DATE: June 21, 2016 REPORT NO. CS2016-062 TO: FROM: PREPARED BY: Chair and Members Committee of the Whole - Operations and Administration L. Wolfe, City Clerk, Director of Clerk s Services A. Eldridge, Co-ordinator, Licensing & Election Services 1.0 TYPE OF REPORT CONSENT ITEM [ ] ITEM FOR CONSIDERATION [ X ] 2.0 TOPIC: Business Licensing - Payday Loan Businesses [Financial Impact - None] (CS2016-062) 3.0 RECOMMENDATIONS: THAT Report CS2016-062 - Licensing of Payday Loan businesses within the City of Brantford BE RECEIVED. 4.0 PURPOSE The purpose of this report is to provide Council with information relating to payday loan businesses located within the City of Brantford. This report is responding to Council s direction that staff research the matter and report on the feasibility of licensing those types of businesses at the Municipal level. 5.0 BACKGROUND In Ontario, it is estimated that lenders issue payday loans to about 3 percent of Ontarians (400,000 individuals) worth approximately $1.1 - $1.5 billion 1, representing a significant source of consumer credit. Deloitte reports that there are 796 payday loan licensed locations in Ontario, operated by 249 different businesses, and the four largest businesses operate 57 percent of the storefronts. In Brantford, there are eleven (11) establishments that operate payday loans (Appendix A ). These types of businesses are regulated by Provincial legislation the Payday Loans Act, 2008 and administered by the Ministry of Government and Consumer Services. Currently, the City does not regulate this type of business. 1 Deloitte/Payday Lending Panel s Findings and Recommendations Report, May 2014, p.6
June 21, 2016 Page 2 A payday loan is a small, unsecured loan that is due and borrowed against the value of the individual s next payday designed to provide relief for urgent, short-term cash needs. The loan is made in exchange for a post-dated cheque or pre-authorized debit. Payday loans generally cater to individuals who have low to moderate income and are unable to access traditional sources of credit such as bank loans or credit cards due to poor or limited credit history, and who are more likely to be in financial distress than non-borrowers. A 2014 survey of payday lenders reported the typical payday loan in Ontario is approximately $460 with a two week term 2. Under current legislation, there is a price cap on the maximum total cost of borrowing, which is set at $21 per $100 advanced (e.g. $63 for a $300 loan), and a payday loan cannot exceed a $1,500 value or a sixty-two day term. 3 Payday loans are the most expensive type of consumer loan in Ontario with the annual percentage rate of 766.5% on a 10 day loan. Individuals with limited credit to address immediate financial needs may turn to payday loans rather than borrowing from friends/family, pawning or selling possessions. Access to payday loans may also reduce the risk of borrowers going to unlicensed lenders or loan brokers. However, frequent use of payday loans generally adds to borrower s financial hardship. Research indicates that the typical payday loan borrower takes out multiple loans in the course of a year, and when they are using loans to pay recurring expenses, they face difficulty in repaying the loan and fee while still covering those recurring expenses. Payday loan borrowers face a risk of entering a debt cycle of continuous payday loan borrowing. In response to the increasing use of payday loans in the lending market, the Province brought in the Payday Loans Act, 2008 to regulate payday loan lenders and to provide consumer protection to individuals using the service. The following table 4 outlines consumer protection provisions of the Payday Loans Act, 2008 and Regulations: CATEGORY CONSUMER PROTECTION PROVISION REFERENCE Restrictions on borrowing Agreement and Advance Other Goods or Services Price cap Lenders may not rollover the balance on an existing payday loan agreement into a new payday loan agreement. Lenders may not offer concurrent payday loans (maximum of one outstanding loan per customer). The borrower must receive a copy of the payday loan agreement and the payday loan advance immediately/no later than upon entering into the agreement. Licensees are prohibited from offering or providing other goods or services in connection with a payday loan agreement. Lenders may charge a maximum of $21 per $100 advanced (e.g., the fee on a $300 loan cannot exceed $63). Payday Loans Act s.35 Payday Loans Act. S.29 O. Reg. 98/09, ss.27(3) O. Reg. 98/09, s.23 2 Deloitte/Payday Lending Panel s Findings and Recommendations Report, May 2014, p.6 3 O. Reg. 98/09, s. 23, p.14 4 Deloitte, p.7
