The Ontario Ministry of Government and Consumer Services recently issued a consultation paper on the regulation of alternative financial services, entitled “Strengthening Protection for Consumers of Alternative Financial Services – Phase One” (the “Consultation Paper”), which sets out in the first part certain proposed draft regulations for payday lending and cheque cashing services, and in the second part, raises matters to be considered in respect of instalment loans, rent-to-own contracts, and disclosure-related elements of payday lending.
First part – Draft regulations
Draft regulatory language has been proposed to:
- provide for extended payment plan options for borrowers who enter into a third or more payday loan agreement with the same lender in a 100-day period – these would be based on the frequency of the borrower’s pay periods;
- take into account a borrower’s ability to pay – a payday loan may not exceed 40% of a borrower’s “net pay”;
- set a minimum 6-day waiting period between payday loans;
- require disclosure of the annual percentage rate (“APR”);
- require a prescribed notice to borrowers of the availability of credit counselling services; and
- exempt credit unions from complying with the requirements applicable to payday loans pending the consideration of how to protect consumers in connection with lower cost payday loans.
Draft regulatory language has been proposed to limit the fee for cashing government-issued cheques to the lesser of $2 plus 1% of the amount of the cheque or $10. Since non-government cheques are not subject to this limit, it is proposed that the cheque cashing service be required to provide a consumer with a receipt containing prescribed information, including the fee charged and resulting balance paid to the customer.
Second part – Matters for further consideration
The Government of Ontario is considering ways in which payday lenders can improve the display and communication of information to consumers through changes to requirements for advertising, signage, website design and the design of contracts for payday loans.
The Consultation Paper proposes stricter regulation of high-cost credit products. In particular “high-cost instalment loans”. It defines these as follows: “An instalment loan is a loan that is scheduled to be repaid in substantially equal instalments at equal periodic intervals. They are commonly referred to as consumer loans or personal loans. Instalment loans may differ from typical payday loans as they can be repaid over a longer term (e.g. more than two weeks or the borrower’s next payday), are not repaid in a lump sum and may be secured by the borrower’s personal property.”
The Consultation Paper notes the high cost of instalment loans (from 35% to 59.9%), and proposes that certain requirements and prohibitions that currently apply to payday loans be extended to instalment loans, including the following:
- Minimum lending standards – Requiring lenders to evaluate a borrower`s ability to repay the loan, by applying various possible tests, such as the ratio of loan payments to net income, or imposing a general requirement to evaluate the borrower`s ability to repay. Failure to comply with such requirements would result in the lender being unable to recover the cost of borrowing.
- Prohibition on contact to solicit refinancing – Prohibiting lenders from initiating contact with consumers for the purpose of offering refinancing.
- Limits on costs outside of interest – Limiting optional services like optional insurance that are offered for consumers, prescribing maximum costs and requiring disclosure.
- Mandatory disclosure requirements – Imposing additional credit disclosure requirements.
The Consultation Paper also raises the potential need for stricter regulation of rent-to-own agreements. It proposes and seeks feedback on the following definition for rent-to-own agreements:
“A rent-to-own agreement:
(a) is for the use of personal property by an individual for personal, family or household purposes, and excludes any lease or rental for agricultural, business or commercial purposes;
(b) is for an initial term of four months or less;
(c) is automatically renewable with each payment after the initial term;
(d) permits the consumer to continue leasing or using the property beyond the initial term;
(e) should the consumer pay a total amount agreed to in advance, permits the consumer to become the owner of the property; and
(f) excludes any lease or rental of a motor vehicle.”
The Consultation Paper proposes that rent-to-own agreements be subject to the following requirements:
- Price tags and disclosures – Since rent-to-own agreements can be very complex, that additional information should be disclosed directly on the price tag, such as whether the item is used or new, the minimum repayment period, the duration of the agreement, the amount of each payment, etc.
- Grace period – That a grace period be offered before late fees are charged, subject possibly to a limit on the number of times a grace period may be used over the course of an agreement.
- Reinstatement rights – Requiring the offering of a reinstatement right when the lessee has not made payments on time, as is common in most US states.
- Termination – That additional disclosure be required to be made in connection with termination rights and obligations relating to the termination of rent-to-own agreements.
The Consultation Paper is one of a series of consultation papers issued by the Government of Ontario following the enactment of Bill C-59, which amended the Consumer Protection Act, 2002 and which addressed various items including payday loans and debt collection.
The Government of Ontario intends to issue a Phase 2 consultation paper on alternative financial services in the fall of 2017, setting forth additional draft regulatory language. The regulatory language in the Phase 1 Consultation Paper is expected to come into effect in early 2018 and the regulatory language in the Phase 2 Consultation Paper is expected to come into effect in early 2019.
By James Archer and Ana Badour
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