Toronto Star: Canada could finally lower its 60% interest cap on loans — but the industry is fighting hard to keep rates high

Looking back, Sal Costa wishes he’d been smarter about it, but he needed the money and it seemed like the only solution at the time.

Despite his training as a social worker, he’d only been finding low-paying work since moving back to Toronto from Saskatchewan some five years ago.

So when his daughter decided to move in with him, coming up with first and last month’s rent for a larger apartment was a daunting prospect. His credit score wasn’t good and he couldn’t get a bank loan or a credit card.

He found what seemed like a simple answer: an instalment loan from easyfinancial.

Easyfinancial is one of hundreds of Canadian “alternative lenders,” lenders other than banks or credit unions that specialize in lending money to people with poor credit at high interest rates to account for the risk of default.

Despite his credit history, Costa was quickly approved and walked out of a Scarborough location with a loan for $7,418.64 — at an annual interest rate of 47 per cent. Over the span of 42 months, he would be required to pay back a total of $15,256.08 — more than double the borrowed amount, according to his contract.

“I should have been wiser, but I was desperate at the time,” he said.

In 2020, 44 per cent of consumers who turned to high-cost credit took out an instalment loan like the one Costa signed up for, according to the Financial Consumer Agency of Canada.

Canadians turning to instalment loans

But those rates? They could soon be illegal.

With basic living costs on the rise and more Canadians seeking credit, the federal government has launched a long-awaited consultation on what it calls “fighting predatory lending.”

Behind the scenes, there’s a battle brewing between advocates demanding protections for consumers and the alternative lenders.

The lenders say lower rates would make their business riskier and they would have to deny credit to more borrowers. This, they say, would force more people to turn to payday loans, for which borrowing costs can reach 390 per cent on an annualized basis in many provinces including Ontario.

But advocates say the country’s biggest instalment lenders are making outsized profits by taking advantage of Canadians under financial stress and it’s time for that to stop.

The criminal rate and efforts at reform

Under Canada’s Criminal Code, creditors (with the exception of payday lenders) can charge an annual interest rate of up to 60 per cent, a cap that was set in 1980 when the Bank of Canada’s overnight interest rate was an eye-popping 21 per cent.

There have been calls to bring the maximum rate down for years, particularly amid a decade of the Bank of Canada keeping its key interest rate near zero.

NDP MP Peter Julian introduced a bill to cut the criminal rate last year and independent Sen. Pierrette Ringuette has proposed similar legislation four separate times starting in 2013.

The Liberals promised to lower the criminal interest rate during the 2021 election and last month the government finally launched the consultation.

“Too many lower and modest-income Canadians are forced to rely on high-interest short-term loans to make ends meet, leaving them in a cycle of debt,” Adrienne Vaupshas, spokesperson for the finance minister, said in an email.

The Department of Finance has asked for written feedback from the public by Oct. 7.

Costa would welcome the change — his experience led him to join ACORN, a national anti-poverty group that has long called for reforms to the high-interest lending industry — but the damage to his finances and credit has been done.

After struggling to pay back about $350 per month on top of his other bills, he filed a consumer proposal, an alternative to a bankruptcy filing that lets individuals renegotiate the terms of repayment of debts that are not secured by assets, such as a mortgage or a car loan.

“We think that our long-term fighting is why this (consultation) is happening in first place,” said Donna Borden, an ACORN leader from Toronto who became involved with the cause after her own experience with a high-interest loan in the early 2000s.

But the alternative lending industry, which in addition to consumer instalment loans provides credit for small businesses, mortgages, buy-now-pay-later services, and financing on furniture, appliances and vehicles, has already been pushing back on any change to the rates.

Goeasy Ltd., the publicly traded corporation that owns easyfinancial as well as the furniture and appliance leasing brand easyhome, has been lobbying the government so vigorously that its CEO recently told investors he feels their arguments will prevail.

Ringuette, the independent senator who wants the criminal rate lowered, told the Star she’s concerned people who might benefit from changes to the laws — including middle-income Canadians faced with financial emergencies — won’t play a meaningful role in the process.

“The predatory lenders have a very strong lobby, they have very strong voices,” she said. “Except for ACORN, which is a forceful voice, we’re outnumbered. I hope that this reality will be taken into consideration by the minister and the Department of Finance.”

