Canada has historically limited the interest payable on a loan under section 347 of the Criminal Code. Under those provisions, commonly referred to as usury laws, any entity charging in excess of 60% may be guilty of an indictable offense and could face punishment of up to 6 years in prison or a fine of up to $25,000. These laws were put in place to protect borrowers, but have always been predicated on the idea of a long term loan for a considerable sum of money. This has left a gap in the marketplace where small loans for short periods of time were effectively put out of reach of nearly every consumer who doesn’t already possess a credit card that allows for cash advances or has reached the limit on all their credit cards.
The Early Days
Before 2006, payday loan companies were circumventing the usury laws by charging fees separate from the interest rates, thus keeping their interest rates below the required threshold. For example, A OK Payday Loans charged customers an interest rate of 21 per cent annually, plus a “processing fee” of C$9.50 for every $50 borrowed. Also, if a customer needed to delay payment, a “deferral fee” of $25 was charged for every $100 for this deferral. Concerns were raised about some questionable practices in the industry, including inadequate disclosure, high costs, collection practices, and the potential for spiraling debt if a loan is rolled over. In annualized terms, once all interest rates and fees are combined, borrowing $100 for two weeks could result in an interest rate between 335 per cent and 650 per cent, well in excess of usury prohibitions.
In response to a class action lawsuit (Kilroy versus A OK Payday Loans), the Supreme Court of British Columbia ruled that these fees were actually interest, and thus A OK was charging a criminal interest rate. The decision was unanimously affirmed by the British Columbia Court of Appeal, and the payout is anticipated to be several million dollars.
Due to legislative action in 2009, payday loans are now permitted in Canada under Canadian Criminal Code Section 347.1, but only if there is provincial legislation regarding payday loans in the borrower’s province. If there is no provincial legislation, such as in Newfoundland and Quebec, payday loans are restricted by usury laws, which consider interest rates exceeding 60 per cent annually to be criminal. Since 2006, all provinces except Quebec and Newfoundland have legislation that deals with payday loan restrictions. Quebec outright prohibits all payday loans, while the provinces of Saskatchewan and British Columbia impose specific regulations, including a lower interest rate cap. International response has praised Canada’s regulations to prevent predatory lenders and the potential abuses of payday loan companies.
The legal safe zone carved out by the legislation has defined a payday loan as any loan of up to $1500 with a term of 62 days or less. In practice, loans of that magnitude are not very common, as there are many additional restrictions placed on payday loans on a provincial basis that limit the size and frequency of loans. A typical limitation is restricting the amount borrowed to be less than 50% of the amount of the upcoming paycheque. In order to qualify for a $1500 loan when being paid semimonthly, a borrower would have to have a take home income of $72,000 which works out to roughly $100,000 in pre-tax income.
According to Statistics Canada, approximately 3 per cent of Canadian households have utilized payday loan services. Most of these families borrow $300 for a period of two weeks. The business has grown rapidly in its young history, from just a few lenders in the early 1990s to more than 1,500 today. The industry was mostly unregulated in the beginning, since most of the statutes for mainstream banks and financial institutions did not apply to payday loan companies because they did not accept deposits.
However, not all problems with the industry have been resolved. Even after the new legislation was introduced, some companies are still accused of overcharging customers. According to CBC News, two Manitoba payday loan companies are facing a class action lawsuit alleging that customers have been overcharged. The suit alleges The Cash Store and Instaloans charged customers in excess of the maximum rates allowed by the province. Paul Bennett, class action lawyer from the Hordo Bennett Mounteer firm of Vancouver, said that payday lenders can charge a maximum rate of 17 per cent, interest and fees combined. The lawsuit contends that the companies circumvented the rules by charged debit card fees, which were required for customers to access their cash. In one case, a $170 loan cost the borrower $84 in fees, while the province allows a maximum fee of $36.
Beatrice Dyce, acting director of the Manitoba Consumer Protection Office, contends that debit card fees, if required under the terms of the loan, would have to be included in the overall maximum of 17 per cent.
Bennett says if the court rules in favour of the lawsuit, the lenders would have to return all fees paid of the borrowers’ loans. Bennett has been at the forefront of the payday loans class action suits, as he also represented Doris Kilroy in the Kilroy vs. A OK Payday Loans class action lawsuit in 2006. The firm has also concluded several lawsuits against the payday loan industry in the intervening years.