Industry Committee on Dec. 12th, 2006

[The Chair, Conservative, James Rajotte]

I call this meeting to order.

I know some members are still making their way from the House, as we did have two votes right after question period, but we should get started. We have only two hours today. We have until 5:30.

This is the 38th meeting of the Standing Committee on Industry, Science and Technology. We are being televised today. It is pursuant to the order of reference of Monday, November 6, 2006. We are studying Bill C-26, An Act to amend the Criminal Code (criminal interest rate).

We have with us today witnesses from the Department of Industry and the Department of Justice. The entire committee would like to welcome, first of all, from the Department of Industry, Mr. Michael Jenkin. Mr. Jenkin is director general of the office of consumer affairs and co-chair of the federal, provincial, and territorial consumer measures committee. Welcome, Mr. Jenkin.

We also welcome Mr. David Clarke, senior analyst in consumer policy in the office of consumer affairs.

From the Department of Justice we have with us Mr. Matthew Taylor, counsel, criminal law policy section. Welcome. We also have Mr. William C. Bartlett, senior counsel, criminal law policy section. Welcome, gentlemen, to the committee.

The committee allows for 10-minute opening statements. Mr. Jenkin, we'll let you start off any time.

[Michael Jenkin, Director General, Office of Consumer Affairs and Co-chair, Federal, Provincial and Territorial Consumer Measures Committee, Department of Industry]

Thank you, Mr. Chair.

I want to thank the committee for allowing me to speak today on this very important consumer issue of payday lending. I'd like to introduce my colleague David Clarke, who has been the senior policy officer on this issue for the past number of years. He is an active member of the federal, provincial, and territorial working group of committees that continues to study the payday lending issue.

I'll be pleased to answer questions you may have today concerning the background to this file, particularly on any federal, provincial, or territorial dimensions or consumer protection issues.

I have a few words, just for a moment, on payday lending. It's a form of short-term lending through which the consumer typically borrows several hundred dollars for 10 days to two weeks. The borrowing costs are very high, as you probably know. They are usually in the range of, for example, $40 to $75 for a $300 loan for two weeks or less.

The concerns expressed about this type of borrowing in the general community have included its very high costs, obviously; the lending practices associated with it, such as inadequate disclosure of costs and terms; and rolling over of loans--that is, the sequential structuring of loans one after the other, and the accumulation of interest and principal costs therein. You very quickly spiral your costs.

The industry, which originated in the United States some time ago, is a relatively recent phenomenon in Canada. It emerged in western Canada in the mid-1990s and rapidly spread eastward over a very few years. It is now a major presence in many urban areas in the country. There are approximately 1,300 retail outlets, and the number is growing. Estimates place annual lending at $1.3 billion or more per year.

Payday lending and other fringe financial services are known collectively as the alternative consumer credit market by the consumer measures committee. They were first identified as a federal-provincial-territorial issue by British Columbia in the late 1990s. In 1998, at the request of some western provinces, the federal-provincial-territorial committee of justice ministers considered the alternative consumer credit market, which by the way includes cheque cashing, chattel mortgages, and pawnbroking. The justice ministers referred the issue to federal, provincial, and territorial consumer ministers, who in turn asked the consumer measures committee of officials to look into the matter on their behalf.

Since the year 2000, CMC officials have been pursuing a detailed program of work, most of which can be found on the CMC website: www.cmcweb.ca. The work has included research by officials and others, for instance Professor Iain Ramsay of Osgoode Hall Law School; a survey of practices employed within the industry; and a roundtable meeting early on in Victoria, with governments, industry, consumer and academic representatives.

In 2001, federal and provincial consumer ministers used that work as the basis for their decision to direct officials to develop options for future action in such areas as best practice guidelines for the industry, consumer education and awareness, and regulatory mechanisms.

In 2003, a national public consultation was held on the legal framework and consumer protection issues for the alternative consumer credit market.

In 2004, FPT Consumer Ministers expressed their concern about the abusive practices and excessive costs encountered by consumers in the alternative market, for example payday loans, cheque cashing, rent-to-own. With an emphasis on payday loans, they asked officials to undertake work related to a consumer protection framework, including measures to address the issue of rollovers of loans, concurrent loans from multiple lenders and the habitual use of payday loans, industry best practices, and consumer education on the true cost of these loans.

In 2004 and 2005, a second national public consultation was held specifically on regulating payday lenders. Subsequently, provincial and territorial senior officials and several ministers formally sought federal legislative action to facilitate regulation of this sector. As you know, in the fall of this year Bill C-26 was introduced in Parliament.

To date, Mr. Chairman, two provinces, Manitoba and Nova Scotia, have passed legislation in anticipation of the possible passage of Bill C-26. There are numerous indications in the media that several other jurisdictions intend to proceed with some form of regulation as well.

A considerable amount of work over a long period of time has brought the federal-provincial discussions on payday lending to this point. I would be pleased to answer any questions you may have in that regard.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Jenkin, for that concise statement.

We will now move to Mr. Bartlett, who will be presenting on behalf of the Department of Justice.

