The Hill Times: ACORN Canada calls on federal government to support alternatives to predatory loans

The government should work with Canada’s big banks to provide fair credit options to borrowers who would otherwise have to turn to bad actors, say advocates.

As Finance Canada implements changes to the Criminal Code intended to crack down on predatory lending, a group representing low and moderate-income Canadians, is calling on the federal government to work with the big banks to provide a low-cost alternative for people who need emergency loans.

A June 29 report from the Canadian branch of the Association of Community Organizations for Reform Now (ACORN) says there is “a very limited number of low-cost or fair credit options for low and moderate-income people,” and that the options that do exist are not widely accessible.

It calls on the federal government to create a Fair Credit Benefit, through which the government would provide funds that would then be loaned out by banks to low and moderate-income borrowers.

“We’re asking for the federal government to provide the funding, and then the banks just distribute it,” said ACORN leader Donna Borden. She said a seven or eight-per-cent interest rate from a well regulated bank, while still steep, would mean vulnerable borrowers are “not going to be ripped off like they are” by the much higher rates they are currently paying to predatory lenders.

Borden is co-chair of the East York (Toronto) chapter of ACORN Canada. She has previously told The Hill Times about her own experience paying $24,000 over six or seven years to service an initial $10,000 instalment loan, only to be told she still owed $7,500.

The ACORN report summarized the responses from an online survey of 623 of its members across Canada. Approximately 40 per cent of respondents said they would fall into debt if faced with an unexpected expenditure of $500, and 30 per cent said they needed to borrow money on a monthly basis in the past year.

More than half the respondents said they had had to borrow money in the past 12 months, with 36 per cent of these relying on a credit card, 18 per cent saying they turned to a family member or friend, 17 per cent saying they turned to a bank, and 22 per cent saying they had to go to a payday lender or an instalment lender.

“The report showed that things were a lot worse off than what we thought,” said Borden, explaining that 87 per cent of respondents “were not even aware of any low-cost alternatives to predatory lenders.”

“A lot more people than we thought were taking up high-cost loans in the last 12 months,” said Borden.

In the absence of an official definition of fair credit, said Borden, the ACORN Canada report defined borrowing costs of up to nine per cent as “low-cost financing,” 10-20 per cent as moderate, 21-30 per cent as medium, 31-45 per cent as high, and anything beyond that as extremely high.

Payday loans are provincially regulated loans of up to $1,500 that must be paid back within a few weeks, along with a combination of interest rates and fees that can add up to more than 400 per cent if calculated on an annual basis. Instalment loans are federally regulated, can be for larger amounts such as $10,000 or $20,000, and can involve cars or houses being put up as collateral.

Fair banking advocates have long been critical of the high interest rates, additional fees, and insurance costs associated with such loans, while the loan companies say the higher fees are necessary to cover the risk of lending to customers with low incomes or poor credit histories who have typically not been a priority for the big banks.

By providing the funds itself, the argument goes, the government would be absorbing the risk—and therefore the higher costs—of providing loans to higher-risk borrowers, while helping them build up their credit ratings.

Canadian Bankers Association spokesperson Mathieu Labrèche told The Hill Times in a July 17 email that many banks do offer “small, short-term loan and credit options, all of which can be accessed at a far lower cost than payday lenders’ products.” He said interest rates for these bank products vary, but are “likely a better value” than the rates available from payday lenders. He encouraged people “in financial hardship” to talk to their bank about options such as lines of credit, credit card cash advances, and overdraft protection.

Labrèche also responded to ACORN’s call for greater financial inclusion by pointing out that, according to data from the World Bank, “Canada is already the most inclusive financial system in the G7 group of countries.”

When asked about ACORN’s call for the government and the major banks to collaborate to provide alternatives to high-cost loans, the Department of Finance highlighted its work to lower the criminal rate of interest, but did not comment on possible additional measures.

“Predatory lenders can take advantage of the most vulnerable people in our communities, including low-income Canadians, newcomers, and seniors—often by extending very high interest rate loans,” a department official said in a July 17 email. “That is why the federal government has changed the Criminal Code to lower the criminal rate of interest to 35 per cent APR [annual percentage rate].”

The reduction to the criminal rate of interest, first promised in this year’s federal budget, became law in June when the Budget Implementation Act received royal assent.

Anti-poverty advocates have generally been supportive of the government’s steps to lower the criminal rate of interest from 60 per cent to 35 per cent annually, although Borden said on June 30 that she would like to see it lowered further to 30 per cent “or
even 20 per cent.”

“We’re also asking that even if it’s 35 per cent, we’d want that to include associate costs,” added Borden, referring to insurance fees and other miscellaneous costs that are often tacked on to the base interest rate.

Borden also called for a clearer complaints and enforcement process for installment loans, saying the lenders that provide these larger loans have “free rein” at present because complainants have nowhere to go.

The Finance Canada spokesperson said the department has launched consultations with businesses, consumer groups, and provincial and territorial regulators on possible further measures, “to better understand how it can best protect Canadians from predatory lending practices.”

The ACORN report also calls on the federal government to support postal banking as another option to provide people with low-cost loans in case of financial emergencies. This approach would make use of Canada Post’s existing infrastructure to provide loans in small and rural communities where banks and credit unions don’t have branches.

Canada Post and TD Bank launched a nationwide program last October to provide loans between $1,000 and $30,000 to customers who do not have a bank account and who do not have an established credit history. But the program, which was extended to roughly 6,000 post offices across the country, was paused indefinitely a few months later.

Borden said she was excited when the program was first introduced because it seemed to meet high demand from its target audience, and that it was unclear why it was stopped. The Toronto Star reported in November that TD said it had detected an apparent cyber attack by “bad actors.”

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Article by Kevin Philipupillai for the Hill Times