June 21, 2016 Page 3 Disclosure requirements No repeat processing charges Prohibited contacts Collection practices Lenders must disclose certain information about the payday loan agreement on the first page of the agreement. The information that must be disclosed includes the amount of the loan, the loan term and the total cost of borrowing. Licensees must display a poster at their premises that sets out information such as the regulated maximum cost of borrowing and the amount that the lender charges. Lenders are prohibited from processing a pre-authorized debit (or other instrument) more than once if subsequent processing attempts results in a charge to the borrower. No licensee may contact, in respect of a payday loan, a member of the borrower s family, or a relative, friend or acquaintance. Employers may only be contacted to verify employment details or with the prior consent of the borrower. No licensee may communicate with a consumer in a manner or with a frequency that constitutes harassment. O. Reg. 98/90, s. 18 s. 14 O. Reg. 98/09, s. 31 O. Reg. 98/09, s.26 O. Reg. 98/09, s. 32 Provincial Review of Payday Loans Act, 2008 In 2013, the Ministry of Government and Consumer Services announced a review of the Payday Loans Act, 2008 with the intent to strengthen consumer protection in the context of Ontario s changing payday loan market. As part of the review, the Ministry considered recommendations by a 14 member Payday Lending Panel of expert stakeholders formed to advise the Ministry on improvements to the Act. The Panel reported to the Ministry and focused on the following seven key priority topics: Online and mobile payday loans New/alternative loan products Concurrent loans and rollovers (high-frequency repeat borrowing) Data requirements, monitoring and enforcement Maximum total cost of borrowing Financial education and awareness Future reviews of legislation and regulation Attached as Appendix B is the list of recommendations made by the Expert Panel to the Ministry of Government and Consumer Services. As noted above, this Expert Panel reported back to the Ministry in May 2014 with recommendations to strengthen the Payday Loans Act, 2008. In December 2015, the Ministry introduced Bill 156, Alternative Financial Services Statute Law Amendment Act, 2016, currently in second reading debate. Bill 156 expands the regulation-making powers in the Payday Loans Act, 2008 with the most significant amendments including:
June 21, 2016 Page 4 restrictions respecting concurrent or replacement payday loan agreements; restrictions relating to the making of more than one payday loan between the same borrower and different lenders; Authority to the Registrar to conduct inspections if there are reasonable grounds to believe that a person or an entity is acting as a lender or loan broker while not licensed. The Province introduced this legislation to increase consumer protections for those individuals who use high-cost alternative financial services such as payday loans, allowing repeat borrowers the option of a longer repayment period to help protect against falling into a cycle of personal debt 5. 6.0 CORPORATE POLICY CONTEXT The report was reviewed within the context of the Municipal Strategic Goal # 2 High Quality of Life and Caring for all Citizens wherein Brantford is recognized as a safe and healthy community. 7.0 INPUT FROM OTHER SOURCES Input was received through a review of practices in other municipalities, staff comments from Clerks, Legal and Social Services Departments, and through research on current legislation/licensing by the Provincial Ministry of Government and Consumer Services and the Ministry of Finance. 8.0 ANALYSIS On September 21, 2015 Council approved the following resolution: A. THAT the Mayor BE AUTHORIZED to forward correspondence to the Province of Ontario, to the attention of the Minister of Consumer Services, requesting that the protections afforded by the Payday Loans Act be strengthened and that Municipalities be authorized to limit the number and regulate the locations of payday loan and cheque cashing outlets; and B. THAT staff BE DIRECTED to research the feasibility of licensing payday loan and cheque cashing outlets to assist in consumer protection by requiring the businesses to post their rates, show comparative and annualized rates and information regarding debt counselling; and C. THAT staff ANALYZE AND MAP pay day loan and cheque cashing outlets in Brantford and report back to Council on recommendations for alternative accessible financial services for Brantford residents. 5 Ontario Proposing Changes to Payday Loans, Debt Collection Press Release, Ministry of Government and Consumer Services Press Release, December 9, 2015