[William Bartlett, Senior Counsel, Criminal Law Policy Section, Department of Justice]

Thank you, Mr. Chairman and members of the committee, for the opportunity to appear before you to speak on C-26, An Act to amend the Criminal Code (criminal interest rate). We refer to it as the payday lending bill. That's what it deals with.

My apologies to the committee; I will be making my remarks in English.

As my colleague from Department of Industry has provided an overview of the payday lending industry and the policy discussions that inform the development of the bill, I will simply make some remarks about the structure of the bill itself and some of the legal framework into which it fits.

The amendments in the bill are really quite straightforward. They simply create an exemption scheme from the applicability of section 347 of the Criminal Code, which otherwise imposes a maximum interest rate on any kind of loan arrangement anywhere in Canada. It's called the criminal interest rate provision. It will allow this exemption to apply in those provinces and territories that choose to regulate the payday lending industry and seek a designation from the federal government in order to do so.

The bill amends the Criminal Code by defining payday loans for the purposes of the exemption schemes. I'll read the definition. It's not a simple definition, because it's not that simple and straightforward to simply say what a payday loan is, although generally we know it when we see it. It reads as follows:

“payday loan” means an advancement of money in exchange for a post-dated cheque, a pre-authorized 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.

We define it primarily by a couple of simple indicia--a post-dated cheque or a similar payment--and then by what it's not. The rest of the definition is contained in another section in which we prescribe the limits on the kinds of loans that can be subject to the exemption.

The definition ensures that only this very narrowly defined class of lending arrangements known as payday lending will qualify and therefore be eligible. For example, lending arrangements by way of credit cards or lines of credit would not be included in the definition of payday loans.

The heart of the proposed amendments is in subsections 347.1(2) to 347.1(4), which set out the exemption scheme. These provisions specify which payday loan agreements are eligible to be exempt from the application of section 347.

Subsection 347.1(2) specifies the conditions that must be in place for such an exemption to apply. First we defined the payday loan, and this is really the rest of the definition of a payday loan for the purposes of this exemption provision: “the amount of money advanced under the agreement is $1,500 or less and the term of the agreement is 62 days or less”.

This, of course, is the typical payday loan scenario described by my colleague from the Department of Industry--that is, a short-term loan for a small amount. Indeed, these are really the top-end figures, if you will, and the average amount, as I understand it, is closer to, say, $300 for 10 days. They are quite small amounts for relatively short periods of time, so $1,500 for 62 days would really specify top-end limits to a payday loan that could be subject to an exemption.

Second, the payday lender “is licensed or otherwise specifically authorized under the laws of a province to enter into the agreement”. It's the province that will do the regulating from top to bottom of the payday lenders who will be subject to the exemption. This necessarily implies that the province has in place consumer protection measures that govern payday loans. The nature of such measures, however, is generally left to the province to determine. There are only a very few requirements for there to be legislation in place, and a requirement for a specification of an upper limit for the cost of borrowing, which can actually be charged.

The third requirement for the exemption to apply is that the province must be designated by the Governor in Council. This is simply a process to ensure that the province that has enacted the legislation, or already had legislation in place, if that is the case, has advised the Governor in Council that the legislation is there and that they wish to have their province be availed of that exemption. Then the exemption is put in place.

The obtaining of the designation is fairly straightforward. It is set out in subsection 347.1(3). A designation will be provided once a provincial Lieutenant Governor in Council--the provincial cabinet--requests it and in so doing indicates that the province has consumer protection measures in place to protect recipients of payday loans.

That is simply a general description of the fact that in the province there must be consumer protection measures in place that apply to these payday loans.

The only particular requirement is that the measures must include a limit on the total cost of borrowing for a payday loan. This will then replace the 60% limit that's otherwise specified under section 347. This guarantees a cap on the total cost of borrowing and provides the provinces and territories some flexibility to assess what the cap should be.

The designation process would amount to the province writing to the federal Minister of Justice to indicate that it has the legislation measures and is seeking the designation. If, on the recommendation of the federal Minister of Industry, the Minister of Justice is satisfied the province meets the requirements, the recommendation would be made to the Governor in Council. It should be a fairly simple process.

In addition, in subsection 347.1(4) there is a process for revoking it. I don't really anticipate that this is going to be necessary for provinces once they decide they're going to be in the business of regulating payday loans and probably aren't going to get out, but in case they did, it could be in two instances: either the province simply requests it, or the consumer protection measure is no longer in place--the legislation has been repealed.

As you are aware, the Constitution of Canada provides the provinces and territories with competence over consumer protection through their authority over property and civil rights. They are the level of government with the appropriate mechanisms in place to provide consumer protection of this kind; in fact, consumer protection measures do already exist across the country, and in some cases there are some measures that do apply to some of the elements of payday lending--although not in the comprehensive way that my colleague has spoken of--that have now been enacted in at least two provinces.

Bill C-26 won't either dictate to or fetter the province's ability to enact appropriate consumer protection measures. It deals simply with the applicability of section 347 to these specified payday loan agreements and provides an exemption that otherwise is prohibited by section 347. This is pursuant to the federal government's constitutional competence over criminal law.

