The federal government is expected to introduce legislation soon aimed at regulating the industry that provides short-term loans to Canadians who have run out of money before payday.

The bill will amend Section 347 of the Criminal Code, creating a special exemption that will allow the provinces to set short-term rates for the payday loan industry. That section deals with criminal interest rates.

Payday lenders target low-income people, who can face exorbitant interest rates and fees.
(CBC)

The Harper government had been expected to introduce the bill on Wednesday. But a government spokesman told CBC News the legislation  will be introduced when the Commons' calendar is less crowded.

Under current provisions of the Criminal Code, a criminal interest rate is defined as more than 60 per cent annually. The law provides for maximum prison terms of five years for lending beyond that rate.

The proposed changes, if passed, would transfer control of regulating short-term loans to the provinces.

Manitoba, which has been dealing with a number of payday operations that have appeared in recent years, has already prepared draft legislation.

B.C., Alberta, Nova Scotia and New Brunswick have indicated they are also interested in drafting laws to regulate the industry in their respective provinces.

Critics claim 1,000 per cent interest rates

Payday companies typically operate out of storefronts in less affluent neighbourhoods. Critics say the lack of guidelines has allowed some companies to levy fees and other charges that can amount to more than 1,000 per cent a year.

The industry has attracted a lot of criticism because their loans can result in huge debts for those consumers who incur added charges when they keep rolling over loans from week to week and month to month, simply because they're unable to pay back the original loan.

The loans are particularly attractive to working Canadians who either live paycheque to paycheque or who run out of money before payday. Regular financial institutions are not interested in giving out $500 loans for two-week periods.

NDP MP Judy Wasylycia-Leis, MP for Winnipeg North, has lobbied for changes to the federal regulation of the industry for years.

She said the problem has not been a high priority because it affects low-income people and it falls into a grey jurisdictional area. Ottawa controls interest rates while the provinces are responsible for consumer protection.

"People who are most vulnerable — on the low end of the income scale — are often targeted by payday lenders. And this hasn't been a high enough priority," she told the Canadian Press.
 
"Unlike any other area, we've left people to the whim of a completely unregulated marketplace. It takes a political will that has been lacking, and it takes the provinces getting their act together."

Loan association welcomes new laws

Michael Thompson, president of the Canadian Payday Loan Association, said Tuesday he welcomes the legislation, but he is concerned about the cap on what lenders can charge.

"Government has acknowledged that payday lenders provide an important service, so they have to set caps that are appropriate to allowing the industry to continue to operate and provide that service," Thompson said.

In Manitoba, meanwhile, the impending legislation is seen as good news. Manitoba introduced its own payday loan legislation in March, but it has not yet been proclaimed into law.

"I think it's good for the country. It's good for consumers," Manitoba Finance Minister Greg Selinger said Tuesday.

The province has put its legislation on hold until the federal government passes its amendments.

Manitoba's proposed law would require payday loan companies to be licensed and bonded. Potential customers would be warned about the high cost of the loan.

The industry, which lends about $2 billion each year, services about two million Canadians annually.

With files from the Canadian Press