Backgrounder

Payday Lending Legislative Amendments

Background

Payday lending is a growing industry in Canada. Virtually non-existent until 1994, the payday lending industry is believed to have grown to more than 1,300 outlets. Canada’s New Government has introduced proposed amendments to the Criminal Code which would allow for the regulation of the payday lending industry by the provinces and territories.

Payday Loans

A payday loan is a short-term loan for a relatively small amount, to be repaid at the time of the borrower’s next payday. In order to qualify for a payday loan, the borrower must have a steady source of income, usually from employment, but also from pensions or other sources, and a bank account. The lender will typically lend up to a specified percentage of the net pay, for a period of 1 to14 days, ending on the payday. The borrower provides the lender a cheque, post-dated to the borrower’s next expected income payment date, for the total amount of principal, plus interest and other fees.

Concerns Raised Regarding the Payday Loan Industry

Provincial and territorial governments, as well as consumer advocacy groups, have raised concerns over incidents or questionable practices within the payday industry. These concerns have involved the high cost of borrowing, insufficient disclosure of contractual terms, unfair collection practices, and the spiralling debt loads resulting from rolling over loans.

Current Legislation and Criminal Interest Rate

Section 347 of the Criminal Code of Canada makes it is an offence to enter into an agreement or arrangement to receive interest at a criminal rate (defined as exceeding 60% per year), or to receive a payment of interest at a criminal rate. Section 347 was initially introduced to combat the practice of loan sharking, and its links to organized crime. It was not intended to be a consumer protection tool for economic price regulation. Despite its intended purpose, section 347 has been interpreted as applying to most lending arrangements in Canada, including payday lending.

The penalties under section 347 are significant:

• A maximum penalty of five years imprisonment (on indictment); or
• A maximum penalty of six months imprisonment and/or a fine not exceeding $25,000 (on summary conviction).

Proposed Amendments

Under the proposed amendments to the Criminal Code, the payday lending industry could continue to operate, but with controls.

The proposed amendments will:

• Exempt payday lenders, who operate in provinces and territories having measures in place to protect borrowers from the application of section 347 of the Criminal Code of Canada; and
• Require jurisdictions that regulate the industry to place limits on the cost to consumers of payday borrowing.

These amendments will not apply to federally regulated financial institutions, such as banks. They are intended to facilitate provincial regulation of an industry that is not currently regulated. Banks and other federal financial institutions in Canada are already subject to federal legislation, including the Bank Act, the Trust and Loan Companies Act, the Cooperative Credit Associations Act, and the Insurance Companies Act

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Department of Justice
October, 2006