Planned new payday loan restrictions could save borrowers $256.8-million over 10 years but also increase the risk that more Canadians may turn to illegal loan sharks, according to a Finance Department analysis.
The Canadian Lenders Association, which represents banks and instalment lenders, but not payday loan providers, rejects the government’s estimates of savings and is warning that related changes to the criminal interest rate will leave millions of Canadians without access to credit.
Finance Minister Chrystia Freeland’s 2023 budget announced plans to amend the Criminal Code to lower the criminal rate of interest to 35-per-cent APR (annual percentage rate), down from 47 per cent. It also vowed to ensure that payday lenders can charge no more than $14 per $100 borrowed, matching the lowest cap currently in place provincially in Newfoundland and Labrador.
Current payday loan rates are as high as $17 per $100 in Manitoba, Nova Scotia and Saskatchewan. The maximum is $15 in Alberta, British Columbia, New Brunswick, Ontario and Prince Edward Island. Quebec and the territories do not have federally approved payday loan regimes.
The core measures were approved later in the year via a budget implementation bill, but cabinet has not yet announced when they will take effect.
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The Finance Department has been consulting on details related to the measures, leading to draft regulations that were published in the Dec. 23 edition of the Canada Gazette. The draft regulations are accompanied by economic modelling outlining the expected costs and benefits.
The draft regulations state that Ottawa is proposing to allow two exemptions to the new rules: Pawn loans, in which a borrower provides an item as collateral for a loan, would be exempt under certain conditions, as would commercial loans valued at between $10,000 and $500,000.
The budget described the package of measures as a crackdown on predatory lending, in which some of Canada’s most vulnerable people – such as low-income Canadians, recent immigrants and seniors – are taken advantage of by very high-interest loans.
Payday loans are defined in the Criminal Code as an advancement of money in exchange for a postdated cheque or similar form of future payment. Payday loans must be less than $1,500. They are exempt from the criminal interest-rate rules, with conditions, according to a 2007 legal change.
The proposed regulations would also effectively set a cap of $20 on one-time dishonoured cheque fees that a payday lender could charge.
While the Finance Department has led consultations on the proposals over the past two years and produced the economic modelling, the Criminal Code regulations are sponsored by the Department of Justice.
As part of the regulatory process, federal officials are required to publish an analysis of the benefits and costs of proposed actions.
In this case, officials estimate the payday loan changes will save Canadian borrowers $256.8-million over 10 years, or an average of $51.90 in savings per customer in the first year.
It also says savings to borrowers are expected to come at a cost to industry profits, which are projected to decline by $238.5-million over 10 years. It says this results in a “net present value to society” of $18.2-million over 10 years.
The economic modelling also points to potential negative effects if some subprime borrowers become unable to access credit from payday lenders. This could lead to higher costs such as late payments on utility bills or insufficient funds fees charged by banks.
“In extreme cases, borrowers may seek out black-market lenders (loan sharks),” the government analysis states. “Loan sharks charge rates above criminal limits and may use threats and/or violence to incent repayment.”
The draft regulations are open to public comment for 30 days from the publication date.
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Gary Schwartz, president of the Canadian Lenders Association, said the federal analysis erroneously assumes that borrowers with poor credit can simply choose to not take out a loan, or to rely on family and friends instead.
“It’s not going to save Canadians anything,” he said, warning that more than four million Canadians could be negatively affected by the interest-rate change. “It’s going to cost Canadians in that sector a huge amount, because they’re going to have to go from payday lender to payday lender.”
Mr. Schwartz said instalment lenders were hoping to obtain a limited exemption from the new 35-per-cent maximum allowable rate of interest.
He said higher interest rates are sometimes needed for the highest risk borrowers, but those clients can qualify for better rates as they successfully build a credit history.
“This will destroy a huge slice of the lending ecosystem for Canadians,” he said, adding that the lower criminal interest-rate policy may look good in terms of political optics, but ignores many unintended consequences.
“What’s going to happen is that nefarious characters will come in to try and service that unmet need,” he said, noting that the government itself acknowledges that risk.
The Canadian Consumer Finance Association, which represents many payday lenders across the country, has said it is “deeply disappointed” by the measures that were first announced in the 2023 budget.
The association said the changes will not make credit more affordable and will cut off access to credit for many Canadians “on the bottom rungs of the credit ladder.”
The association did not immediately respond to a request for comment on the draft regulations.
Four lawyers with the business law firm Blakes published a summary of the draft rules this week, describing them as “highly anticipated” details that will “have important implications for lenders across Canada.”
The lawyers described the proposals as the most significant changes to this area of law in more than 40 years.
“The amendments are largely motivated by the government’s aim to improve affordability for Canadians,” Paul Belanger, Mena Bellofiore, Alan Fraser and Alexis Levine wrote.
“However, given the higher interest rate environment, for many sub-prime borrowers, the amendments may result in a loss of access to sub-prime credit altogether, moving such high-risk borrowers to payday loans or illegal sources of credit.”