Payday Lending and Debt Cycles: the Act to End Predatory Lending and Criminal Interest Rates

By: Geea Atanase

Over the last decade, the exorbitant interest rates charged on payday loans have been the subject of multiple class action proceedings against payday lenders in provinces across Canada. Most recently, in Ontario, a class action against Cash Store and Instaloan concluded last summer with a $10 million settlement in favour of the plaintiffs, which potentially number 100,000 (“Class action settlement for borrowers of Cash Store and Instaloans” CBC News (7 July 2016) online: http://www.cbc.ca/news/canada/sudbury/payday-loans-illegal-1.3668316).

In Young v Dollar Financial Group Inc., 2012 ABQB 601 (“Young”), the defendants, National Money Mart Co. and Dollar Financial Group Inc. argued that the named plaintiffs had signed an agreement containing an arbitration clause, as well as an agreement to waive any class action against Money Mart Inc., and therefore the proceedings should be stayed. Justice A.D. MacLeod declined to stay the proceedings on the basis that the agreement had not been approved by the Minister pursuant to the Fair Trading Act, RSA 2000, c F-2 (“FTA”). The Alberta Court of Appeal upheld this decision (Young v National Money Mart Co., 2013 ABCA 264), and the Supreme Court declined to hear an appeal by the defendants (2014 CanLII 3513).

As Justice MacLeod notes in Young, payday loans are controversial. Their purpose is to provide short term financial assistance, and they are typically accessed at ‘cash stores’ by individuals who cannot make ends meet until payday and who typically lack access to other forms of credit, such as lines of credit, bank loans, and overdrafts. The loans are secured by paychecks or social assistance. As result, payday loans are more often than not accessed by low income and vulnerable individuals, and the bulk of Calgary’s payday loan businesses are located in the city’s poorest postal codes, with 78% located in areas where the median family income is less than the average median family income for Alberta (Jeremy Simes, “Payday loan shops concentrated in Calgary’s poorest postal code” Metro (20 July 2016) online: http://www.metronews.ca/news/calgary/2016/07/20/payday-loan-shops-concentrated-calgary-poorest-postal-code.html).

On May 27, 2016, the Alberta government received Royal Assent for Bill 15: An Act to End Predatory Lending, SA 2016, c E-9.5 (“Act”), a piece of legislation aimed at the payday loan industry. The purpose of the new legislation is to reduce the high cost of short-term financial options for vulnerable Albertans and to put a halt to predatory lending practices by cash stops (Alberta, Legislative Assembly, Hansard, 29th Leg, 2nd Sess (19 May 2016), Hon Stephanie McLean).

The new legislation also includes the introduction of new regulations to the existing FTA that specifically target payday lenders. Section 12.1 of the FTA prohibits the use of intimidating or coercive language when attempting to collect an outstanding payment, mandates the use of installments in repaying a loan, and requires that payday lenders display and provide borrowers with financial literacy information, among other things.

Perhaps most significantly, the new legislation decreases the cost of borrowing. Previously, Albertans were charged $23 for every $100 for a 10-day loan. Calculated over one year, these interest rates can reach a staggering 600%. While the charging of effective annual rates of interest over 60% is prohibited by section 347 of the Criminal Code, RSC 1985, c C-45, section 347.1(2) exempts payday loans under $1500 and for less than 62 days under this provision if a province has its own legislation to regulate payday loans under subsection 3. Now, under section 124.61(1) of the FTA, a lender cannot charge more than 15% of the principal amount on a payday loan, the lowest rate in Canada. Additionally, under sections 124.61(3)(a) and (b), payday lenders can only charge borrowers an interest rate of 2.5% per month, uncompounded, if they fail to pay back the loan specified in the agreement, as well as a one-time fee for returned cheques in an amount to be determined by the Director.

The new legislation also addresses the fact that payday lenders have often granted rollover loans to borrowers for the purpose of paying back existing payday loans, which perpetuates a cycle of debt and further drives vulnerable individuals into financial despair. This practice is prohibited under section 134.2(1)(c) of the FTA, including the extension or renewal of a loan that charges the borrower additional fees other than interest. The new legislation also directly targets poverty and predatory lending; under section 2 of the Act, the Minister is tasked with promoting alternative short-term lending options to payday loans,  and working with Alberta’s financial institutions and the community to make such options available.

Considering that the intended purpose of the new legislation is to protect vulnerable Albertans, it bears mentioning that payday lenders provide a service that many might see as indispensable. Ready access to different forms of credit is simply not a reality for many low income individuals, and for those with bad credit and lack of collateral, a payday loan can enable individuals and families to make ends meet in the short term (Stephanie Ben-Ishai, Regulating Payday Lenders in Canada: Drawing on American Lessons – Research Report No. 16, 2008).

Additionally, Wildrose MLA Derek Fildebrandt pointed out that the high interest and fees associated with payday lending represent the high risk of default that most borrowers pose to payday lenders, and that legislating away high interest rates could force low income individuals to turn to crime to make ends meet if payday loans become less widely available (Alberta, Legislative Assembly, Hansard, 29th Leg, 2nd Sess (19 May 2016), Derek Fildebrandt). While the introduction of the Act and FLA amendments may cause smaller, independently owned cash stops to close (Jeremy Simes, “New Alberta payday loan laws take effect; one Calgary shop pledges to close” Metro (2 August 2016) online: http://www.metronews.ca/news/calgary/2016/08/02/new-alberta-payday-loan-laws-take-effect-one-shop-to-close.html), larger companies like Money Mart will likely continue doing business, and optimistically, perhaps the new legislation will cause these companies to operate on a more ethical level. Further, an increased demand for alternative short-term lending options, offered by credit unions and other financial institutions, will likely fill any gaps in the market left behind by the closure of smaller businesses. To assume that people who are struggling financially, a significant portion of the population, are likely to turn to crime to make ends meet is presumptuous and short-sighted.

Alberta Party MLA Greg Clark explains that while the new legislation is extremely important, it is only one piece of the puzzle when it comes to alleviating poverty (Alberta, Legislative Assembly, Hansard, 29th Leg, 2nd Sess (19 May 2016), Greg Clark). For hundreds of thousands of Albertans, living paycheck to paycheck and struggling to make ends meet are daily realities, and in order to effectively reduce poverty, it must be addressed in light of the other systemic factors that contribute to and perpetuate it. On a foundational level, in order to be effective, a poverty reduction scheme must address addiction, violence, education, homelessness and a lack of affordable housing, and the vulnerability and susceptibility of marginalized peoples, to name a few.

Despite the magnitude of this task, the concept of financial literacy, in tandem with the new Act and FLA amendments, is gaining momentum in Alberta. November is Financial Literacy Month, and an anonymous group of Albertans has donated $15,000 to a public service campaign that offers Albertans a chance to win a $500 emergency savings account each day in exchange for their stories of financial emergencies. Additionally, organizations like Money Mentors, a non-profit credit counselling agency, are educating teens about credit (Valerie Fortney, “Fortney: Financial literacy campaign walks the talk with prize money” Calgary Herald (3 November 2016) online: http://calgaryherald.com/news/local-news/fortney-financial-literacy-campaign-walks-the-talk-with-prize-money?__lsa=5e03-1864). While not a complete solution to the issue of poverty by any means, these initiatives represent a step in the right direction with respect to targeting some of the underlying issues that contribute to poverty.  Whether the new legislation will make a large impact on the financial situations of the working poor remains to be seen, but perhaps it will spark additional legislative reforms, such as amending the Criminal Code to lower the amount of interest deemed criminal.