Mr. Speaker, I am pleased to have this opportunity today to speak in favour of Bill C-26, An Act to amend the Criminal Code regarding criminal interest rates.
What is a payday loan, one might ask. The Library of Parliament explains it this way.
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.
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.
Some payday lenders will cash the borrower’s post-dated cheque or process the direct withdrawal on the due date of the loan. Others will require that the borrower repay the loan in cash on or before the due date, and may charge an additional fee if the loan is not repaid and they must cash the cheque or process the direct withdrawal subsequent to the loan due date. If there are insufficient funds in the borrower’s account, the borrower may also be required to pay a return fee to the payday lender and/or a non-sufficient funds...fee to his/her bank or credit union. In this instance, the borrower may have the option of “rolling over” the loan — that is, taking out another payday loan to pay off the original loan — for an additional fee.
Mr. Speaker, I invite you to read the library's excellent paper on payday loans from which I have just quoted.
With an estimated 1,350 storefront locations and representing annual revenues of approximately $1.7 billion, payday lending is one of the fastest growing industries in Canada. This industry appears to be filling a gap that exists in the availability of credit from the chartered banks and other traditional lending institutions.
There may be different reasons for this gap. Perhaps it is because such institutions are not willing to offer the type of short term unsecured credit that payday lenders do, or simply because local bank branches have been closed in many population centres, thereby making access to credit for many customers very difficult.
The payday lending industry may also be succeeding because of the relative convenience of their operations and the relatively anonymous nature of the commercial transaction.
The payday lending industry has been operating for just over 10 years now without any effective regulation, resulting in some payday lending companies charging outrageous and often crippling fees that trap many an unwary customer. In light of these questionable business practices, which may also include ineffective disclosure of contractual terms and aggressive debt collection practices, many have been right to criticize the current situation, including provincial and territorial governments, consumer groups and the payday lending industry itself.
For example, consumer groups have argued that consumers who would not otherwise have access to this type of short term credit, sometimes feel they have no alternative but to accept the terms and conditions of the payday lender. This can lead to their becoming vulnerable to unfair practices. Consumer groups want to see this issue brought under control.
On the other hand, lenders who have offered loans on reasonable terms and follow a voluntary code of conduct fear that their conduct is being questioned and thus seek regulations in order to give their industry both legitimacy and long term viability in Canada.
The provinces and territories have expressed concern as well. They, too, wish to ensure that Canadians who live in their communities are protected from unscrupulous practices and have noted that section 347 of the Criminal Code, the criminal interest rate provision, stands in the way of them effectively regulating this industry.
The government has heard the criticism and the concerns that have fueled the calls for legislative reform and Bill C-26 is a reflection of our resolve to address them. Our government has been working closely with our provincial and territorial colleagues to examine options for the most effective response to this pressing issue. Indeed, the situation has been the subject of discussion and examination by federal, provincial and territorial ministers responsible for justice and consumer affairs.
Bill C-26 is the result of that collaboration. I believe it would mean enhanced protection for those Canadians who have come to use the services of the payday lending industry.
Who uses payday loans and why? Again I want to go back to the excellent Library of Parliament paper that I quoted from earlier. The library researchers found:
In early 2005, the Financial Consumer Agency of Canada placed questions on the Canadian Ipsos-Reid Express...— a national omnibus poll of Canadian adults—about Canadians’ experiences with, and motivations for, using cheque-cashing and payday loan services. The survey found that approximately 7% of survey respondents had used a cheque-cashing or payday loan company. Cheque cashing was the most frequently used service (57%), followed by payday loans (25%) and tax refund anticipation loans (5%). Certain respondents were more likely to have used these services, including: men; those between the ages of 18 and 34 years; urban residents; residents of British Columbia, Alberta, Saskatchewan and Manitoba; those with household incomes less than $30,000 per year; and those with some post-secondary education
Those are causes for concern. The ongoing and expanding presence of payday loan companies suggest that some Canadians are willing to pay usurious rates of interest in excess of that permitted under the Criminal Code for their payday loans. This situation raises important questions about whether and how issues in the payday loan industry should be addressed, by whom and with what consequences for the industry and its customers.
The drafters of Bill C-26 must have also read the library paper because they found that section 347 of the Criminal Code, often seen as a de facto regulatory provision to limit the maximum lending rates for commercial and consumer loans, had to be considered in any discussion of payday lending. Indeed, section 347 is at the heart of the amendments proposed in Bill C-26.
I will come back to the substance of the proposed amendments a bit later but first I will explain the origins of the section and why, in my opinion, it is not an appropriate tool to use in regulating consumer lending.
Section 347 was not enacted to regulate commercial or consumer lending per se. The policy goal of the section was instead to enhance the ability of our police forces to target the harmful activities of organized crime syndicates. More specifically, the goal was to address the loansharking activities of these syndicates and the related practices of threats and violence that are often used when collecting payments. The adoption of a specific interest rate limit in the Criminal Code immediately next to the provision for extortion was to facilitate proof of extorted loans. This was clearly not about regulating legitimate lending activities.
Section 347 provides serious criminal penalties for entering into an agreement or receiving payments where the interest charged exceeds the defined criminal rate of 60%. When charges proceed under indictment, the offender is liable for a term of imprisonment of up to five years and, when they proceed summarily, for a fine of up to $25,000 and a term of imprisonment of up to six months.
This government does not believe that section 347 is the most appropriate way to regulate the payday lending industry and provide consumer protection. Bill C-26 would address the concerns noted by the provinces and territories by creating a narrowly defined exemption from section 347 of the Criminal Code to facilitate provincial and territorial regulation of payday loan agreements. In instances where a jurisdiction has chosen not to enact consumer protection legislation directed at payday lending, section 347 would continue to apply.
The exception created by Bill C-26 removes the application of section 347 of the Criminal Code, as well as section 2 of the Interest Act where a payday loan agreement is for an amount that does not exceed $1,500 and runs for a maximum term of 62 days and where the province in which the lender operates has been designated as having in place an appropriate regulatory scheme which must include limits on the total cost of borrowing.
It is clear that the exception only applies where the province in which the lender operates has made the appropriate amendments to its legislative scheme that governs consumer protection matters. The province would also have to request the federal cabinet for the necessary designation which allows for the exemption in respect of section 347. The criminal interest rate from section 347 would continue to apply in any province or territory which chooses not to implement qualifying regulations for payday lending agreements.
In Manitoba, bill 25, the consumer protection amendment act regarding payday loans, is now ready for a third reading and provides a good example of the type of complementary consumer protection legislation at the provincial level that would properly leverage the exception.
Manitoba's bill 25 establishes a licensing and inspection scheme for payday lenders, defines limits on certain loan agreement terms and parameters, sets out a lender's information disclosure obligations and defines a borrower's right in terms of cancellation and redress. This cooperative framework of a narrow Criminal Code exception, coupled with suitable provincial regulations specifically addressing the payday lending industry, should meet the goals and objectives of consumers and their advocacy groups, as well as those of legitimate payday lending companies and their industry associations.
In closing, this government believes strongly in protecting consumers from the unscrupulous practices of unregulated payday lenders. Bill C-26 is an important and necessary first step in establishing a fair and equitable regime under which to regulate the activities of payday lending institutions, giving consumers the best possible protection in accessing this type of credit.
I urge all hon. members to join me in support of Bill C-26 and ensuring its speedy passage.