Pragmatic Solutions to Payday Lending: Regulating Fringe Lending and “Alternative Banking"
Executive Summary
This report is a follow-up to PIAC’s November 2002 Report: “Fringe Lending and “Alternative” Banking: The Consumer Experience” (“Report 1”). From that report, a much clearer picture emerged of the “alternative financial sector” (AFS). The November 2002 report analyzed survey findings of users of the AFS and made several recommendations for consideration by policy makers. This report builds on those recommendations and undertakes an in-depth consideration of possible regulation of a major aspect of the AFS, the payday loan industry, from a consumer perspective. This report outlines several possible options for regulation of the payday loans industry and highlights the advantages and shortcomings of each possible approach. The report is timely, as provincial and federal regulators are presently meeting to determine the scope and method of regulating the AFS in general and the payday loans industry in particular.
Report 1 concluded that the best course of action to deal with problems in payday lending was fairly complete and specific regulation of the payday loan industry. Also discussed was the possible amendment of s. 347 of the Criminal Code (the criminal interest offence and related interest rate cap of 60% effective annual rate of interest) and the resultant need for effective regulation. In light of the possible amendment of s. 347 to permit small, short-term loans, more partial regulatory schemes such as simple licensing, (with or without industry self-regulation or codes of conduct), was rejected as likely to be inadequate to the task of protecting consumers.
This report continues these conclusions, expands upon the regulatory options and justifies extensive regulation. It also suggests which regulatory policies would be most likely to curb industry excesses while encouraging responsible provision of credit to users of payday loan services.
The Report concludes with a plea to mainstream financial institutions to enter the payday loan market once the necessary changes are made to the Criminal Code usury provision, however, it cautions that such an entry by federally-regulated financial institutions must be in accordance with the relevant provincial regulatory scheme.
The regulatory recommendations include:
Licensing of Operators
Extensive Regulator Powers, including
- jurisdiction over all payday lenders, licensed or unlicensed;
- Prosecution powers – fines, licence suspensions
- consumer complaints mechanism (toll-free 1-800 number);
- Require transaction data from lenders;
- Educate borrowers about cost of credit and payday loans in particular;
- Report on industry each year to provincial legislature with suggested changes to industry regulation
Cost of Credit Disclosure, including
- All fees and charges must be clearly detailed in writing in contracts and advertising and promotional materials;
- Provide loan application and loan agreement before completion of application/transaction; allow customer to have copy of completed application/loan transaction
- Standardized loan documentation should be produced by the regulator with regulatory requirements;
- Reference to Consumer complaints mechanism on documents
- Fees and charges may not be excluded from definition or calculation of interest (NSF fees may be excluded);
Annual Percentage Rate (APR) statement
- APR must be calculated for all loans and displayed on loan documentation.
- Typical APRs for standard loan increments and standard loan terms should be available in chart form for borrowers.
Interest Rate Cap, including borrowing limits
Limits on Specific Charges and Fees, including
- Allowable NSF fees should be limited to a modest amount, representing the real cost of administration;
- Electronic NSF charges must be limited to one attempt to collect;
- Lender-specific identification card charges must be modest and not become a revenue source.
- No default or delinquency charges.
- Interest may not accrue after a default.
- No “broker” or “agency” fees permitted.
No Rollovers, Extensions, Back-to-Back Loans
Advertising Rules, including
- Advertising must not be deceptive or misleading;
- Must detail typical APR of standard loan amount for typical term in clear and conspicuous type;
- Must detail all applicable fees and charges for loans, as well as other charges such as those for convenience cards.
Education and Awareness Campaigns for Consumers, including
- campaigns to increase financial literacy of payday borrowers, with specific emphasis on cost of this form of credit and alternative credit sources.
- education and action programs to encourage consumer savings.
- Payday lender funding of consumer borrowing education
Other Borrower Rights
- Right of rescission immediately following a loan (cooling-off period).
- Right of Prepayment of loan at any time and to pay it down in increments
- floating or variable rates should be limited to the lowest rate
- prohibition on secondary marketing purposes borrowers. Lenders should clearly and conspicuously post privacy policies. Clear, express written consent of borrowers should be provided before lenders may use borrowers’ personal information with related entities.
Collection and Litigation Limits, including
- No assignment of wages
- No security or contingent security.
- No personal guarantees from third parties
- No interest in land
- No threatening of prosecution for “crime” of bad cheque passing
- method of cheaply and expeditiously contesting amounts illegally demanded by lenders, with right of set-off against present debts.
- no private arbitration clauses– disputes to be handled by payday loans dispute tribunal or small claims court
- Statutory damages should be recoverable to borrowers
Lender Database (Positive Credit Reports)
- Should not be used as surveillance of borrowers but to create positive credit histories
- Positive payday lending records should be made portable to mainstream credit reporting agencies to allow borrowers to improve their credit rating while taking payday loans.
“Executive Summary (français) [pdf file: 0.06mb]