The Hill Times: Opinion: Will feds keep their promise to crack down on predatory lending?
Posted May 17, 2022
“It’s easy to get the loan, but that’s where the nice part ends, and the financial nightmare begins,” says Sal Costa, a member of the Association of Community Organizations for Reform Now (ACORN) Canada. As testimonials of ACORN members show, hundreds of thousands of low and moderate income people are left with no choice but to go to Easy Financial, Money Mart and the like to obtain a loan in times of financial crisis.
In its annual report, Easy Financial brags about the expansion of its loan portfolio, rising from 10.2 million in 2009 to 1.25 billion in 2020 with more than 190,000 customers. Notably, it says that 78 per cent of its customers were denied a loan from banks or credit unions and 80 per cent of its customers rely on access to credit when an emergency comes up.
Despite Canadian banks being among the most profitable companies in the world, hundreds of thousands of low- and moderate-income people are forced to rely on predatory lenders to borrow money. Predatory lending includes the offering of loans that people cannot afford, at high interest rates, with high late fees, and often, people take them in high-pressure situations, like when they have emergency costs arise they need to cover but do not have the funds for.
While payday loans, which are short-term, and small dollar loans (below $1,500), continue to see increased uptake, instalment loans are growing exponentially. Between 2016 and 2020, ACORN saw a 300 per cent jump in instalment loans. These loans are higher amounts with a longer repayment period.
Unlike payday loans which are provincially regulated, instalment loans are federally regulated under the Criminal Code of Canada, which allows payday lenders to charge an annual rate of interest of 60 per cent for these loans. The lenders can charge optional products such as insurance, fees, penalties etc. over and above this 60 per cent, making the total cost much higher. As per the data shared by Easy Financial, that lender has made close to half a billion dollars just in interest, insurance and charges and fees in the first 9 months of 2021.
It was very easy to take out an instalment loan. I took out a $5,000 loan from Cash Money to get car repairs done—an essential expense as I juggled two jobs at the same time. Everything seemed to be going fine until I realized that even after making regular payments for a year, I still owed $4,300. Tax returns helped pay down the loan within 2 years, without which I would have paid more than $10,000 for a $5,000 loan! It’s a vicious cycle. The bank would have denied the loan in the first place because of a bad credit score.
Today, only people with top notch credit scores can get access to a bank loan. ACORN’s latest study shows that many people have had to turn to predatory loans especially as their financial situation was impacted by the pandemic. Worse still, more than 60 per cent of people do not see their financial situation getting better anytime soon. More than 50 per cent of people went to a traditional banking institution first but were denied.
After years of fair banking campaigning, ACORN Canada secured a commitment from the Trudeau government—both in the Liberals’ election platform as well as now in the mandate letter of Minister of Finance Chrystia Freeland—to crack down on predatory lending by lowering the criminal interest rate. This has been a long time coming, and would undoubtedly be a huge win for scores of people who have been struggling to access credit at a fair cost.
Will this commitment translate into action? In Budget 2021, the government committed to launching a consultation to lower the criminal interest rate in the Criminal Code of Canada. The federal government needs to move swiftly to lower the criminal interest rate of instalment loans from 60 per cent plus insurance to at least 30 per cent, including all costs associated with the loan. Equally important, there needs to be fair banking alternatives so that people don’t have to go to predatory lenders. We also want to see postal banking as an alternative to high-cost credit.
The pandemic has clearly reinforced the inequities in our system. Time to make fair banking essential for people who need it most.
Lydia is a member of ACORN Canada and has been a strong supporter of the fair banking campaign. ACORN Canada is an independent national organization of low- and moderateincome people with 160,000+ members in 20+ neighbourhood chapters across 9 cities.
Source: The Hill Times