On January 29, the Government of Ontario released its consultation paper on regulating Alternative Financial Services (AFS) and high-cost credit, titled "High-Cost Credit in Ontario: Strengthening Protections for Ontario Consumers" (Consultation Paper).
What you need to know
- Growing in popularity, AFS are high-cost financial services offered outside of traditional financial institutions like banks and credit unions. Common AFS offerings include payday loans, instalment loans, lines of credit, and auto title loans.
- The Consultation Paper seeks input on establishing a high-cost credit definition, licensing high-cost credit providers, regulating costs, fees and charges, and imposing disclosure, cooling-off period and debt collection requirements, among others.
- The government is not considering the regulation of high-cost credit provided by banks or credit unions, and payday loans would continue to be regulated under the Payday Loans Act and its regulations.
- Currently, British Columbia, Alberta, Manitoba and Québec are the only Canadian provinces with legislation respecting high-cost credit.
- The Consultation Paper requests the views of stakeholders on its proposals by March 31, 2021.
Government of Ontario's Consultation Paper and consumer protection
Currently, other than for payday loans (which are regulated), Ontario law does not provide consumers with protections specific to high-cost financial services. High-cost loans, which are typically for larger amounts and a longer duration than payday loans, create a greater potential for harm to economically vulnerable consumers, including the potential to trap them in debt cycles. To address this gap in legislation, the Consultation Paper proposes to protect consumers by establishing a threshold interest rate, several protective requirements and a licensing regime. This regime would be similar to the one that currently exists in Québec, Manitoba and Alberta and is currently being proposed in BC.
The new requirements would not apply to credit or loans provided by banks or credit unions, as these businesses are already regulated separately, and payday loans would continue to be regulated under the Payday Loans Act and its regulations (together, the PLA).
High-cost credit or AFS products
Marketed as instalment loans, personal loans, lines of credit or debt consolidation loans, high-cost credit is distinguished from other types of loans by virtue of their interest rates, which are much higher than those generally charged by banks and credit unions.
Many high-cost credit providers in Ontario, including licensed payday lenders that also offer other types of high-cost credit, advertise instalment loans with APRs ranging from 20 percent to those exceeding 45 percent. Some of these loans may approach the maximum interest rate permitted by the Criminal Code (Canada), which is an effective annual rate of interest of 60 percent, when various fees are factored into the cost of borrowing.
Definition of high-cost credit
The Consultation Paper proposes to define a high-cost credit agreement as an agreement with an APR that exceeds the Bank Rate of the Bank of Canada by 25 percent or more. A business in Ontario that offers credit agreements that meet this threshold would be required to register and would also be subject to regulatory requirements.
The Ontario definition is similar to the Québec definition, which defines high-cost credit agreements as agreements where the credit rate exceeds the Bank Rate of the Bank of Canada by more than 22 percentage points. Given current low interest rates, Québec's rule means that an interest rate over 22.5% is considered "high-cost". This is in contrast to Alberta and Manitoba which use an absolute standard; specifically, Alberta defines a high-cost credit agreement as one with an interest rate of 32 percent or more, and Manitoba as one with an interest rate exceeding 32 percent.
Requirements regarding high-cost credit contracts
The Consultation Paper considers a regulatory framework for high-cost lending that is similar to the payday lending regime. We identify below the key aspects of the proposal and for comparison purposes have provided some details regarding Québec's framework.
Disclosure requirements: The Ministry proposes enhanced requirements for lenders to disclose and review important terms and conditions of high-cost credit agreements with borrowers to ensure clear, simple and transparent disclosure of prices, fees and other key loan features. Specifically, the Consultation Paper proposes:
- Strengthened disclosure requirements for credit agreements which mimic those in the PLA; and
- Disclosure requirements for optional products and services (e.g., in order to ensure consumers understand that a loan can still be purchased without the obligation to purchase such optional services, and to ensure that borrowers understand the cost of the optional products or service, which may be very high relative to the potential benefit to the borrower).
We note that Québec's Consumer Protection Act (the Québec CPA) contains similar requirements with respect to loans and open credit/credit cards, which also apply to high-cost credit.
Cooling-off period: The Ontario Consumer Protection Act (the Ontario CPA) provides for a mandatory 10-day no-fault cooling off period for specific contracts, and the PLA provides for a two business day cooling off period regarding payday loan contracts. Because high-cost credit agreements tend to be complex and in some cases are entered into by borrowers under pressure, the Ministry is similarly proposing to establish a mandatory no-fault cooling off period of at least two business days for high-cost credit agreements. In comparison, the Québec CPA provides for a 10-day cooling off period for high-cost credit contracts.
Protections against collection practices: The Consultation Paper notes that some lenders may be engaging in practices that would be prohibited if they were a collection agency or payday lender, including contacting the borrower or family members of the borrower frequently. The Ministry is proposing that prohibitions against certain debt collection practices, similar to those in place in Ontario for collection agencies and payday lenders under legislation, are implemented. Québec legislation provides stringent rules regarding collection practices of lenders, including a general prohibition on contacting family members of a borrower or contacting borrowers at their workplace, except as permitted by law.
Regulation of costs, fees and charges: Other than the criminal interest rate discussed earlier in this bulletin, there are presently no limits in Ontario on interest and fees that a lender (other than a payday lender) can charge. The Consultation Paper calls for consideration of the need to establish some limits on costs, fees and charges that may be imposed on high-cost credit agreements or products. Such limits may be aligned with those applicable to payday loans (for example, payday lenders are prohibited from charging a borrower more than $15 for every $100 borrowers, including all fees and charges directly or indirectly related to the agreement). By comparison, the Québec OPC Office de la protection du consommateur refuses as a matter of policy to grant permits to lenders whose rates are above 35%.
We note that, unlike Québec, Ontario does not seem to require high cost lenders (and all non-bank lenders) to assess the consumer's capacity to repay credit; the Québec CPA requires such assessment by non-bank lenders for granting new credit or granting credit limit increases, and a copy of the assessment must be given to the consumer. Such an assessment was not addressed in the Consultation Paper. Under the Québec CPA, high-cost credit contracts entered into with a consumer whose debt ratio (essentially monthly disbursements relating to housing, long-term lease of goods, and credit contracts vs. monthly income) is above 45% are presumed to be "excessive, harsh or unconscionable". When the lender fails to rebut this presumption, a consumer may demand nullity of the contract.
Online/remote high-cost lending: The Consultation Paper notes consideration of how disclosures can be improved in online high-cost lending through more specific or different requirements. Such rules would be consistent with the Ontario CPA and PLA which both provide for slight variations in requirements for remote/online agreements.
The Consultation Paper also requests feedback on regulation of auto title loans (which often carry significant charges), and emerging / alternative financing products like "buy now, pay later" services.
Considerations for lenders
The Ontario CPA currently contains robust disclosure requirements for all lenders, including those offering AFS. It also offers broad prohibitions against unfair and abusive practices. In many ways, the proposals are intended to ensure that existing requirements are met by those offering AFS, in addition to enhancing transparency of borrowing costs and loan terms for those borrowers who are most vulnerable. The regulation of costs, fees and charges would likely have the most dramatic effect on AFS businesses.
To discuss these issues, please contact the author(s).
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