Bill-184, payday loans: A perfect storm
Thursday, August 13, 2020 @ 11:15 AM | By Maggie Vourakes
What is changing?
Under the new rules, the monthly penalty interest that lenders can charge borrowers who default on their loans will be limited to 2.5 per cent. This rate is non-compounding and calculated on the outstanding principle. In addition, borrowers who bounce cheques or have insufficient funds in their bank account when the time for repayment comes can only be charged a maximum $25 penalty fee. Lenders can only charge this fee once, regardless of the number of times a payment is dishonoured. The rules take effect Aug. 20, 2020, and cannot be applied retroactively to loans in existence before this date.
The Ontario government introduced the changes under the COVID-19 Economic Recovery Act 2020, to provide relief to individuals who are facing financial hardship in repaying their loans. Enhancing protections for borrowers facing financial insecurity as a result of the pandemic is a good starting point, however limiting this protection to loans already in default may be too little, too late.
According to the Financial Consumer Agency of Canada (FCAC), payday loans represent some of 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 works out to an annual percentage rate (APR) of 391 per cent.
The amendments do not reduce the cost of borrowing. The 2.5 per cent cap will only apply to the default interest rate; an added charge applied when the borrower cannot pay back their loan in time. The repayment period also stays the same; borrowers have a maximum 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 on borrowers to prevent them from obtaining another loan from a different lender. This presents a tempting but potentially dangerous loophole for individuals who need to cover a shortfall quickly.
Bill-184, payday loans: A perfect storm
In July 2020, Ontario passed Bill-184, now formally known as the 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 eviction for rent unpaid during COVID-19.
Landlords cannot evict tenants who refuse to accept the terms of a rent repayment plan. However, the existence of a repayment plan is a factor the Landlord and Tenant Board (LTB) must consider before deciding whether to grant a landlord’s application for eviction. Tenants who refuse repayment plans or cannot afford the proposed terms can still request a hearing to explain their individual circumstances to the LTB.
It remains unclear how much weight the LTB will assign to the existence of a repayment plan, or the level of scrutiny that the terms of each plan will be given. In the meantime, the risk of eviction may push more tenants to seek out payday loans to cover the difference.
A recent report issued by the Canadian Centre for Policy Alternatives (CCPA) found that tenant households were already four times more likely than homeowning households to use payday loans. As the CCPA explains, the more economically vulnerable a family is, the higher the likelihood that they will need to resort to payday loans. Individuals 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 out under conditions of extreme necessity.
As most of Ontario enters Stage 3 of COVID-19, the anticipation to begin economic recovery is well underway. The financial relief that the Payday Loans Act amendments intend to provide individuals facing financial insecurity as a result of the pandemic may quickly be overshadowed by the introduction of rent repayment plans that push these same individuals to seek out more expensive credit. Payday loans are provincially regulated and provinces can legislate a lower cost of borrowing. For example, Quebec has strict legislation that limits the annual interest rate on its payday loans to just 35 per cent. Despite the lower interest rate, a 2019 Statistics Canada study that examined debt and financial distress among Canadian families found that Quebec residents are least likely to use payday loans (one per cent, compared to five per cent in Ontario).
Introducing legislation that may tempt individuals to use payday loans without reducing the cost to borrow may have unwanted consequences. As it stands, Ontario’s existing payday loan protections may not be enough to counter an accelerated borrowing rate that, if left unchecked, may inevitably hinder a speedy 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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