Payday Loans

A payday loan is defined as a short term loan of a relatively small amount, which must be repaid on the borrower’s next payday. To qualify for a payday loan, the borrower must have a regular source of income, usually from a job, but also pensions or other sources, and even a bank account. In general, the lender pays a certain amount up to a certain percentage of net salary for a period of 1 to 14 days, ending on payday. The borrower gives the lender a check postdated to the day of the date of payment from the source of income for the full amount of principal, plus interest and other costs.

The concerns for the industry of payday loans

The provincial and territorial governments, as well as consumer advocacy groups, have expressed their concerns about questionable practices payday loan industry – including the high cost of borrowing, insufficient disclosure of contract terms, unfair collection practices, and debt increasing because of the overlap of the loans.

Governing Law and criminal interest rates

Currently, under section 347 of the Criminal Code of Canada, anyone who enters into an agreement or arrangement to receive interest at a rate of crime (defined as greater than 60% per year), or receives interest at a rate of crime, is a crime. However, Section 347 was originally designed to address usury and its links with organized crime, not as a tool for consumer protection to regulate prices. Despite its intent, section 347 has been interpreted to apply to most loan agreements in Canada, including payday loans.

Pursuant to section 347, the penalties are significant:

A maximum penalty of five years (on conviction), or
A maximum penalty of six months in jail and / or a fine of $ 25,000 (on summary conviction to a sentence).
Proposed changes

Under the proposed amendments to the Penal Code, the industry of payday loans could continue to operate, but would be subject to controls.

The proposed amendments:

payday lenders free in the provinces and territories that use a system of consumer protection, the application of Section 347 of the Criminal Code of Canada;
require the governments that regulate this sector a limit to the total cost of consumer loans.
These changes do not apply to federally regulated financial institutions such as banks. Their purpose is to facilitate provincial regulation of an industry that currently is not regulated. Banks and other financial institutions regulated at the federal level in Canada are already subject to federal laws, including the Bank Act, the Trust and Loan Companies Act Cooperative Credit Associations Act, the Companies Act, and insurance.