The Minister of Justice and Attorney General of Canada, the Hon. Vic Toews, introduced Bill C-26, An Act to amend the Criminal Code (criminal interest rate), in the House of Commons on 6 October 2006. Bill C-26 amends section 347 of the Criminal Code of Canada,(1) which criminalizes the charging of usurious interest rates.
The expanding presence of payday loan companies suggests that some Canadians are willing to pay rates of interest in excess of those permitted under the Criminal Code for their payday loans. Bill C-26 is designed to exempt payday loans from criminal sanctions in order to facilitate provincial regulation of the industry. Thus, the exemption applies to payday loan companies licensed by any province that has legislative measures in place designed to protect consumers and limit the overall cost of the loans.
A payday loan is a short-term loan for a relatively small sum of money provided by a non‑traditional lender. Statistics from the Canadian payday loan industry suggest that the average payday loan is valued at $280 and is extended for a period of 10 days.(2) In order to qualify for a payday loan, the borrower generally must have identification, a personal chequing account, and a pay stub or alternative proof of a regular income. Payday lenders typically extend credit based on a percentage of the borrower’s net pay until his/her next payday (generally within two weeks or less). The borrower provides the payday lender with a post-dated cheque, or authorizes a direct withdrawal, for the value of the loan plus any interest or fees charged.
In Canada, section 347 of the Criminal Code makes it a criminal offence to charge more than 60% interest per annum. If the rate of interest on payday loan transactions is calculated according to the definitions and methods specified in the Criminal Code, some payday loan companies appear to be charging interest in excess of 1,200% per annum.(3)
Shared federal-provincial jurisdiction over payday lenders has meant that they have been left essentially unregulated.(4) Provinces are unable to regulate the price of a loan, since any attempt to do so would conflict with section 347, and could therefore be challenged as ultra vires of the province. Moreover, section 347 has not been used in a criminal context to curtail the activities of payday lenders. The consent of a provincial Attorney General is required to prosecute an offence under section 347. Provincial governments have yet to prosecute a payday lender; they may fear that the lack of a payday loan company alternative would result in consumers using illegal alternatives such as loan sharks.
If the payday loan industry is not regulated, its future may ultimately be determined by a number of class action lawsuits currently proceeding through Canadian courts. These lawsuits claim that consumers were charged fees in excess of the rate allowable under the Criminal Code rate, and seek to recover hundreds of millions of dollars’ worth of interest. Should these class action lawsuits succeed, they could potentially bankrupt the payday loan industry.
Faced with jurisdictional challenges, federal and provincial/territorial governments have been negotiating a regulatory regime that would oversee payday lenders. The Consumer Measures Committee (CMC) Working Group on the Alternative Consumer Credit Market was established by Industry Canada and the provinces to explore ways of providing standard levels of consumer protection across Canada. In December 2004, the CMC published a consultation document that contained a proposed consumer protection framework and a number of possible measures for discussion.(5) Consultations with stakeholders ensued.
Bill C-26 opts for provincial regulation of the market rather than an outright ban on payday loans.
Clause 1 of Bill C-26 updates the wording of section 347 of the Criminal Code. The clause replaces the word “notwithstanding” by “despite,” following modern statutory drafting practices, and replaces “twenty-five thousand dollars” by “$25,000.”
Clause 2 amends the Criminal Code by adding new section 347.1(1), which retains the definition of “interest” found in section 347(2),(6) and adds a definition of “payday loan.” A payday loan is defined as “an advancement of money in exchange for a post-dated cheque, a preauthorized debit or a future payment of a similar nature but not for any guarantee, suretyship, overdraft protection or security on property and not through a margin loan, pawnbroking, a line of credit or a credit card.”
Clause 2 of Bill C-26 then introduces new section 347.1(2), which exempts a person who makes a payday loan from criminal prosecution if:
New section 347.1(2) does not apply to federally regulated financial institutions, such as banks.
New section 347.1(3) states that the provisions outlined above will apply in provinces that are designated by the Governor in Council, at the request of the province. The designation is dependent on the province enacting legislative measures that “protect recipients of payday loans and that provide for limits on the total cost of borrowing under the agreements.” New section 347.1(4) allows the Governor in Council to revoke the designation if requested to do so by the province, or if the legislative measures referred to above are no longer in force.
The recent growth of the payday loan industry has focused attention on the industry and its practice of charging relatively high rates of interest.(7) Critics have called for the prosecution of payday lenders under the existing Criminal Code provisions, even if such action reduces the profitability of the industry or results in its abolition.
Proponents of the industry point to the growth of payday loan companies as evidence that the industry is fulfilling an otherwise unmet need for short-term credit and/or convenience. Proponents have argued that instead of an outright ban on payday loans, the federal government should allow provinces to regulate the industry in the interests of restricting some of the more abusive industry practices, such as insufficient disclosure of contractual terms, aggressive and unfair debt collection practices, and the “rolling over” of loans. The payday loan industry itself has proposed self-regulation as a means of addressing some of the concerns associated with lending practices.(8)
Since the introduction of Bill C-26, some commentators have suggested that the federal government has merely transferred the problem of payday loans to the provinces, which may or may not adequately regulate them.(9) Transferring responsibility to the provinces may also lead to a patchwork of different laws and regulations, and a lack of uniformity in enforcement.(10)
Other commentators advocate reforms to section 347 beyond those provided by Bill C-26. For example, the Supreme Court of Canada has stated that section 347 “is a deeply problematic law.”(11) In addition, there is concern that the provisions set out in Bill C-26 could cause legal uncertainty in relation to negotiating larger-scale financial transactions, such as bridge loans and convertible debentures.(12)
Finally, a number of other stakeholders have made recommendations that they believe would reduce the need for payday loan companies, including:(13)
Some of the concerns expressed by stakeholders were shared by members of the Standing Senate Committee on Banking, Trade and Commerce during its study of Bill C-26. The Committee reported Bill C-26 without amendment, but included observations expressing reservations about the Bill as drafted. The Committee echoed the concerns of some that Bill C-26 could result in a patchwork of different provincial laws and regulations with no assurance that minimal consumer protection levels would be met. Therefore, the Committee urged provinces to include the following minimum requirements in adopting consumer protection measures regarding the payday loan industry:
The Standing Senate Committee on Banking, Trade and Commerce also urged Canada’s chartered banks to make short-term, low-value loans, thereby enhancing the options available to customers.
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