty activists, consumer groups, politicians, and the media. Federal Bill C-26, An Act to Amend the Criminal Code, was introduced in the context of the growth of the payday lending industry and the mounting concerns surrounding it. In provinces designated under Bill C-26, it is not the criminal interest rate that will apply to payday loan agreements but the maximum total cost of borrowing set by the province.
On June 18, 2008, the Ontario Payday Loans Act, 2008 (the “Act”) received Royal Assent. Under the Act, payday lenders and payday loan brokers would have to be licensed and operate within a consumer protection framework. This framework prohibits the most controversial practices of some industry operators, such as rollovers and concurrent loans. Borrowers will have recourse if they have dealt with a non-compliant lender or broker and there are strong penalties for lenders and brokers operating in contravention of the Act. Additionally, the Act provides for the establishment of a limit to the maximum total cost of borrowing.
Ontario’s new legislative/regulatory framework has been developed to adhere to the following three principles:
• To protect borrowers who avail themselves of payday loans.
• To create public confidence in the integrity of the payday lending market.
• To develop a proportionate licensing regime that allows payday lenders to continue to operate and serve a market that depends on their services.
Setting the Maximum Total Cost of Borrowing for Payday Loan Agreements
Federal Bill C-26 exempts payday loan agreements from the application of the criminal interest rate provision of the Criminal Code where the principal amount is less than $1500 and the term is less than 62 days, providing that lenders are licensed and a province has received designation. Once designated, a province sets the maximum total cost of borrowing for these payday loan agreements. Ontario has elected to seek the advice of the Board before deciding what the appropriate maximum total cost of borrowing is for payday loan agreements in Ontario.
Under the Act, “cost of borrowing” includes the total of all amounts that a borrower is required to pay under, or as a condition of entering into, a payday loan agreement, but does not include default charges and the repayment of the advance. This means that if someone wishes to borrow $300, any and all amounts that they are required to pay to receive the $300 is considered part of the cost of borrowing. It does not matter if the charges are called interest, brokerage fees, administration charges, or any other name; they are part of the cost of borrowing.
Public input on what is the appropriate upper limit to the total cost of borrowing for payday loan agreements in Ontario is key to the work of the Board. Answers to the following questions will make a valuable contribution to this important consumer protection initiative.
1. What do you believe should be the maximum total cost of borrowing for payday loan agreements in Ontario?
2. What criteria should be used to determine a maximum total cost of borrowing for payday loan agreements in Ontario?
3. What societal values and/or impacts should be considered in determining a maximum total cost of borrowing for payday loan agreements in Ontario?
4. Should there be different upper limits to the total cost of borrowing for different classes of borrowers, i.e., how should different upper limits be determined and what should those limits be?
5. What impact or benefit would a different upper limit on the total cost of borrowing have on the behaviour or circumstances of the different classes of borrowers?
We Want Your Feedback
The Board invites your comments on the issues raised in this paper and any additional comments related to the total cost of borrowing for payday loan agreements in Ontario. The Board thanks you for the time and effort you invest in this process. As consumers, members of the business community, social policy groups and academics, your input, advice, views and suggestions are important to ensuring that an appropriate maximum to the total cost of borrowing for payday loan agreements in Ontario is established.
Please submit comments by October 31, 2008 through any of the following ways:
Writing:
Maximum Total Cost of Borrowing Advisory Board
C/O Ministry of Small Business and Consumer Services
5th Floor, 777 Bay Street
Toronto, ON M7A 2J3
E-mail: paydaylending@ontario.ca
Your Privacy is Protected
For individuals making submissions - The Ministry of Small Business and Consumer Services is subject to the Freedom of Information and Protection of Privacy Act and may wish to make your submission or portions of your submission available to the public in future. We will not disclose your identity in relation to your submission without your express consent.
For organizations making submissions - The Ministry of Small Business and Consumer Services is subject to the Freedom of Information and Protection of Privacy Act (FIPPA) and may wish to make your submissions, or portions of your submissions available to the public in the future. If you will be providing confidential information in your submission that could reasonably be expected to cause you some harm if it were to be publicly disclosed, we would ask that you identify those portions of the submission in your covering letter and your concerns. The Ministry will maintain this information in confidence subject to the requirements of FIPPA, or an Order of a court or tribunal.
