New Payday Loan Rules Enacted

So-called payday loans must rank up near the top of the list of things which may be viewed as both a blessing and a curse.  Regardless of how you view them, the companies which provide them will soon be subject to new regulations intended to protect their customers.

Payday loan companies have been the subject of substantial scrutiny in recent years.  Their practices have given rise to a number of class action law suits alleging the fees charged in exchange for these short-term loans exceed the maximum allowed in Canada’s Criminal Code. 

Now, the provinces are stepping up the degree to which the business practices of payday loan companies are regulated. 

B.C.’s Ministry of Public Safety and Solicitor General recently announced the introduction of the Business Practices and Consumer Protection (Payday Loans) Amendment Act.  This legislation became effective on November 1, 2009, establishing a range of prohibitions (contained in the Payday Loan Regulation) to restrict the activity of lenders.

A payday loan is defined as being for an amount less than $1,500 borrowed for a maximum of 62 days.  Loans of these types may be most attractive to individuals who don’t qualify for financing from chartered banks and trust companies.

It may be fair to say that these borrowers, because of their economic circumstances, can least afford to pay heightened interest rates.  They may also be challenged to calculate the true costs of borrowing in this manner as there can be a dizzying array of related fees.

Some companies have charged processing fees, brokerage and documentation fees, late (or “rollover”) payment fees, fees for obtaining a cash card, and certain other “transaction” fees in addition to high rates of interest.  In one court case, the plaintiff claimed that, within a few months, the various associated fees and interest had exceeded the principle amount of the original loan.

B.C.’s new legislation requires licencing of lenders by Consumer Protection B.C. (previously the Business Practices and Consumer Protection Authority), including those conducting business by telephone and over the internet.  It requires payday loan companies to clearly display their rates and fees.

The Act prohibits lending practices which unreasonably increase the borrower’s debt load.  This includes rollovers that require borrowers to pay significant extra fees for extending the time to pay a loan.

Of particular interest to employers, the Act also prohibits the inclusion of a provision giving the lender permission to collect on a delinquent loan from the borrower’s employer.  This is good news for employers as, presumably, it will take them out of the loop when it comes to the personal debt obligations of employees.

Dealing with demands for payment from lenders has long been a challenge for employers’ payroll departments.  Many are confused by lenders’ demand for payment and feel caught in the middle, not knowing precisely what their legal obligations are in this situation.

The Act prohibits lenders from charging more than 23% of the amount borrowed in interest and fees.  It also stops lenders from lending more than 50 percent of a borrower’s take-home pay or demanding repayment before the borrower’s next payday.

These legislative measures establish much-needed protections for a highly vulnerable segment of the borrowing public.  By tightening the reins on activities of this category of lenders, surely the opportunity for exploitation of people needing short-term cash will be curtailed.