A payday loan is a short-term loan for a relatively small amount to be repaid on the borrower’s next payday. The borrower writes a post-dated cheque for the principal, plus interest and fees. A typical payday loan might involve a loan for $200 cash with a $275 repayment due two weeks later.

The Criminal Code currently sets a limit of 60 percent on the annual interest rate for lenders. With short-term loans, such as payday loans, the total cost of borrowing, including fees and charges, far exceeds that limit. For example, in the loan described above, the effective annual interest rate is close to 1,000 percent. A recent amendment to the Criminal Code exempts payday lenders from the 60 percent limit, if there is provincial regulation in place and the province has set the maximum cost of borrowing.

“Most provinces are moving toward regulating payday lenders,” says Attorney General Gerard Greenan. “The PEI government is currently considering a similar initiative, and we want to know what Islanders think. This is an opportunity for the public to tell us how the province should respond to payday lenders and what rules they would like to have applied to the industry.”

In addition to dealing with the cost of borrowing, many provincial laws are also setting best practices for payday lenders. For example, the legislation in other provinces requires full and clear disclosure of all terms of the loan in the loan agreement. Generally, lenders are also prohibited from extending further credit until the borrower has fully paid off all previous loans.

To participate in the consultation, members of the public and interested parties are asked to submit written comments by December 31, 2008.

The consultation paper is available on the PEI Government website at www.gov.pe.ca/consumerservices. Copies can also be requested from the Consumer, Corporate and Insurance Services Division of the Office of the Attorney General at the Shaw Building (4th Floor), 95 Rochford St, PO Box 2000, Charlottetown, PE, C1A 7N8 or by telephone at (902) 368-4580 or 1-800-658-1799.

BACKGROUNDER ON PAYDAY LENDING REGULATION

• The government of Prince Edward Island is seeking public comment on regulating the payday lending industry.

• Payday loans represent a relatively high-cost form of short-term credit. Currently, there are approximately 1350 storefront outlets operating across Canada. Numerous storefronts have been operating in Prince Edward Island for the past four to five years.

• A typical payday loan would involve a cash payment to the borrower of $200 with repayment of $275 two weeks later. This would represent an annual cost of borrowing close to 1000 percent. Under the Criminal Code, the maximum annual cost of borrowing on a loan is 60 percent.

• Recent amendments to the Criminal Code provide that certain provinces with appropriate legislative protections in place may be designated to allow payday lenders to charge rates in excess of 60 percent.

• Certain provinces have or are in the process of enacting consumer protection legislation specific to the payday loan industry:

- Prince Edward Island - General consumer protection legislation.

- Newfoundland & Labrador - General consumer protection legislation.

- New Brunswick - Bill 4, An Act Respecting Payday Loans, enacted April, 2008. Not yet in force.

- Nova Scotia - Bill 87, An Act to Amend the Consumer Protection Act, enacted November, 2006. Not yet in force.

- Ontario - Payday Loans Act, enacted June, 2008. Not yet in force.

- Quebec - For many years, the Office de la protection du consommateur has refused to issue permits under the Consumer Protection Act to businesses that charge interest rates greater than 35 percent per annum.

- Manitoba - The Consumer Protection Amendment Act (Payday Loans), enacted December, 2006. In force.

- Saskatchewan - Bill 43, An Act Respecting Payday Loan Agreements, Payday Lenders and Borrowers, enacted May, 2007. Not yet in force.

- Alberta - General consumer protection legislation.

- British Columbia - Bill 27, Business Practices and Consumer Protection (Payday Loans) Amendment Act, enacted November 22, 2007. Not yet in force.

- Northwest Territories - General consumer protection legislation.

- Yukon - General consumer protection legislation.

- Nunavut - General consumer protection legislation.

The consultation paper is available on the PEI Government website at www.gov.pe.ca/consumerservices. Copies can also be requested from the Consumer, Corporate and Insurance Services Division of the Office of the Attorney General at 4th Floor Shaw Building, 95 Rochford St, PO Box 2000, Charlottetown, PE, C1A 7N8 or by telephone at (902) 368-4580 or 1-800-658-1799.