Loophole in Bill Allows Payday Lenders to Charge 365% Interest Rates, Senate Committee Hears

A loan store is seen in Oshawa, Ontario on Dec. 18, 2019. The Canadian Press/Aaron Vincent Elkaim

The Department of Finance has confirmed the existence of a loophole in a bill aimed at combating usury, allowing payday lenders to charge interest rates of up to 365 percent annually.

“The annual percentage rate on $14 per $100 is still a very high rate, 300 percent or more,” Sen. Jim Quinn said during a Standing Senate Committee on Legal and Constitutional Affairs meeting on May 18. “That’s a very high rate. I’m wondering why.”

Bill C-47, also known as the Budget Implementation Act, lowers the criminal interest rate from the current 60 percent a year to approximately 42 percent, according to Blacklock’s Reporter. However, payday lenders are still permitted to charge borrowers up to $14 on every $100 borrowed on a monthly or biweekly basis, resulting in an equivalent annual interest rate of 365 percent.

“That does target vulnerable Canadians mostly,” Quinn said. “Why wouldn’t we consider having a consistent application of the criminal rate? I am at a loss as to why we are not better protecting those most vulnerable.”

In defence of the exemption, Attorney General David Lametti acknowledged the validity of the concern raised but said there is “a sad necessity for a lot of the payday loan operations to make these kinds of monies available,” citing the higher risk involved in denying access to immediate funds could leave individuals without food.

“Shouldn’t vulnerable Canadians be better protected?” Quinn asked.

“The opposite is also true if they don’t have access to that money,” Lametti responded. “If they don’t have immediate access to that money they also don’t get food. It’s a lousy situation. It’s a true dilemma. Neither option is good.”

Sen. Kim Pate brought attention to the fact that payday lenders have already started adapting their practices to circumvent any new usury laws. She pointed out that these predatory companies have begun offering high-interest installment loans instead of traditional payday loans, making it clear that stricter measures are necessary to address the issue effectively.

Pate further emphasized the need to address that chartered banks often fail to cater to the needs of those who are compelled to turn to predatory lenders. She expressed interest in developments in that area, suggesting that a comprehensive solution requires improvements in mainstream financing options.

Mark Radley, acting director of consumer affairs in the Department of Finance, said further legislation is under consideration, and that “We'll be proceeding to consult on whether to lower the criminal rate of interest further as well as lowering the cap on payday lending.”

In 2007, the responsibility of regulating payday loans was assigned to individual provinces. A 2010 study titled “Payday Lending: In Search of A Local Alternative,” conducted by the Wellesley Institute, a research group based in Ontario,  revealed that borrowers often resort to high-interest short-term loans due to limited access to mainstream financing.

The study also highlighted the alarming trend of chronic debt among borrowers who find themselves trapped in a cycle of repeat loans, paying additional fees without receiving any new funds.