That's the basis upon which section 347 was enacted. Should a province or territory wish to exempt their loans, they need only have the legislation in place and seek an exemption in order to do so.

Mr. Chairman, the bill is necessary to provide the flexibility to the provinces to regulate payday loans. Otherwise, section 347 puts in place a prohibition against their operating at anything over 60%, as my colleague has described. It's in the nature of these short-term, small-amount loans. The definition of interest under section 347 is very broad and covers all of the interest and associated charges involved--not just the interest, but all of the associated charges--and specifies it on an effective annual rate of interest, which is a compound rate of interest. None of the payday lending operations can operate or do operate within that 60% limit.

This is simply opening the door to the provinces to be able to regulate them, allow them to exist, and provide appropriate limits on the cost of borrowing, and also to put in place other regulatory rules to ensure that the consumers of these loans are adequately protected.

Thank you, Mr. Chairman.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Bartlett. That was very helpful.

We go now to questions from members. We start with Mr. Bagnell.

[Larry Bagnell, Liberal, Yukon, YT]

The figure was 60% annually with all the things put in. Does that only apply to payday loans, or does that apply to anything Canadians do?

[William Bartlett]

It applies to any lending transaction in Canada.

[Larry Bagnell, Liberal, Yukon, YT]

Does that include pawnbrokers?

[William Bartlett]

Yes.

[Larry Bagnell, Liberal, Yukon, YT]

Is there any evidence or concern, as in prohibition, that organized crime might fill in the vacancy we create?

[William Bartlett]

Indeed, Mr. Bagnell, the purpose of proposed section 347 is to provide a mechanism to deal with what we all understand to be loansharking, with its attendant violence, threats of violence, coercion, and those kinds of well-known criminal aspects. It was never really intended to be a consumer protection measure simply regulating business transactions. It has acquired a certain consumer protection role.

The purpose of providing an exemption here is to allow provinces to regulate, in a lawful environment, the payday lending industry. Nothing is going to be opened up for criminal operators. In fact, I suppose the concern might well be on the other side. If there is a market for this kind of loan and no lawfully regulated environment in which it can operate, you might get more loansharking that would develop in violation of proposed section 347 and not in the open, transparent way that payday lenders operate. If anything, the regulation of the industry by the provinces should contribute to making it less likely that there will be that kind of criminal loansharking that section 347 was originally intended to deal with.

[Larry Bagnell, Liberal, Yukon, YT]

It is true that there is legal usury going on because that limit is not there now.

[William Bartlett]

The limit is 60%. Given the circumstance in which the payday lenders operate, the limit simply doesn't seem to be a realistic one for them to operate under.

[Larry Bagnell, Liberal, Yukon, YT]

What are the comparable rules, percentage-wise, in other countries such as the United States and Great Britain?

[William Bartlett]

Perhaps my colleague from the Department of Industry might be able to comment on what goes on in the United States. Certainly they have similar kinds of regulatory frameworks in many states.

[David Clarke, Senior Analyst, Consumer Policy, Office of Consumer Affairs, Department of Industry]

These are set at the state level in the United States, and it can vary widely. A lot of the states will have upper limits for different kinds of lenders. For payday lenders, they may set it at 300%, 500%, 600%, or maybe even higher than that. For other kinds of lenders, they'll set it for a lower amount. In the United States it varies very widely.

Great Britain doesn't have an upper lending rate, or any kind of lending rate, as far as I understand.

Those are the ones we looked at.

[Larry Bagnell, Liberal, Yukon, YT]

You say that in the United States some of them are 300% or 500%.

[David Clarke]

Oh yes. That's by their own definitions. I mean, their definition of interest could vary too. They could have a definition of interest that might include fees or it might not.

[Larry Bagnell, Liberal, Yukon, YT]

Are there any as low as the one we hopefully are going to pass today?

[David Clarke]

This bill does not actually set a maximum rate for payday lenders. That would leave it to the provinces to make that determination about what the maximum rate would be for payday lenders.

[Larry Bagnell, Liberal, Yukon, YT]

But that's what the 60% was.

[David Clarke]

The 60% is the current rate. The concept behind the bill is to establish an exemption specifically for payday lenders, specifically in a jurisdiction that has a law that will protect borrowers and that sets its own maximum rate that will be different from the 60%.

[William Bartlett]

Perhaps I can comment, Mr. Bagnell.

Certainly we're talking about provinces regulating these payday lenders and allowing them to charge more than 60%. If they were charging less than 60%, there would be no need for the exemption. The exemption is necessary so that they can allow them to charge more than 60%. Given the very short-term and small-amount nature of the loan, at a 60% effective annual rate of interest, the fee on a $300 loan for ten days would be a few bucks.

The commission that the consumer measures committee gave this alternative consumer credit market working group was to look at what would be a viable rate to allow the industry to operate. That's to provide for a viable industry but no more. These are the sorts of rates they're looking for here. But 60% is the limit. The exemption is to allow the provinces to set higher rates, and they will set them under the circumstances of their province.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Bagnell.

We'll go to Mr. Crête now.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Mr. Chairman.

At the moment, can provinces set an interest rate below 60%?