Ontario Government Proposes Reforms to Payday Lending
My first article for Insauga was about the issue of payday loan companies and whether they should have more stringent oversight on their activities. If they cannot be banned outright, was it perhaps possible that more oversight and rules to protect vulnerable people could be implemented? Certain local politicians have taken up this cause, such as Hamilton city councillor Matthew Green, and the subject has been a topical matter amongst many municipal administrations across Ontario and beyond.
In response to these concerns over the payday lending industry, the Ontario government has released proposed amendments to the Payday Loans Act. The public can submit their opinions via the email link at the bottom of the link on reforming payday lenders, otherwise known as "Alternative Financial Services" (AFS).
The deadline to submit your thoughts to the Ministry of Consumer Services is August 21.
The Alternative Financial Services Consultation Paper outlines what falls under the basic definition of an AFS, which are financial services provided outside of the traditional financial institutions like banks and credit unions. AFS's considered by the consultation report include payday lenders, cheque cashing, rent-to-own, and instalment loans. A number of suggested changes to the existing legislation were contained in the paper.
The following are some of the proposed reforms as outlined in the consultation paper.
Extended Payment Plans
The Ontario government would propose the creation of an optional extended payment plan for repeat borrowers. Under this proposal, a payday loan company lending money for a borrower for the third time in 100 days would be required to allow borrowers to repay the loan in multiple instalments. This would spread out the cost of a payday loan over more time, giving consumers the option to repay the loan gradually.
According to consultations with stakeholders, borrowers find the short term and lump sum payment of payday loans difficult to manage. This measure would be designed to give consumers more options in paying back their loans on time, or if they want to pay the loan in full and end their extended payment plans.
Responsible Lending Standards
Another proposal is to require payday lenders to take each borrower's circumstances into account when determining the size of a payday loan. Prior to entering into an agreement, many lenders will determine the borrower's net income. But the high incidences of repeat borrowing have shown many borrowers find their loans unaffordable and they end up repeatedly borrowing.
The government looked at similar approaches to lending standards in British Columbia, Saskatchewan and Manitoba. In those provinces, the formula used by lenders to calculate the borrower's expected net pay would be: Net Pay = MNI x 12. MNI standing for Monthly Net Income and 12 being the number of pay periods in a year. The MNI will be the borrower's net income for the previous calendar year. Ontario is proposing to limit the loan amount to 40 per cent of a borrower's net pay.
Under the current system payday lenders can only enter into a new agreement with a borrower if 7 days have passed since the borrower has paid off the full outstanding balance of the first loan, or if the borrower has provided proof of repayment on the first loan. What this means was that a borrower could take out another loan on the same day as repaying it.
The Ontario government is proposing to shorten the waiting period from 7 days to 6 days and that the provision that enables a borrower to receive another loan when proof of repayment is provided be eliminated. 6 days is short enough that an individual being paid weekly would still have access to payday loans every pay period. The government concluded that the proof of repayment had little impact on the consumer's evaluation of their options, hence why they propose removing it.
Improving Existing Disclosures
Consumer advocates have called for the annual percentage rate (APR) to be included in the disclosure of the cost of borrowing for a payday loan. APR is a common tool for comparing the cost of credit, allowing consumers to easily compare the relative cost of different forms of credit regardless of the term length.
The government proposes to implement such a disclosure on the costs of borrowing, and additionally when those costs are used for illustrative purposes the lender to show the sample period as 14 days with the example loan being in the amount of $500.
This proposal would require payday lenders to provide information for borrowers about not-for-profit credit counselling, who can help consumers manage their debts. The report mentions that some payday lenders have publicly supported this idea, which may sound counter intuitive if the industry was interested in just making profits. But in the long term, this might be helpful for both lenders and borrowers if they can keep the latter solvent by giving them some help in managing their credit.
Exempting Lower Cost Loans
There is a broad definition for what is considered a payday loan, and that definition may capture some lower costs loans that are not that serious or perpetual. The government proposes to exempt credit unions from the requirements of the Payday Loans Act and its regulations.
There are also other proposals, such as mandating that advertising for payday lending include certain information, signage that compares the cost of a payday loan against another consumer credit product, and the need to modify website designs for AFS's. Other measures that were discussed includes those affecting minimum lending standards, prohibiting contact to solicit refinancing, and rent to own agreements.
For those of you who are familiar with using payday lending and related services you should examine the consultation paper fully to see how these changes affect you.
Photo courtesy of ww2.cfo.com
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