On August 9, the federal government released a consultation paper (the consultation) seeking comments on proposals related to the criminal interest rate and the provision of high-cost installment loans in Canada. The consultation follows the government’s announcement in the 2021 federal budget that it intends to consult on lowering the criminal interest rate in the criminal code, which is currently set at 60%. The consultation also demonstrates an increased focus on consumer financial protection in Canada, including financially vulnerable populations.
What do you want to know
- The consultation is seeking comments and opinions from stakeholders, consumer groups, industry associations and the public on the proposal by October 7, 2022.
- The proposals relate to the lowering of the criminal interest rate within the framework of the criminal codeset at 60% since its introduction in 1980.
- The criminal interest rate provisions apply to most loan products and loans made in Canada, including installment loans offered by other lenders (i.e. lenders other than banks or credit unions, such as payday lenders).
- There have been several previous attempts to lower the criminal interest rate. The most recent legislative effort to change the criminal rate of interest, Bill S-239, An Act to amend the Criminal Code (criminal interest rate)was tabled in March 2022 and is in second reading in the Senate.
- The consultation invites comments on the relevance of changes in market rates and pricing risk for the criminal interest rate, the impact of a lower criminal interest rate on consumers who take high-cost installment and other credit products, and how to improve high-cost loan education.
Criminal interest rates in the criminal code
The penal interest rate provided for in Article 347 of the criminal code was first introduced in 1980 to deter loan sharking and other predatory practices where lenders offer credit at high interest rates. The establishment of a flat rate of 60% was intended to provide certainty and an objective standard for proving a violation. The rate is a fixed rate and is not tied to prevailing market rates.
It is prohibited under the criminal code either enter into an agreement or arrangement to receive interest at a rate greater than 60%, or actually receive interest at a rate greater than 60%. The definition of “interest” under the
criminal code includes all charges and expenses, such as fees, fines, penalties, and commissions, and excludes many other charges, such as insurance and overdraft charges, or property tax amounts.
In addition, the “crime rate” under the
criminal code means the effective annual rate of interest (i.e. includes compound interest) and is calculated in accordance with generally accepted actuarial principles and practices. The Supreme Court of Canada confirmed that the Criminal Code definition is comprehensive and expansive in nature and ruled that determining whether something is an “interest” depends on the substance rather than the form of the transaction.
Consumer Protection Legislation and High Cost Credit
In addition to criminal codefederally regulated banks are subject to the federal financial consumer protection framework under the Banking Actwhich includes strong measures to protect consumers, including the obligation to disclose certain information in a way that is clear, simple and not misleading.
Banks, to some extent, as well as provincially regulated credit unions and alternative lenders that offer high-cost installment loans are also subject to provincial consumer protection legislation. As a result, rules relating to lending products and practices, business practices, disclosure of information, maximum interest rates and complaint handling procedures may vary from province to province.
We also note that the criminal interest provisions under the
criminal code are distinct from consumer protection legislation relating to high-cost credit in some provinces. Alberta, British Columbia, Quebec, and Manitoba consider loans above certain rates (e.g., a rate above 32% in British Columbia) to be high-cost credit and require lenders high-cost loans obtain licenses and comply with certain disclosure requirements in order to engage in high-cost loans. Quebec goes further by requiring high-cost lenders to demonstrate a borrower’s ability to repay, and we understand that the Office de la protection du consommateur of the OPC du Québec refuses as a policy to grant allowed to lenders whose rates are higher than 35%. Ontario also held consultations on the regulation of high-cost credit in the province. Approved high-cost lenders are still subject to the limits set by the criminal interest rate provisions.
Definition of “High Cost Loans” and “Installment Loans”
The Consultation notes that, while there is no universally accepted definition of a “high-cost” or “high-interest” loan in Canada or abroad, “high-cost for the purposes of the Consultation refers to financial credit products at interest rates or fees. These products are usually provided by alternative lenders.
High-cost installment loans are personal loans with a fixed amount of principal that is repaid with interest in several installments over a short period (ranging from several months to a few years). Alternative lenders also offer longer, higher value installment loans. In each case, these loans have advertised interest rates as high as 47% per annum; however, effective annual interest rates are close to 60% when factoring in non-interest and loan-related fees, as well as frequent compound interest rates.
Some high-cost installment loans can look like payday loans with shorter repayment periods (like 90 to 150 days). Payday lenders are exempt from the criminal interest rate provisions under the criminal code when the loan amount is $1,500 or less and certain other conditions are met.
Consultation Considerations and Questions
The following considerations are set out in the consultation and form the basis of the feedback requested by the government:
- Evolution of market rates and price risk: The government wants to know whether the pricing of interest rates set by alternative lenders reflects the actual credit risk of the borrower or whether the interest rates for these products are set to conform to criminal code, and whether the penalty interest rate should be set at a fixed level or linked to prevailing market conditions. The consultation notes that the Bank of Canada’s overnight rate has fallen significantly since the introduction of the criminal interest rate; the difference between the Bank of Canada’s overnight rate and the criminal interest rate has grown to nearly 60%, which is a much larger difference than when the criminal interest rate was introduced in 1980.
- Access to credit: The government is seeking to understand the impact on the availability of credit for financially vulnerable Canadians if the criminal interest rate is significantly lowered. Specifically, the government understands that financially vulnerable Canadians may turn to other lenders for high-cost installment loans with dramatically high interest rates and fees, which can further increase debt and test financial resilience. Lowering the criminal interest rate will reduce the rates allowed for these loans, which may affect the availability of credit, and these consumers may still need to access credit offered by other lenders.
- Other loan products: The government is seeking comments on the impact of the lower criminal interest rate on credit products other than high-cost installment loans, such as lines of credit, credit cards, certain auto loans and short-term loan products such as bridge loans. financing of real estate transactions.
- Consumer Education: The government is considering how it (together with the Financial Consumer Agency of Canada (FCAC)) could improve financial education and awareness about high-cost installment loans. Some consumers may choose high-cost loan products without fully understanding the implications of these loans, including on their long-term financial health. For example, consumers may not understand the difference between the advertised rate and the actual rate when considering a high cost installment loan. In addition, Products may be subject to fees such as late fees, NSF fees and administration fees, which may make credit more expensive.
Considerations for Lenders
Lenders should consider that the broad definition of interest in the criminal code may include fees that may put their loans at a higher rate than it appears. Depending on the scope of any changes made to the criminal code interest rate provisions, a number of products offered by lenders could be affected.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.