Finally, there are new capping regulations on payday installment loans implemented in British Columbia (Canada, Republic of Ireland and the United Kingdom). This is in response to the calls for the protection of borrowers against predatory lenders. British Columbia has capped the total charges on their payday installment loans at $23 per $100 loaned including all interest and fees.
The British Columbia regulatory changes include the following:
- A loan agreement should be legally made between the payday lender and the borrower that clearly discloses all charges, terms and conditions. In addition, lenders are required to display posters and signage about their rates and fees.
- Borrowers have the right to cancel the payday installment loan by the end of the following day, without paying any charges.
- Lenders can not collect payments on payday installment loans directly from the borrowers employer or have unrestricted access to his bank account. Lenders are also not allowed to ask for repayment of the loan before the borrowers payday.
- Lenders should not issue more than one loan to a borrower at a time and avoid rolling one loan into another with new charges attached.
- Lenders are prohibited from issuing a payday installment loan that is 50% of the borrowers next paycheck.
According to Solicitor General John van Dongen, one of the proponents of the legislation, “Many British Columbians use payday installment loans from time to time. However, the real cost of these short-term loans can be extremely high for borrowers when fees are added in and they can have trouble paying the loan off by the due date. We’re regulating the industry to ensure that these loans are being administered fairly and appropriately.” In fact, records show that there has been a significant increase in the short-term lending industry in British Columbia and there are about 250-300 payday outlets as of today.
To further ensure compliance to the new regulations on payday installment loans, as of Nov. 1, 2009, all lenders and lending companies in British Columbia should be licensed by the Business Practices and Consumer Protection Authority (BPCPA). The BPCPA will have the tools needed to ensure industry compliance and will be reviewed every two years.
However, Canadian regulators are warned by the Federal Reserve Bank of New York about some drawbacks regarding capping interest rates in British Columbia. In their study, households in states where payday installment loans are capped or even banned, borrowers bounce more checks, thus, incurring more costs than if they had applied for the loan. There are also more complaints against receiving annoying and harassing calls from collection agents.
In the conclusion of the study made by the Federal Reserve Bank of New York, the borrowers welfare is harmed when access to payday installment loans is capped or banned. Price caps may only bring more harm to borrowers because lenders come up with pricing strategies and terms which work around these restrictions.
But according to Scott Hannah of the Credit Counseling Society, “These measures (regulating interest rates) will help borrowers clearly understand the costs associated with payday installment loans and assist those who are repeatedly using these loans. The British Columbia government is moving in the right direction with these regulations.” The effect of capping payday installment loans depends on the weight of the legislation. How and when it is imposed will either bring positive or negative effect to borrowers.