June 21, 2016 Page 5 Resolution - Part A Request Province to Strengthen the Act Staff corresponded with the Province and attached as Appendix C is the acknowledgment of Council s request. The Province is taking action to strengthen the Payday Loans Act, 2008 by introducing Bill 156, Alternative Financial Services Statute Law Amendment Act, 2016. Resolution Part B Possible Municipal Regulation In review as to whether or not the Municipality should regulate these types of businesses, staff considered the following: (a) existing Provincial oversight, (b) municipal authority, and (c) existing municipal regulation of this type of business across the Province. (a) Existing Provincial Oversight The Provincial Ministry of Government and Consumer Services is responsible for the Consumer Protection Act and the Payday Loans Act, 2008 which regulates and licenses payday loan businesses. Municipalities can include these types of businesses within their established business licensing framework should they deem it in the public interest to regulate beyond the efforts of the Province. The Ministry of Government and Consumer Services is building on the on-going work of the review of the Payday Loans Act, 2008 to examine broader opportunities to improve consumer protection for vulnerable indebted Ontarians. The Ministry has the responsibility of ensuring all Payday lenders hold a Provincial license and follow the rules set by the Payday Loans Act, 2008. The licensing fees are $750 per main office and $990 per branch office. Examples of some of the regulations are: Include specific information on the first page of the borrowers contract: o The amount being borrowed o The number of days the loan is for o How much the borrower will pay to borrow the money Business must display a poster and give out a flyer that explain the cost of taking out a payday loan over time Lender cannot contact borrower more than three times a week or on holidays Lender cannot contact borrower s spouse, family, household members, relatives, friends, neighbours, or acquaintances Lender cannot use threatening or intimidating language Lender cannot use excessive or unreasonable pressure The Ministry of Government and Consumer Services provides borrowers the opportunity to make a complaint regarding the payday loans business. Once the complaint is made, the Ministry monitors all inquiries to track patterns of misconduct.
June 21, 2016 Page 6 They may mediate or investigate complaints if the business is violating the law. Charges under the Consumer Protection Act are quite substantial: A corporation can be fined up to $250,000 A business owner can be sentenced to a term of imprisonment up to two (2) years less a day or be fined up to $50,000, or both. (b) Municipal Powers Section 8 of the Municipal Act, S.O. 2001, c.25 grants municipalities broad authority to govern their affairs as considered appropriate and within their own ability to respond to municipal issues. Further, subsection 10(2) of the Act provides that a municipality may pass By-laws regarding health, safety and wellbeing of persons. On January 1, 2007, the Municipal Statue Law Amendment Act granted municipalities broader powers to pass By-laws respecting matters including: Economic, social, and environmental well-being of the municipality; Health, safety and well-being of persons, services and things the municipality is authorized to provide that are considered desirable to the public; and, Protection of persons and property, including consumer protection. There is no authority for municipalities to limit the number of payday loan establishments, nor is there authority to regulate the fees and interest rates that these businesses can charge. Should Council establish a new schedule under the City s Business Licensing By-law to include payday loan businesses, criteria would need to be established and likely modeled after the Hamilton model which includes business identification, proof of current and valid provincial license as a lender or a loan broker under the Payday Loans Act, 2008, requirement for a poster reflecting rates, poster reflecting credit counselling, and the provision that every payday loan applicant be given information on credit counselling. The proposed licensing fees are estimated to be $650 for a new business and $557 for annual renewals. The proposed licensing fees are consistent with the existing Business Licensing fee structure. The owners/operators must still obtain a Provincial license and comply with all their requirements. Penalties will be in accordance with the provisions of the Municipal Act, S.O. 2001, c. 25. (c) Research of other Municipalities By-laws Staff has reviewed By-laws currently in force by other municipalities. The consistent response has been that they are not considering licensing this type of business as it is already regulated by the Province. The only municipality in
