Department of Finance – Government of Canada – Consultation on Fighting Predatory Lending

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Letter Summary:

As part of the 2021 budget, the Government indicated its intention to consult on fighting predatory lending by lowering the criminal rate of interest (currently set at 60%). The consultation paper asks a number of questions relating to the criminal rate of interest and the impact of high-cost installment loans. The consultation does not consider payday loans which are regulated provincially. Questions include those related to whether the interest rates set by high-cost alternative lenders is a reflection of the credit risk of the borrower, or set to comply with the interest rate ceilings, as well as the impact to credit availability if the rate were to be lowered.

Overview of the Council’s Comments:

The Council strongly supports initiatives to re-examine potentially predatory lending activity impacting consumers and believes additional guardrails are required to alleviate some of the predatory pricing concerns.

Our key comments are summarized below:

We think it is more appropriate to set the criminal rate of interest based on a floating benchmark rate plus a maximum allowable spread rather than solely through a fixed interest rate ceiling.
We do not believe the creditworthiness of the borrower is a primary consideration for many of the loans provided through alternative lending channels.
We believe financial consumers access high-cost installment loans for many reasons, such as being unqualified for a loan at traditional lenders and being attracted by convenient, time-efficient, and accessible channels of high-cost lenders.
To protect consumers from egregious loan terms, we believe it would be helpful to require a consistent interest calculation methodology that does not penalize prepayments or effectively charge interest on interest, as well as a workable cooling-off period.
We do not have any specific concerns that lowering the criminal rate of interest will have any negative impact on the availability of credit for financial consumers.
In our view, to minimize any negative impact on other types of credit products, the new regulation should be conscious of prevailing rates and spreads when setting a new criminal rate.
We also believe it is important to educate consumers on alternatives to high-cost installment loans, which may involve a telecom-based lending/banking solution in remote and/or indigenous areas.