On August 9, the federal government published a consultation paper (the Consultation) seeking feedback on proposals related to the criminal rate of interest and the provision of high-cost installment loans in Canada. The Consultation follows the government’s announcement in the 2021 federal budget of its intention to consult on lowering the criminal rate of interest in the Criminal Code, which is currently set at 60%. The Consultation also demonstrates an increased focus on the financial protection of consumers in Canada, including financially vulnerable populations.
What you need to know
The Consultation invites feedback and views from stakeholders, consumer groups, industry associations and the public on the proposal by October 7, 2022.
The proposals focus on lowering the criminal interest rate under the Criminal Code, which has been set at 60% since it was first introduced in 1980.
The criminal interest rate provisions apply to most lending products and loans made in Canada, including installment loans offered by alternative 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 amend the criminal interest rate, Bill S-239, An Act to amend the Criminal Code(criminal interest rate), was introduced in March 2022 and is in its second reading in the Senate.
The Consultation is seeking feedback on the relevance of changes in market rates and pricing risk to the criminal interest rate, the impact of a lower criminal interest rate on consumers who use high-cost installment loans and on other credit products, and how to improve consumer education on high-cost lending.
Criminal interest rates in the Criminal Code
The criminal interest rate in Section 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 purpose of setting a fixed rate of 60% was to provide certainty and an objective standard for proving a violation. The rate is a fixed rate and is not linked to prevailing market rates.
It is prohibited under the Criminal Code either to enter into an agreement or arrangement to receive interest at a rate exceeding 60% or to actually receive interest at a rate exceeding 60%. The definition of “interest” under the Criminal Code includes the aggregate of all charges and expenses, such as fees, fines, penalties and commissions, and excludes many other charges, such as insurances and overdraft charges, or amounts relating to property taxes.
Additionally, the “criminal rate” under the Criminal Code means the effective annual rate of interest (i.e., it includes compound interest) and is calculated using generally accepted actuarial practices and principles. The Supreme Court of Canada has confirmed that the definition under the Criminal Code is comprehensive and broad in nature and has held that determining whether something is “interest” depends on the substance, rather than the form, of the transaction.
Consumer protection legislation and high-cost credit
In addition to the Criminal Code, federally regulated banks are subject to the federal Financial Consumer Protection Framework under the Bank Act, which includes robust measures to protect consumers, including a requirement to disclose certain information in a manner that is clear, simple and not misleading.
Banks, to a certain extent, and provincially regulated credit unions and alternative lenders that offer high-cost installment loans are also subject to provincial consumer protection legislation. Accordingly, the rules relating to lending products and practices, business practices, disclosure of information, maximum interest rates, and complaint-handling procedures, may vary by province.
We also note that the criminal interest provisions under the Criminal Code are distinct from the provisions in consumer protection legislation relating to high-cost credit in certain provinces. Alberta, British Columbia, Québec and Manitoba deem loans above certain rates (e.g., a rate exceeding 32% in British Columbia) to be high-cost credit, and require high-cost lenders to obtain licences and comply with certain disclosure requirements in order to engage in high-cost credit lending. Québec goes further by requiring high-cost lenders to demonstrate a borrower’s capacity to repay, and we understand that the Québec OPC Office de la protection du consommateur refuses as a matter of policy to grant permits to lenders whose rates are above 35%. Ontario has also had consultations on the regulation of high-cost credit in the province. Licensed high-cost credit lenders are still subject to the limits set out by the criminal interest rate provisions.
Defining “high-cost lending” 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 internationally, “high-cost lending” for the purposes of the Consultation refers to financial credit products with high interest rates or fees. These products are generally provided by alternative lenders.
High-cost installment loans are personal loans with a fixed amount of principal that is repaid with interest in installments over a short period of time (ranging from several months to a few years). Alternative lenders also offer longer term, higher value installment loans. In each case, these loans have advertised interest rates as high as 47% per year; however, the effective annual interest rates are close to 60% when considering non-interest fees and loan-related charges, as well as frequent interest compounding.
Certain high-cost installment loans may resemble payday loans where there are shorter repayment periods (such as 90 to 150 days). Payday lenders are exempt from the criminal interest rate provisions under the Criminal Code where 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 sought by the government:
Changes in market rates and pricing risk: The government is seeking feedback on whether the interest rate pricing set by alternative lenders reflects the actual credit risk of the borrower, or whether the interest rates on these products are set to comply with the Criminal Code, and whether the criminal rate of interest should be set at a fixed level or linked to prevailing market conditions. The Consultation notes that the Bank of Canada overnight rate has decreased significantly since the criminal interest rate was introduced; the difference between the Bank of Canada overnight rate and the criminal rate of interest has grown to nearly 60%, which is a significantly larger difference than when the criminal rate of interest was introduced in 1980.
Access to credit: The government is looking to understand the impact on the availability of credit to financially vulnerable Canadians if the criminal rate of interest is lowered significantly. Specifically, the government understands that financially vulnerable Canadians may turn to alternative lenders for high-cost installment loans with significantly high interest rates and fees, which may further increase debt and challenge financial resilience. Lowering the criminal interest rate will reduce the permissible rates for such loans, which may impact availability of credit, and these consumers may still require access to credit offered by alternative lenders.
Other loan products: The government is interested in obtaining feedback on the impact of lowering the criminal rate of interest on credit products other than high-cost installment loans, such as lines of credit, credit cards, certain auto loans, and short-term loan products like bridge financing in real estate transactions.
Consumer education: The government is considering how it (along with the Financial Consumer Agency of Canada (FCAC)) could improve financial education and awareness regarding high-cost installment loans. Some consumers may choose high-cost loan products without fully understanding the implications of these loans, including to their long-term financial health. For example, consumers may not understand the difference between the advertised rate and the effective rate when considering a high-cost installment loan.Additionally, products may be subject to fees such as late penalty fees, non-sufficient funds fees and administration fees, which can make the credit more expensive.
Considerations for lenders
Lenders should consider that the broad definition of interest in the Criminal Code can include fees which can put their loans at a higher rate than may be apparent. Depending on the scope of any amendments to the Criminal Code interest rate provisions, a number of products offered by lenders could be impacted.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
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