Businesses that issue loans to customers for $5,000 or less should be aware that the Ontario Ministry of Consumer Services (MCS) is proposing an amendment to the regulations under the Payday Loans Act, 2008 which, read literally as drafted, would result in those businesses being designated payday lenders. That, in turn, carries registration requirements and imposes significant restrictions on activities that surround such loans. MCS is asking for submissions to be made on the proposed draft by September 30, 2013.
The Ontario government passed the Act in 2008 to regulate small principal, short-term, high-interest loans. It defined "payday loans" in broad terms: "an advancement of money in exchange for a post-dated cheque, a pre-authorized debit or a future payment of a similar nature", but then it excluded other types of loans such as lines of credit and credit cards. Section 2(1) of the Act then provides that the Act applies in respect of all payday loans if the borrower, lender or loan broker is located in Ontario when the loan is made. Section 2(2) then says that, except for one section, the Act applies for any other loans "other than payday loans, that are prescribed". Until now, the Ontario government had not prescribed any such "other" loans. But under the Proposed Regulatory Amendments to the General Regulation (O.Reg. 98/09) of the Payday Loans Act, the Ontario government plans to do exactly that. They read, in full:
1.1 (1) A loan described in subsection (2) is prescribed for the purposes of subsection 2 (2) of the Act.
(2) Subsection (1) applies to a loan under which a lender extends credit to a borrower so that the borrower may make one or more draws for up to an aggregate amount of principal and to which one of the following criteria applies but does not apply to a loan that is secured against real property:
1. The aggregate amount is $5,000 or less.
2. The borrower is not entitled to make a draw without first obtaining authorization, approval or permission of any kind from the lender or any other person, whether or not there is a charge for obtaining the authorization, approval or permission.
3. The borrower is required to make repayments of the principal amount of the loan or payments of any other amounts under the loan on a schedule that corresponds to the days on which the borrower is regularly due to receive income.
4. The amount that the borrower is required to pay in any 30-day period under the loan, except for the last such period, includes one or more repayments totalling at least 10 per cent of the principal amount of the loan.
Therefore, to be captured by the Act, a lender needs only to "extend credit" to a borrower where the borrower can make "one or more draws" of the principal, and which satisfy one of the criteria. The first criterion is that the loan is for $5,000 or less. Other criteria would also be applicable for many unsecured loans in excess of $5,000, such as any loan where repayments correspond to the borrower's payday, or where advanced authorization is required prior to making the first draw.
The consequences of being captured by the Act are significant. Among other things, the Act has registration requirements and licensees are regulated by MCS. There are very specific disclosure requirements that must be contained in loan agreements. There are restrictions on default and prepayment charges. Rollover loans are prohibited. The cost of borrowing cannot be demanded or received until the end of the term of the agreement.
As drafted, and depending on how the phrase "extend credit" is interpreted, it would appear that the proposed amendments could capture a wide swath of business activity, from computer financing to auto financing to any other form of micro-lending. It is highly unlikely that MCS intended for its proposed amendments to capture such a broad range of activities, yet that may well be the import of the proposed amendments if they are not fundamentally changed. The Regulation is scheduled to come into force on October 31, 2013.
The Ontario government has posted its proposed regulations with a call for public comment and submissions. Businesses in Ontario that provide loans for less than $5,000 or who provide loans that otherwise satisfy one of the criteria set out above are advised to make submissions to the Ontario government via its website.