Regulating Payday Lenders in Canada: Drawing on American Lessons

Abstract

The regulation of payday loans holds the potential of extending the benefits of regulating overindebtedness, currently provided via bankruptcy legislation to the middle-class, to lower income debtors. This potential needs to be balanced against lower income debtors' need for credit and the corresponding benefits resulting from access to credit provided by alternative credit markets, such as the payday lending market. Unlike the United States, where payday lenders have more locations than Starbucks and McDonalds combined, and payday lending regulation is up there with Vampire Weekend and the Tipping Point as an attention grabbing pop-culture reference, payday lending is relatively new, underdeveloped and unregulated in Canada. Over the last year, in the wake of a recent amendment to the Canadian Criminal Code, that would see payday lenders exempted from the 60 per cent criminal rate of interest in provinces where payday lenders are provincially regulated, Canadian provinces have began to regulate and put forth regulatory proposals for a previously unregulated area. This exercise has been attempted in the context of limited recent domestic analysis of the payday lending industry, borrowers and regulatory options. Accordingly, this article sets out to fill this void. The article draws on the American experience with payday lending and payday lending regulation, and also a first-hand experience of attempting to obtain a payday loan in Toronto, Ontario, to evaluate the current provincial reform efforts.