Posted on July 11, 2017 at 6:20 p.m.
My first article for Insauga focused on the issue of payday loan companies and whether they should exercise more stringent oversight of their operations. If they cannot be banned outright, was it possible that more oversight and rules to protect vulnerable people were enforced? Some local politicians have embraced this cause, such as Hamilton City Councilor Matthew Green, and the topic has been a hot topic among many municipal governments in Ontario and beyond.
In response to these concerns about the payday loan industry, the Ontario government released proposed changes to the Payday Loans Act. The public can submit their opinions via the email link at the bottom of the link on Payday Lender Reform, otherwise known as “Alternative Financial Services” (AFS).
The deadline for submitting your thoughts to the Ministry of Consumer Services is August 21.
The Alternative Financial Services consultation paper describes what falls under the basic definition of an AFS, which are financial services provided outside traditional financial institutions like banks and credit unions. AFS considered by the consultation report include payday lenders, check cashing, leasing with option to buy, and installment loans. A number of suggested changes to existing legislation were included in the document.
Here are some of the proposed reforms outlined in the consultation document.
Extended payment plans
The Ontario government would propose the creation of an optional extended payment plan for recurring borrowers. Under this proposal, a payday loan company lending money to a borrower for the third time in 100 days would be required to allow borrowers to repay the loan in installments. This would spread the cost of a payday loan over a longer period of time, giving consumers the flexibility to pay off the loan over time.
According to consultations with stakeholders, borrowers find it difficult to manage the short term and lump sum payment of payday loans. This measure would be designed to give consumers more options to pay off their loans on time, or if they want to pay off the loan in full and end their extended repayment plans.
Responsible lending standards
Another proposal is to require payday lenders to consider the circumstances of each borrower when determining the amount of a payday loan. Before entering into a deal, many lenders will determine the borrower’s net income. But the high frequency of repeat borrowing has shown that many borrowers find their loans unaffordable and end up borrowing repeatedly.
The government has looked at similar approaches to lending standards in British Columbia, Saskatchewan and Manitoba. In these provinces, the formula used by lenders to calculate the expected take-home pay of the borrower would be: Net Pay = MNI x 12. MNI stands for Monthly Net Income and 12 is the number of pay periods in a year. The NMI will be the borrower’s net income for the previous calendar year. Ontario proposes to limit the loan amount to 40 percent of the borrower’s take-home pay.
Under the current system, payday lenders can only enter into a new agreement with a borrower if 7 days have passed since the borrower has paid off the entire outstanding balance of the first loan, or if the borrower has provided proof. repayment on the first loan. This means that a borrower could take out another loan on the same day he paid it off.
The Ontario government is proposing to reduce the waiting period from 7 days to 6 days and eliminate the provision that allows a borrower to receive another loan when proof of repayment is provided. 6 days is short enough that someone who gets paid weekly still has access to payday loans every pay period. The government has concluded that proof of reimbursement has little impact on the consumer’s assessment of their options, which is why they are proposing to remove it.
Improve existing disclosures
Consumer advocates have called for the annual percentage rate (APR) to be included in the disclosure of the cost of borrowing for a payday loan. The APR is a common tool for comparing the cost of credit, allowing consumers to easily compare the relative cost of different forms of credit regardless of the length of the term.
The government proposes to implement such a disclosure on borrowing costs and further, when these costs are used for illustration purposes, the lender indicates that the sampling period is 14 days, example of loan being in the amount of $ 500.
The proposal would require payday lenders to provide borrowers with information about nonprofit credit counseling, which can help consumers manage their debts. The report mentions that some payday lenders have publicly supported the idea, which may seem counterintuitive if the industry was only interested in making a profit. But in the long run, it could be useful for both lenders and borrowers if they can keep the latter creditworthy by helping them manage their credit.
Least Cost Loan Exemption
There is a broad definition of what is considered a payday loan, and this definition can encompass some lower cost loans that are not so serious or perpetual. The government is proposing to exempt credit unions from the requirements of the Payday Loans Act and its regulations.
There are other proposals as well, such as requiring advertising for payday loans to include certain information, signage comparing the cost of a payday loan to another consumer credit product, and the need. modify the web design for AFS. Other measures that have been discussed include those affecting minimum lending standards, prohibiting contacts to seek refinancing and lease agreements with an option to buy.
For those of you who are familiar with the use of payday loans and related services, you should review the consultation document in detail to see how these changes affect you.
Photo courtesy of ww2.cfo.com
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