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The Ontario government recently passed new changes to the Payday Loans Act 2008. The amendments mark the first time the government has stepped in to legislate protection for defaulting borrowers.
What is changing?
Under the new rules, the monthly penalty interest lenders can charge defaulting borrowers will be capped at 2.5%. This rate is not compounded and calculated on the principle of the outstanding amount. Additionally, borrowers who bounce checks or don’t have enough funds in their bank account at the time of repayment can only be charged a maximum penalty of $25. Lenders can only charge this fee once, regardless of how many times a payment is declined. The rules come into effect on August 20, 2020 and cannot be applied retroactively to loans existing before that date.
The Ontario government introduced the changes in light of COVID-19 Economic Recovery Law 2020, to help individuals who are experiencing financial difficulties repay their loans. Improving protection for borrowers facing financial insecurity due to the pandemic is a good start, but limiting that protection to loans already in default may be too little, too late.
According to the Financial Consumer Agency of Canada (FCAC), payday loans are among the most expensive forms of credit available. In Ontario, lenders can charge a maximum of $15 for every $100 borrowed. For a two-week loan, this equates to an annual percentage rate (APR) of 391%.
The amendments do not reduce the cost of borrowing. The 2.5% cap will only apply to the default interest rate; an additional charge applied when the borrower cannot repay the loan on time. The repayment period also remains the same; borrowers have a maximum of 62 days to repay their loan.
In Ontario, individuals must repay their loan in full before they can take out a second loan from the same lender. However, there are no restrictions placed on borrowers to prevent them from obtaining another loan from another lender. This presents a tempting but potentially dangerous escape route for people who need to quickly cover a shortfall.
Bill-184, Payday Loans: A Perfect Storm
In July 2020, Ontario passed Bill 184, now officially known as Protecting Tenants and Strengthening Community Housing Act, 2020. The new legislation will introduce several changes to the Residential Tenancies Act 2006. Notably, landlords are encouraged to negotiate repayment plans with their tenants before seeking an eviction for unpaid rent during COVID-19.
Landlords cannot evict tenants who refuse to agree to the terms of a rent refund plan. However, the existence of a repayment plan is a factor that the Landlord and Tenant Board (LTB) must consider before deciding whether to grant a landlord’s eviction request. Tenants who refuse repayment plans or who cannot afford the proposed terms can still request a hearing to explain their personal situation to the CLI.
It remains unclear what weight the CLI will place on the existence of a repayment plan, or the level of scrutiny to which the terms of each plan will be subject. In the meantime, the risk of eviction may push more tenants to apply for payday loans to cover the difference.
A recent report published by the Canadian Center for Policy Alternatives (CCPA) found that renter households were already four times more likely than owner households to use payday loans. As the CCPA explains, the more economically vulnerable a family is, the more likely they are to have to resort to payday loans. People who use payday loans are unlikely to have access to lines of credit or credit cards with lower interest rates. In almost all cases, payday loans are sought under conditions of extreme need.
As most of Ontario enters Stage 3 of COVID-19, anticipation for the onset of economic recovery is well underway. The financial relief that the Payday Loans Act amendments intended to provide for people facing financial insecurity as a result of the pandemic risk being quickly eclipsed by the introduction of rent repayment schemes that push these same people to seek more expensive credit. Payday loans are regulated by the provinces and the provinces can legislate to reduce the cost of borrowing. For example, Quebec has strict legislation that limits the annual interest rate on its payday loans to only 35%. Despite falling interest rates, a 2019 Statistics Canada report study which examined the debt and financial distress of Canadian families found that residents of Quebec are the least likely to use payday loans (1%, compared to 5% in Ontario).
The introduction of legislative measures that may induce individuals to use payday loans without reducing the cost of borrowing can have undesirable consequences. As it stands, current payday loan protections in Ontario may not be sufficient to counter an accelerated borrowing rate that, if left unchecked, can inevitably impede a rapid economic recovery.
Maggie Vourakes is currently a law student at Osgoode Hall Law School with a background in journalism.
Photo Credit / ChrisGorgio ISTOCKPHOTO.COM
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