June 21, 2016 Page 7 Ontario that currently has a by-law in place for payday loan businesses is the City of Hamilton, enacted in February 2016. However, staff report that implementation has yet to take place. The By-law is not actively being enforced at the present time. The following requirements are included in the Hamilton by-law beyond the current Provincial regulations: Post the amount of the payday loan business s annual interest rate Post the amount of the chartered bank s annual consumer loan rate Post contact information for credit counselling agencies Provide prospective borrowers with a flyer on credit counselling information immediately upon the expression of interest in a loan Resolution Part C Attached as Appendix A is a map marked with the eleven locations of payday loan business outlets in the City. With regard to alternative accessible financial services, currently, traditional banks and credit unions do not offer the same type of loan product. However, in February, 2016 the Province announced it will make changes to the regulatory framework for Credit Unions which may offer alternative lender products at a more competitive rate than payday loan companies. This type of market-hybrid product would allow the borrower to improve his/her credit rating and break the payday loans cycle. The action is intended to have credit unions explore their role in protecting and educating consumers of payday loans. For example, in B.C., credit unions offer a type of loan which falls between a traditional line of credit and a pay day loan, with a 19% interest, monthly repayment periods, and a term of up to two years. In Ontario, a 10 day loan of $100 at the $21 fee has a 766.5% annual percentage rate. As an alternative to payday loans, there are companies in the financial services industry who offer installment loans ranging from $500-15,000 with annual interest rates ranging from 29-40% and with longer repayment terms. These companies advertise comparator cost information between installment and payday loans. 9.0 FINANCIAL IMPLICATIONS In accordance with the provisions of the Municipal Act, 2001, a Municipality may establish license fees to reflect cost recovery (or less), but cannot base fees solely on revenue generation or in an effort to discourage certain types of businesses. There are eleven (11) Payday Loan businesses within the City. In the event these types of businesses were added as a new licensing schedule to the City s Business Licensing By-law, the first year revenue would be $7,150. The renewal fee of $557 would generate revenue of $6,125 annually in subsequent years, provided the number of locations remained the same.
June 21, 2016 Page 8 10.0 CONCLUSION The payday lending industry is regulated by the Provincial Government through the Payday Loans Act, 2008. Current Provincial legislation includes consumer protections including: Posting of the loan cost and how it compares to a credit card cash advance Posting of Ministry contact information to submit complaints Rollover loans are not allowed (e.g. cannot obtain another payday loan from the same lender before paying the first loan in full) Borrowers have two (2) business days to cancel a contract for a payday loan without any penalty (e.g. paying a fee) and without having to give a reason The Ministry of Government and Consumer Services engaged a panel of experts to review the industry and make recommendations on strengthening the Act specifically to provide additional consumer protections. In response to the Panel s 2014 report, the Ministry has introduced Bill 156, Alternative Financial Services Statute Law Amendment Act, 2016, which expands the regulation-making powers in the Payday Loans Act, 2008 with the most significant amendments including: restrictions respecting concurrent or replacement payday loan agreements repeat payday loan borrowers to have options for longer repayment periods restrictions relating to the making of more than one payday loan between the same borrower and different lenders Authority to Registrar to conduct inspections if there are reasonable grounds to believe a person or entity is acting as a lender or loan broker while not licensed. Council directed staff to research the matter and report on the feasibility of licensing payday loan businesses at the Municipal level. At this time, staff recommend that Council pause on it s consideration to include payday loan businesses in the Business Licensing By-law for the following reasons: Province has undertaken significant activity to seek the guidance of a panel of experts, and consulted with the public to bring forward amendments to the Payday Loans Act, 2008 with the goal to strengthen consumer protections for individuals using payday loans After consideration of those expert panel recommendations, Province has introduced Bill 156, Alternative Financial Services Statute Law Amendment Act, 2016 which is only in second reading. Province has announced that it will make changes to the Credit Unions and Caisses Populaires Act, 1994 to work with credit unions to explore the role they can play in protecting and educating consumers of payday loans
