Charities that engage in charitable micro-lending programs (both inside and outside Canada) need to be aware of a proposed amendment to the regulations under the Ontario Payday Loans Act, 2008 (the “Act”) which could have significant implications.
The proposed amendment would prescribe that lines of credit loans for $5,000 or less be made subject to the Act. If passed, this could mean that where either the lender or the borrower is located in Ontario, lenders of micro-loans would require a lender’s licence, be subject to inspection, have to provide certain mandatory information to borrowers, and other matters. The lender could also be made subject to potential penalties under the Act, which can include substantial fines and possible imprisonment.
The Ontario government has posted the draft amendment for public comments until September 30, 2013.
Some charities and non-profit organizations make loans, or guarantee loans made by a financial institution or angel lender, to Ontario residents who are new Canadians or former patients now discharged from medical care, to help them start home businesses. For example, a $2,000 loan might buy an industrial sewing machine and supplies to run a home garment-making business. Many charities also engage in a range of micro-lending programs in the developing world to support poor communities.
The present draft of this amending regulation provides that the Act would apply to:
… a loan under which a lender extends credit to a borrower so that the borrower may make one or more draws for up to an aggregate amount of principal and to which one of the following criteria applies but does not apply to a loan that is secured against real property:
- The aggregate amount is $5,000 or less.
- The borrower is not entitled to make a draw without first obtaining authorization, approval or permission of any kind from the lender or any other person, whether or not there is a charge for obtaining the authorization, approval or permission.
- The borrower is required to make repayments of the principal amount of the loan or payments of any other amounts under the loan on a schedule that corresponds to the days on which the borrower is regularly due to receive income.
- The amount that the borrower is required to pay in any 30-day period under the loan, except for the last such period, includes one or more repayments totalling at least 10 per cent of the principal amount of the loan.
The purpose of this amendment appears to be aimed at payday loan lenders who have created new loan products that are not caught by the definition of “payday loan” in the Act, and as a result are not caught by the capped rates of return on payday loans contained in the Act. Read literally, however, the proposed regulation could arguably encompass either of the following:
- charities (wherever located) that conduct micro-lending programs in which some borrowers are located in Ontario; and
- charities that are located in Ontario and conduct micro-lending programs outside Canada, either directly or, potentially, through an agent or service contractor in the local country.
It is highly unlikely that the amendment was intended to catch charitable micro-lenders. However, unless the amendment is revised to include an exemption for charities that conduct charitable micro-lending (or, at least, charitable micro-lending outside Canada), microfinance charities may find themselves uncertain as to their compliance with the Act.
The government website posting the amendment and inviting public comment is found here. Charities that do micro-lending in Ontario, as well as charities that are based in Ontario and do micro-lending elsewhere, should send comments to the Ontario Ministry of Consumer Services advising of this issue and requesting that they be exempted from the new amendments.