On August 9th, 2022, the Department of Finance Canada published a consultation paper (the "Paper") to solicit feedback from stakeholders, various industry associations, consumer groups, and members of the public relating to the maximum rate of interest in the Criminal Code (the "Code") and the provision of high-cost installment loans in Canada.
While the government has not yet proposed a new criminal interest rate, the purpose of the Paper is to better understand the impact a rate reduction may have on the availability of credit to Canadians. The Code payday loans provisions are not part of the consultation since they are exempt from the maximum rate of interest under the Code, and are instead regulated at the provincial level.
The Maximum Rate of Interest and the Criminal Code
Section 347 of the Code was first introduced in 1980, intending to cap the maximum rate of interest charged to consumers at 60%. At the time, the criminal rate of interest was established to combat predatory lending that relied on intimidation and violence to enforce repayment, and was never designed as a financial instrument to protect consumers from high-cost loans offered by established stakeholders. The initial rationale behind the maximum rate of interest of 60% was to provide an objective standard that avoid prosecutors from having to prove that violence or intimidation was associated with enforcement of the loan.
The Code makes it an offence to: (1) enter into an agreement or arrangement to receive interest at a rate exceeding 60 per cent; and, (2) actually receive interest at a rate exceeding 60 per cent. The Code defines "interest" as the aggregate of all charges and expenses, which includes fees, fines, penalties or commissions that includes compound interest at an effective annual rate. What it does not include within that definition is additional charges such as insurance, overdraft or fees when discharging a mortgage. The Supreme Court of Canada has provided a more comprehensive Code definition of "interest", holding that the determination of whether something is "interest" depends on the substance of the transaction.1
High-Cost Installment Loans and the Maximum Rate of Interest
The Paper focuses primarily on high-cost installment loans, which are personal loans that give a borrower a fixed sum of money (the principal) that is repaid with interest in installments over an agreed period of time, typically several months to a few years.
The Financial Consumer Agency of Canada ("FCAC") recently conducted a study in which they found that 44% of consumers who had taken out high-cost credit reported taking out a high-cost installment loan in 2020, making these products the most widely held high-cost lending product in Canada.
Considerations
The Paper identifies four general categories where the government is seeking feedback:
- How changes in market rates and pricing risk correlate
Despite recent increases, the Bank of Canada overnight rate has been on a general downward trend since the 1980s. The disparity between the Bank of Canada overnight rate and the criminal rate of interest is nearly 60%, which is a much larger difference than what was intended when the rate was originally introduced. As a result, the government is interested in understanding whether current practices by high-cost alternative lenders reflect the actual credit risk of borrowers, or if current rates on high-cost products simply reflect adherence to the maximum rate of interest in the Code.
- How rates and high-cost installment loans may affect access to credit
Vulnerable populations, including low-income households, individuals with lower educational attainment, single parents and Indigenous Canadians are more likely to turn to alternative lenders who offer high-cost installment loans, as they can have difficulty accessing traditional financial institutions. Accordingly, the government is interested in understanding if significantly lowering the criminal rate of interest will impact the availability of credit to financially vulnerable Canadians.
- Impact on other loan products
The criminal rate of interest is applicable to most lending products in Canada. Accordingly, the government is also interested in understanding the impact of reducing the criminal rate of interest on other loan products, such as lines of credit, credit cards, certain auto loans, auto title loans and short term loan products (e.g. bridge financing).
- Consumer education
Some consumers often choose high-cost loan products without understanding the consequences these products may have on their financial well-being. Accordingly, the government is interested in understanding how it can work with stakeholders to raise awareness with vulnerable Canadians about the costs and potential risks of high-cost lending products.
Questions
Based on the four general categories above, the Paper has broken down the main inquiry to seven questions, found below for ease of reference:
- Should the criminal rate of interest be set at a fixed level or linked to prevailing market conditions?
- To what extent is the interest rate charged by alternative lenders on high-cost installment loans a reflection of the creditworthiness of the borrower?
- What are the reasons financial consumers access high-cost installment loans?
- What are the impacts of high-cost installment loans on the financial well-being and financial resilience of Canadians?
- What impact would lowering the criminal rate of interest have on the availability of credit for financial consumers who use high-cost installment loans? Would lowering this rate have any negative implications for financial consumers, including lost or reduced access to credit?
- What impact would lowering the criminal rate of interest have on credit products other than high-cost installment loans?
- How could the Government of Canada, including the FCAC, improve financial education and awareness regarding high-cost installment loans to further empower and protect Canadians as they make informed financial decisions?
What's Next?
Stakeholders can provide comments on the Paper until October 7, 2022 by either sending an email to consultationconsumeraffairs.consultationconsommation@fin.gc.ca with "Predatory Lending Consultation" as the subject line, or by mail.
If you or your business require assistance in determining the impact of a potentially lower criminal interest rate, please feel free to reach out to the authors of this post.
For more information about our firm's Fintech expertise, please see our Fintech group's page.
Footnote
1. See Garland v. Consumers' Gas Co., [1998] 3 SCR 112 at para 28.
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