June 21, 2016 Page 9 Staff will monitor the progression of Bill 156, Alternative Financial Services Statute Law Amendment Act, 2016 as well as the Credit Unions and Caisses Populaires Act, 1994 and will report on the details of the legislation once passed into law. Lori Wolfe, City Clerk Director of Clerk s Services Darryl Lee General Manager, Corporate Services In adopting this report, is a by-law or agreement required? If so, it should be referenced in the recommendation section. By-law required [ ] yes [ X ] no Agreement(s) or other documents to be signed by Mayor and/or City Clerk [ ] yes [ X ] no Is the necessary by-law or agreement being sent concurrently to Council? [ ] yes [ X ] no
June 21, 2016 Page 10 Appendix A
June 21, 2016 Page 11 Appendix B Summary of Payday Lending Panel Recommendations TOPIC Online and mobile payday loans RECOMMENDATIONS Enhance the content, usability and awareness of the Ministry of Consumer Services searchable database of all payday loan licensees. The Payday Loans Act should include protections for consumers against lead generators. Encourage licensed lenders and loan brokers to report all unlicensed lenders or loan brokers that come to their attention. Increase cooperation with other jurisdictions to facilitate prosecution of unlicensed lending activity. Ontarians who take out a payday loan online or on a mobile device should automatically receive the information that in-person borrowers receive in a format that recognizes the differences between in-person and online channels. Require online lenders and loan brokers to include a link to a list of licensed, non-profit credit counselling agencies that are registered charities. New/alternative loan products Encourage lenders, loan brokers, industry associations and credit counsellors to report new loan products that may violate the Payday Loans Act when such products come to their attention. High-frequency, borrowing repeat Review the existing spectrum of enforcement tools and consider new tools to address the development of new loan products that may have been designed to avoid the Payday Loans Act. Introduce a requirement for lenders to offer a voluntary extended payment plan to borrowers; the requirement should be triggered by a period of repeat borrowing. Require licensees to provide customers with a list of licensed, not-for-profit credit counselling agencies that are registered charities. Data requirements, monitoring and enforcement Authorize the Registrar to inspect unlicensed lenders and loan brokers. Consider how to facilitate access to compensation for borrowers who have been harmed by violations of the Act. Obligate lenders to provide the Registrar with data (at least at the aggregate level) on their lending activities. The data request should be developed and issued in a timely manner. A payday loan data working group should be formed to provide advice on data requirements and analysis. Maximum total cost of borrowing (price cap) The maximum total cost of borrowing (price cap) should reflect the cost of lending and a balanced approach to maintaining industry viability and affordability for consumers.
June 21, 2016 Page 12 Introduce a requirement that the price cap be reviewed every five years or less, concurrent with the full review of the Payday Loans Act. In setting the price cap, receive external advice from a broad range of stakeholders (including industry, consumer advocates, community agencies and credit counsellors). Financial education and awareness Strike a working group to study opportunities for enhancing the provision of financial literacy and education to payday loan borrowers, including the future of the Payday Lending Education Fund. Until the working group has completed its study, maintain the clauses establishing the Ontario Payday Lending Education Fund and designating the Ontario Payday Lending Education Fund Corporation. Future reviews of legislation and regulation Establish an advisory committee of payday loan industry representatives, consumer protection associations, community organizations and the Registrar or their designate that meets regularly. Review the Payday Loans Act every five years or less
June 21, 2016 Page 13 Appendix C