Federal government addresses predatory lending practices with proposed Criminal Interest Rate Regulations
On December 23, 2023, the federal government published the proposed Criminal Interest Rate Regulations (the “Regulations”) for public consultation. These Regulations form part of the biggest change to the criminal rate of interest in roughly forty years, and affect the entire landscape of financial lending in Canada. See our previous article, The cost of consumer credit in Canada: What protections do consumers have?, in which we outline the history of the criminal interest rate under the Criminal Code.
The Regulations are made pursuant to recent amendments to the Criminal Code, and as per Bill C-47, the Budget Implementation Act, 2023, No. 1 (the “Act”), which changed the criminal interest rate and added a new section 347.01 authorizing the Governor General to make regulations exempting the application of s. 347. The Regulations are designed to exempt certain arrangements and agreements that do not promote the predatory lending behaviours targeted by the Criminal Code interest rate provisions. As the consultation period for the Regulations closed on January 22, 2024, this article addresses the Regulations in their current form and the possible drawbacks the changes will bring.
Background
The Act amends Section 347 of the Criminal Code, changing the method of interest calculation from an effective annual rate to an annual percentage rate (APR). The Act also lowers the criminal interest rate to 35 percent APR, down from the current 60 percent effective annual rate (which is equivalent to 48 percent APR, outlined in the Department of Justice’s Regulatory Impact Analysis Statement).
The new Criminal Interest Rate Regulations are intended to exempt areas of financial accommodation that do not involve usurious lending practices per se. We discuss these areas in greater detail below; namely, commercial lending, pawnbroking, and payday loans.
Commercial lending
Under the Regulations, Section 347 of the Criminal Code will not apply where:
- a borrower is not a natural person;
- the agreement or arrangement is entered into for business or commercial purposes; and
- the amount of the credit advanced under the agreement is of a certain amount.
The amount of the loan impacts the applicable interest rate cap, to be applied as follows:
|
Loan Amount |
Interest Rate Cap |
Rationale |
|
Less than $10,000 |
35 percent APR |
Smaller loans are likely to be made to less sophisticated parties, who are at greater risk of being targeted by predatory lending behaviours and who benefit from greater criminal protection. |
|
$10,000 - $500,000 |
48 percent APR |
Medium-sized loans are likely to be made by small business owners who should receive some criminal protection, but should also be able to maintain flexibility in structuring their agreements. |
|
More than $500,000 |
No Cap |
Larger loans do not affect vulnerable Canadians that these amendments aim to protect. Parties to large loans are typically sophisticated, and should have flexibility in structuring their agreements. |
Pawnbroking
Under the Regulations, a pawnbroking loan will be exempt from the criminal interest rate if the lender’s only recourse upon the borrower’s default is to retain or foreclose on the pawned property, and for loans valued at under $1,000, an interest rate cap of 48 percent APR will apply. Loans with a value over $1,000 will be subject to the 35 percent APR cap under the criminal interest rate.
The rationale for the difference in interest rate caps at different values is twofold. First, the higher interest rate cap for pawnbroker loans under $1,000 does not threaten to trap the borrower in a cycle of debt, as the loan is extinguished when the lender retains the collateral. Second, subjecting pawnbroker loans over $1,000 to the criminal interest rate disincentivizes lenders from becoming pawnbrokers and creating collateralized loans merely to benefit from an increased interest rate cap.
Payday loans
The Regulations create a unified cost of borrowing for payday loans. The cost of borrowing is currently set provincially, and ranges between 14 to 17 percent of the amount of money advanced under the agreement. Under the Regulations, each payday lender in a province with provincial payday loan legislation will now be limited to charging a cost of borrowing of $14 per $100 borrowed, or 14 percent of the total amount borrowed. In Quebec and the territories, where there is currently no provincial payday loan legislation, the criminal interest rate will apply to payday loans.
The Regulations only apply to payday loans where the loan is for $1,500 or less, runs for a term of 62 days or less, and is issued by a licensed lender, such as an Ontario lender licensed under the Payday Loans Act, 2008. The cost of borrowing does not include fees, fines, penalties, or charges for borrowers upon default of a payment, and excludes one-time dishonored cheque fees of $20 or less.
Penalties
If a lender commits an offense by lending contrary to Section 347, the Crown can elect to proceed by summary conviction or indictment. The penalty under summary conviction is a fine of not more than $25,000 or imprisonment for a term of not more than two years less a day, or both. The penalty on indictment is imprisonment for a term not exceeding five years.
Potential drawbacks
The Budget Implementation Act, 2023, No. 1 and the Regulations are intended to protect vulnerable Canadians from predatory lending behaviours, and are designed to ensure Canadians do not become trapped in a cycle of debt. However, there is evidence to suggest that some of these changes may have the opposite effect — subprime borrowers, who are more likely to rely on high-rate lenders, may soon be unable to take out a loan entirely.
A model provided by the federal government’s Regulatory Impact Analysis Statement projects that payday lender profits would decrease by over 50 percent (over $26 million) in the first year following the enactment of the amendments to the Criminal Code and the Regulations. The way a lender decides to recuperate this loss may ultimately harm borrowers more — fewer companies may be willing to offer loans, fewer locations may be available for offering loans, and the industry as a whole may be consolidated.
The model also estimates that the number of loans issued, particularly by payday lenders, would decrease by 93,000 in the first year following these amendments coming into effect. The Regulatory Impact Analysis Statement suggests that these amendments may encourage nonprime lenders to seek out loans from family and friends, which may be less costly and help the borrower avoid entering a cycle of debt. However, if subprime borrowers must rely on non-personal loans, they may face other charges that outweigh the effects of a lowered rate of interest. These may include, for example, late fees for non-payment of their utilities and NSF fees from banks. Some borrowers may feel driven to lenders who operate illegally, putting them into further and higher-risk debt, and resulting in an outcome that is contrary to the federal government’s stated intent.
Next steps
The 30-day consultation period for the Regulations ended on January 22, 2024. Comments submitted on the Regulations are now being reviewed, following which the Regulations may be amended before they are finalized. The Regulations, as well as the amendments to the criminal interest rate in the Criminal Code, are to come into force on a day to be fixed by the Governor in Council, which is to be three months following the publication of the final Regulations in the Canada Gazette, Part II. This three-month period is designed to allow lenders to adjust their lending practices in alignment with these amendments.
As the amendments come into force and impact the lending market, lenders and borrowers should stay up-to-date with legislative developments and be aware of how their business may be impacted.
For further information on these proposed changes, please reach out to a member of our Financial Services Group.
