Payday loan bedlam cries out for legal fix
by Jacob Ziegel
This commentary was first published in the National Post on March 15, 2006.
Every week, payday loan companies across Canada make small short-terms loans to thousands of low-income consumers that appear to violate the Criminal Code's all-inclusive interest ceiling of 60% per annum. In Metro Toronto, the nominal interest rate on a 14-day payday loan of $100 can run anywhere from 335% to 650% or, assuming the most favourable loan rate, more than five times the permissible ceiling. (The payday loan rate is so high because of the small size of the loans, the short period of the loans, and the relatively high cost of setting up and administering the loans.) Just as disturbing is the fact that the federal and provincial governments are fully aware of what is happening yet, with few exceptions, have taken no steps to enforce the law.
It has been left largely to individual borrowers to raise the issue when sued by payday loan companies for outstanding balances. Enterprising lawyers have also entered the fray through class action suits of payday loan companies in Ontario and British Columbia: Refunds and punitive damages could run into the millions of dollars.
For more than five years, federal and provincial officials have sought a common solution but so far no agreement has materialized and, except in Manitoba and possibly Saskatchewan, nothing has been done. Manitoba on Monday announced legislation to license payday loan companies and regulate payday loan terms. However, the legislation would not be implemented until the federal government amended section 347 of the Criminal Code. Saskatchewan's intentions appear to be similar to Manitoba's.
While outgoing federal Justice Minister Irwin Cotler announced last November that the federal government intended to introduce legislation amending section 347, this may have been a political gesture: No one outside the federal government appears to have seen even a first draft of the legislation.
The principal actors in this drama - the federal and provincial governments and the payday loan industry - are all to blame for this legal bedlam. The current environment is all the more remarkable because Canada prides itself on being governed by the rule of law and sends legal experts abroad to help developing countries establish a modern legal order.
The federal government is to blame for the current malaise for the following reasons. It was warned by many analysts when section 347 of the Criminal Code was first enacted in 1980 that the usury ceiling was unnecessary and harmful for commercial loans, and that it was unworkable in its existing form for small loans of the type payday loan companies now make. The criticisms have been repeated many times since then and have been echoed in court judgments, yet the federal government has preferred to bury its head in the sand and to hope that the problem will somehow go away of its own accord.
The provincial authorities are to blame because, under Canada's constitution, they are primarily responsible for enforcing the Criminal Code. Their attitude (again with the exception of Manitoba) seems to be that section 347 was misconceived to begin with and that payday loan companies are rendering a useful public service: They cater to the needs of low-income consumers when neither the banks nor the credit unions are prepared to bridge the gap. These arguments carry some weight but they don't begin to justify the provinces turning a blind eye to the willful violation of section 347 or to the oppressive terms of many payday loans.
The payday loan companies are at fault because they have no business taking the law into their own hands. It is true they have been asking for legislation for many years to legitimize their activities. However, the fact that it hasn't yet been enacted doesn't entitle them to jump the gun.
Canada urgently needs a revised section 347 (or perhaps no section 347 at all) and modern, well balanced payday loan legislation at the federal or provincial levels (preferably the former) to serve the needs of low-income consumers without driving away legitimate lenders. Until 1980, Canada had a well functioning and highly regarded Small Loans Act, which Parliament ill advisedly repealed around the same time that it adopted section 347. The Small Loans Act could serve as a model for the needed payday legislation. The federal and provincial authorities should also exert pressure on banks and credit unions to enter the alternative credit market. Meanwhile, it is deeply troubling that none of the three principal actors seems willing to take a bold step to bring to an end the open defiance of section 347.
