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The Ontario government recently adopted new changes to the Payday Loans Act, 2008. The changes mark the first time the government has stepped in to legislate protections for defaulting borrowers.
What is changing?
Under the new rules, the monthly penalty interest that lenders can charge defaulting borrowers will be limited to 2.5%. This rate is not cumulative and calculated according to the principle of the outstanding amount. Additionally, borrowers who write bad checks or have insufficient funds in their bank account at the time of repayment may only be charged a penalty of up to $ 25. Lenders can only charge these fees once, regardless of the number of times a payment is declined. The rules come into effect on August 20, 2020 and cannot be applied retroactively to loans existing before that date.
Ontario government introduces changes in response to COVID-19 Economic Recovery Act 2020, to relieve people who face financial difficulties to repay their loans. Strengthening protections for borrowers facing financial insecurity as a result of the pandemic is a good place to start, but limiting this protection to loans already in default may be too weak, too late.
According to the Financial Consumer Agency of Canada (FCAC), payday loans are 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%.
The changes do not reduce the cost of borrowing. The 2.5 percent cap will only apply to the late payment interest rate; additional charges apply when the borrower cannot repay their loan on time. The repayment period also remains the same; borrowers have a maximum period of 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 getting another loan from another lender. This presents a tempting but potentially dangerous loophole for people who need to fill a shortfall quickly.
Bill-184, Payday Loans: A Perfect Storm
In July 2020, Ontario passed Bill-184, now officially known as Protecting Tenants and Strengthening Community Housing Act, 2020. The new legislation will bring several changes to the Residential Tenancies Act, 2006. Notably, landlords are encouraged to negotiate repayment plans with their tenants before seeking eviction for unpaid rent during COVID-19.
Landlords cannot evict tenants who refuse to agree to the terms of a rent repayment plan. However, the existence of a repayment plan is a factor that the Landlord and Tenant Board (LTB) should consider before deciding whether or not to accept a landlord’s eviction request. Renters who decline repayment plans or cannot afford the terms offered can always request a hearing to explain their personal situation to the CLI.
It’s still unclear how much weight the CLI will place on the existence of a repayment plan, or the level of scrutiny that the terms of each plan will give. In the meantime, the risk of eviction may cause more tenants to seek payday loans to cover the difference.
A recent report released by the Canadian Center for Policy Alternatives (CCPA) found that renter households were already four times more likely than owner households to use payday loans. As the CCPA explains, the more economically vulnerable a family, the more likely it is that they will have to resort to payday loans. People 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 dire need.
As most of Ontario enters Phase 3 of COVID-19, anticipation of the onset of economic recovery is well advanced. The financial relief that the Payday Loans Act amendments intended to provide individuals facing financial insecurity as a result of the pandemic can quickly be overshadowed by the implementation of rent repayment plans that push those same people to seek more expensive credit. Payday loans are regulated by the provinces and the provinces can legislate to reduce the cost of borrowing. For example, Quebec has strict legislation that limits the annual interest rate on its payday loans to just 35 percent. Despite the lower interest rate, a 2019 Statistics Canada study that examined the indebtedness and financial distress of Canadian families found that residents of Quebec are the least likely to use payday loans (one for percent, compared to five percent in Ontario).
Introducing legislation that might encourage individuals to use payday loans without reducing the cost of borrowing can have unwanted consequences. As it stands, Ontario’s current payday loan protections may not be sufficient to counter an accelerated borrowing rate which, if left unchecked, can inevitably hamper a rapid 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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