The problem with payday loans

The lending industry’s biggest argument against change is that lowering the interest rate will paradoxically hurt borrowers and leave them with much worse options.

One of those options would be payday loans. These are short-term loans (they usually must be paid back within 62 days) for up to $1,500 and typically require the borrower to provide a post-dated cheque or pre-approve a debit of their account for payment.

In 2007, Ottawa exempted payday loans from the criminal interest rate and gave provinces the power to regulate the then-burgeoning and unchecked short-term lending industry. Payday loans are not part of the current federal consultation.

Most people understand the interest on credit products in terms of an annual percentage rate (APR), which is the cost you pay to borrow money for a year, including all fees and interest, expressed as a percentage.

In Ontario, payday lenders can charge a maximum of $15 per $100 borrowed. In APR terms, that works out to more than 390 per cent, and the costs are even higher in several provinces.

In contrast, the APR on many Canadian credit cards, still a relatively high-cost form of borrowing, is about 19 or 20 per cent, while numerous retailers offer in-house credit cards with APRs in the mid to high 20s.

The 60 per cent ceiling on the “effective annual rate of interest” under the Criminal Code is based on a complicated formula tied to actuarial principles that takes into account the frequency of payments.

When expressed in more familiar terms, that 60 per cent equates to an annual percentage rate of about 47 per cent, which is the maximum most alternative lenders charge for instalment loans like the one Costa took out.

It’s that rate that the alternative lending industry is fighting to keep.

Chisholm Pothier, who recently joined the Canadian Lenders Association as a spokesperson, says the “unintended consequence” of lowering the maximum rate is that it will “dramatically make 6.7 million Canadians’ lives worse if they do need credit.”

The CLA’s membership includes companies like goeasy, LendDirect and SkyCap Financial (among many others) that lend money to consumers with “sub-prime” credit scores below about 700 who have trouble borrowing from traditional lenders.

(The CLA doesn’t represent companies that offer payday loans, some of which, like Money Mart and Cash Money, also offer high-interest instalment loans. The Canadian Consumer Finance Association, which represents payday lenders, did not reply to an email seeking an interview.)

The group estimates 8.5 million Canadians have sub-prime credit scores and the 6.7 million people Pothier referenced are about 80 per cent of that total, the ones with the worst credit.

A CLA analysis based in part on “the pricing practices of its members” concluded that for every percentage point drop in the legal annual percentage rate, almost four per cent of non-prime consumers would lose access to credit. The CLA says lenders would reject those people if they couldn’t charge enough interest to cover the credit losses expected on loans that are not repaid.

If the maximum rate dropped to 30 per cent, which the CLA says is an APR of 26.5 per cent on most products, it says those 6.7 million people would be excluded from borrowing if they needed to.

Pothier added that alternative lenders report borrowers’ loan payments to credit bureaus, helping them rebuild their credit score, which doesn’t happen with payday loans.

Jason Mullins, the CEO of goeasy, says his company has already influenced the federal government’s perspective on the issue.

During an August conference call with Bay Street analysts, he said his company is in regular contact with the government. “They put out a consultation, which we feel, given our meetings with them, we’ve kind of helped shape and helped inform based on the discussions that we’ve had.”

While the consultation was just launched in August, consultants registered to lobby for goeasy on the potential interest rate change have met with federal officials three times since March, while a consultant for the CLA had eight government meetings on the topic over that time period, according to the federal lobbyist registry. Those meetings included discussions with MPs as well as political staffers and bureaucrats in the Department of Finance.

Mullins said previous policy debates about lowering the rate revealed how complex the issue is and ultimately didn’t lead to any changes out of a concern that borrowers could be pushed to payday lenders or other options. “We continue to believe that is and will be the case here,” he said.

The industry’s arguments are based at least in part on its own business models and risk assessment tools and many who think the criminal rate should be lowered don’t buy the industry’s claim that they would be forced to stop lending if the rates were lowered.

“It’s a good line because it is putting forward a question that cannot be answered in the definitive,” Ringuette said. “But I will say that with the quantity of on-site and online predatory lenders, that access will not be reduced to the point of Canadians in dire need not being able to access (credit).”

The case of Quebec and interest rates already coming down

Jerry Buckland, a professor of international development studies at Winnipeg’s Menno Simons College who has researched the payday lending industry, points to the “huge natural experiment” of Quebec, where courts have previously ruled that lenders cannot charge interest rates of more than 35 per cent and the province does not allow payday loans at all.

