Author(s): Joyce M Bernasek, Dominic Duchesne
September 9, 2022
Last August, the Canadian government released its awaited consultation paper (the Consultation Paper) to solicit feedback from stakeholders and vulnerable members of the public on the criminal interest rate and availability of expensive installment loans often offered by alternative lenders.
While the Canadian government’s policy goal has yet to result in a new criminal interest rate, lowering the criminal interest rate could potentially have market-changing implications for lenders and borrowers.
Interest rates in Canada cannot exceed 60% – Section 347 of the Criminal Code
When it was introduced in 1980, the criminal interest rate was introduced to discourage loan sharking and other predatory lending practices. Section 347 of the Criminal Code (the Code) makes it a criminal offense to: (1) enter into an agreement or agreement to receive interest in excess of 60% of the total value of the loan made; and (2) actually receive interest in excess of 60% of the total value of the loan advanced. Note that the Code defines interest broadly to include fees, fines, penalties or commissions. Overdraft charges and discharge charges also fall within the scope of what would qualify as “interest”. Although the consultation paper addresses high-priced installment loans, it’s important to note that certain payday loans are exempt from the Code.
High-priced installment loans
The consultation paper targets alternative lenders in their offering of what are commonly seen as “high-cost” or “high-interest” loans. Alternative lenders are quick to lend with less stringent conditions and offer longer-term, more expensive installment loans. The consultation paper shows that these installment loans were advertised with interest rates of up to 47% per year. With additional fees and charges included, and frequent compound interest, many of these installment loans add up to a total annual interest rate of just under or nearly equal to the criminal rate of 60%.
A rate that has been fixed at 60% for the past 40 years
The consultation paper commits to better understanding the impact of such a rate cut on the market and the availability of financial products as we know them. As highlighted in the consultation paper, the criminal interest rate is a fixed interest rate that is not tied to market rates. When the criminal interest rate was introduced, the Bank of Canada overnight rate was 21%. At that time, the difference between the overnight rate and the crime rate was 39%. Today the gap is almost 60%. Therefore, the Canadian government is interested in understanding whether the interest rates set by expensive alternative lenders reflect the actual credit risk of the borrower, or whether the interest rates on these expensive financial products are simply set to comply with the criminal interest rate cap.
Considerations for Lenders
Responses to the consultation paper are due by October 7, 2022. Any change in the criminal interest rate would apply to all credit products in Canada and would affect a variety of debt instruments in the market. If you or your business need assistance in determining the potential impact of a lower crime rate, please contact the authors of this article.