Although only a few lines out of the hundreds of pages that make up Budget 2021, the federal government’s commitment to open talks on changing Canada’s ‘criminal interest rate’ has anti-poverty campaigners prepare for a battle with high interest lenders.
It is currently a federal crime to charge interest greater than an annual rate of 60% on any type of installment loan or line of credit.
But the laws of Canada have left one type of loan exempt from this prohibition. Short-term payday loans — which generally must be repaid within two weeks — are regulated by the provinces and typically charge annualized interest rates in the range of 400% to 500%.
While payday loans command the highest interest rates, those who want the industry reformed are also alarmed by a new trend: payday lenders offering longer-term loans or lines of credit.
Companies like Money Mart and Cash Money began branching out into these types of loans after 2016, as provinces began to tighten rules on what they could charge for payday loans.
Compared to bank rates, the interest charged on these loans is Very high, often around 45 to 50%.
The “criminal” interest rate
These longer-term loans must meet the 60% annual interest limit, but critics like Independent Senator Pierrette Ringuette say that limit is still far too high.
“That 60% criminal interest rate that was put in place over 40 years ago is no longer what is required in the Canadian market,†she told CBC News as she was preparing to introduce a bill that would set the criminal interest rate at 20%. % over Bank of Canada overnight rate.
“We are in an era where the Bank of Canada rate is 0.5%. So I sincerely believe that 20% above the Bank of Canada overnight rate is a criminal interest rate adequate for many years to come.
“It will be in place and can be in place for a very long time, and create the stability that we need in this new modern era… We are no longer in the 1980s, [when] the Bank of Canada’s overnight rate was 22%, 23% or even 24%. »
But the industry lobby group says ‘a cut to such a rate would wipe out the sector and deny access to credit from legal approved lenders for millions of Canadians’.
the Financial Consumers Association of Canada (CCFA) – which represents Canada’s largest payday lenders, operating approximately 900 retail outlets – said in a written statement that “with the reduction, it would not be financially viable to lend to the majority of borrowers who demand credit from our members.
The lending industry has said it plans to argue that the alternative to payday lenders is criminal loan sharks.
“If the government unwittingly eliminates access to credit, the need does not disappear and borrowers will turn elsewhere to unlicensed sources,†CCFA said.
The CCFA has increasingly advanced this argument in recent years as provinces and even cities imposed restrictions on their operations – and after the federal government launched a public information campaign warn Canadians about the risks associated with using services that they believe Financial Consumer Agency of Canada, “are very expensive compared to other ways of borrowing money”.
The bills target the industry
The industry has long been targeted by anti-poverty groups such as GLANS, but is now increasingly subject to legislation.
NDP MP Peter Julian has been campaigning for tougher regulation of the high interest lending industry for years and currently has a private member’s bill on the subject.
“I’ll just give you one example of many… A local voter who borrowed $700 a few years ago paid $13,000 in interest charges and still owes $700,” he said. he told CBC News.
“We’re talking interest rates in real terms of 400, 500, up to 600% per annum. It’s legalized loan sharking and in a time when Canadians are struggling, it just shouldn’t be allowed. .”
Julian said the rules that allow the system to charge these tariffs were “put in place deliberately” and he doubts the sincerity of the government’s recent commitment to consultations.
“The government’s attempt to fake it in the budget by saying, ‘Well, we’re going to consult on this’ makes no sense to all Canadians who are struggling under the weight of an impossible debt,” a- he declared.
Like Ringette’s bill, Julian’s C-247 proposes linking the criminal interest rate to the Bank of Canada’s overnight rate, but with a little more leeway for lenders — under the Julian’s bill, they could exceed that rate by 30%.
Katherine Cuplinskas of Finance Canada says the government is committed to fixing the problem.
“Over the past 15 months, we have introduced significant new and expanded income support programs. These include CERB, Recovery Benefit and the expanded Employment Insurance (EI) program,†she said.
“However, many low- and modest-income Canadians continue to rely on short-term, high-interest loans to make ends meet, leaving them in a cycle of debt. That is why we are committing in the budget to fight against predatory lending. We will soon be launching a consultation on the lowering of the criminal interest rate in the Criminal Code of Canada on installment loans offered by payday lenders. »
Cuplinskas told CBC News the government was not yet ready to provide details on how and when the consultation will take place.
The pandemic effect
While the pandemic may have brought more attention to the issue of high-interest loans, it’s unclear what effect it’s actually had on lenders and borrowers.
Julian and Ringuette said they heard of people being forced to resort to such loans to get through a difficult year of job losses and reduced working hours. The lending industry, meanwhile, said it has seen demand for its services decline during the pandemic.
Lenders say that if they are unable to provide high-interest loans, things will only get worse for the poorest Canadians.
“It is important that lenders extend credit to Canadians who are denied loans from a bank or credit union,†CCFA said. “These loans are high risk and expensive to provide. It is important that policy makers fully understand the need for licensed legal credit options and the costs of providing that credit.”
“Two-Class System”
Julian agrees that high-interest lenders exist because there are often no other options available to people who don’t have strong credit scores or collateral.
“The reality is that what we have created in this country is a two-class system, where those who have assets can access loans, short or long term, at a reasonable cost,†he said. declared. “And then those who have the least assets to offer are the ones who get ripped off the most by a system that does not protect them.”
In Australia — where there are proof that the pandemic has put many people, especially young people, into debt – the government warns against such loans but has hot and cold soufflé on the idea of ​​taking legislative measures.
The UK recently considered introducing tougher controls on interest rates, but backed down over fears it would close off access to credit for the poorest people and embolden criminal loan sharks.
Several US states, on the other hand, have limited the amount lenders can require payday loans and many states have imposed a 36% ceiling interest on installment loans. The federal government also prohibits lenders from charging interest rates above 36% to members of the US military (some lenders were known to set up near military bases).
Canada’s CCFA says these restrictions have effectively killed the payday loan industry in some states and warns the same could happen here, leaving many low-income households with no other source of credit.
Peter Julian said the government should ignore these arguments and – rather than launch a lengthy consultation – should simply incorporate his bill, C-274, into the budget.
“Mr. Trudeau has the opportunity. The bill is there.”