“Payday lenders make the strong argument that if people don’t get payday loans, they’ll go to the mob and be subjected to physical violence,” Buckland said. “(Borrowers) are not dropping over from financial stress in Quebec as far as I can tell.”

Pothier said fewer alternative lenders operate in Quebec and although goeasy does operate in the province, the company’s approval rate for credit is 25 per cent lower there, he said, making it harder for people to get loans.

Yet goeasy, which declined an interview request and referred questions to Pothier, has also told investors that it plans to expand in Quebec with new retail outlets.

Goeasy has also been steadily lowering the average interest rates it charges consumers — in 2017, the weighted average interest rate of the company’s loan portfolio was 46 per cent and as of August, Mullins said it was at 31 per cent.

Pothier said the reason goeasy’s average rate has come down is because the company helps its customers “graduate” to lower-interest products as they rebuild their credit. Most customers start at a rate of 46 per cent and he said lowering the maximum allowable rate would “remove an important tool for a customer to rebuild their credit and earn access to lower rates.”

Still, this is what Mullins told Bay Street analysts on the conference call: “So, even in the low probability that there were a change (to the interest rate), our business today is in excellent position to accommodate a lower overall rate cap.”

Nevertheless, finding the right balance will undoubtedly be tricky.

ACORN wants to see the cap on interest lowered to a floating rate of 20 per cent plus the Bank of Canada’s overnight lending rate, which is 3.25 per cent after last week’s hike.

Ringuette’s bill calls for the same thing while Julian proposed a floating rate of 30 per cent plus the overnight rate (he also wants to do away with the exemption for payday lenders).

Changing the rate could also affect the late fees telecoms and utilities charge customers and impact creditors of high-risk businesses like startups or companies facing insolvency.

Denise Bright, a corporate law partner at Bennett Jones LLP in Calgary, said the government could change the rules for individuals and smaller business loans but leave large borrowers out of it.

“It won’t surprise me if the government is focused on individuals,” Bright said. “A lot of the public pressure right now is related to people who are getting themselves into circumstances where it will be hard to dig themselves out.”

Alternative lenders say lowering rates would force more people to use payday loans, for which borrowing costs can reach 390 per cent on an annualized basis in many provinces including Ontario.

Demanding more from Canada’s big banks

It’s not just the criminal interest rate that needs to change, according to ACORN. The government also needs to demand more from Canada’s big banks.

Shelly Ann Allan said she would have preferred to borrow from a bank when she needed money for two relatives’ funeral costs.

But after being turned down by CIBC and Scotiabank, Allan, who works as a materials handler in Toronto, instead took a $10,000 loan from easyfinancial.

“I was thinking it would be easy to pay back,” she said, adding she now regrets the decision as she struggles to pay her bills and find an apartment after being evicted.

ACORN wants to see more affordable credit options made available to anyone who applies, lower fees for overdrawing accounts and even basic banking services in Canada Post branches. (TD Bank launched a pilot project offering personal loans for small amounts in select Canada Post locations last year.)

The Canadian Bankers Association would not agree to an interview, but spokesperson Mathieu Labrèche said in an email that its members “are responsive to the needs of all Canadians.”

“Many banks offer small, short-term loan and credit options, all of which can be accessed at far lower cost than payday lenders’ products,” he said. He also pointed to information on how customers can apply for overdraft protection to avoid insufficient funds charges.

But Buckland said the very existence of the “fringe” credit industry shows that there’s still a need for “certain people and certain communities to have better access to credit.”

He said banks closing branches in low-income neighbourhoods and prioritizing online service have exacerbated this. (Labrèche pointed to CBA survey data showing only 10 per cent of customers do most of their banking at the branch.)

Duff Conacher, co-founder of Democracy Watch, a citizens’ group that advocates for democratic reform and corporate responsibility, has long called for tougher banking regulations.

Conacher also wants to see the government live up to another election promise to enable a federal consumer protection agency to investigate and crack down on excessive bank fees and charges, if necessary.

Vaupshas, the finance minister’s spokesperson, would not comment on those promises or other steps the government could take to make credit and banking services more accessible.

Lowering the criminal interest rate, “is fine,” Conacher said, “but it’s not going to solve the problem.”

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Article by Christine Dobby for the Toronto Star