A Liberal plan to crackdown on predatory lending could instead lead to a rise in crime and put vulnerable Canadians further at risk, a new warning from police and lenders argues.
A report from the Ontario Association of Chiefs of Police (OACP) and the Canadian Lenders Association (CLA) released Monday studies the potential impact of the Liberal government’s plan to cap the criminal rate of interest. The legislation would see this capped at 35 per cent on an annualized percentage rate basis, down from the current 47 per cent APR.
These measures were passed into law as part of the Budget Implementation Act in 2023, but have not yet come into force, according to the federal government.
The criminal rate of interest applies to all borrowing in Canada, with some exception for certain payday loans in provinces except for Quebec. Some commercial loans and pawn loans would also be exempt from the updated rate cap under new amendments.
Limiting the maximum allowable interest rate in Canada could create a “vacuum for criminals to fill,” said Barry Horrobin, co-chair of the OACP’s Community Safety and Crime Prevention committee, in a statement.
He pointed to “illegal predatory lenders” taking advantage of clients by operating online and outside the bounds of Canadian jurisdiction.
“By forcing legal, responsible lenders out of the marketplace, we worry Canadians will be targeted by this type of criminal activity,” Horrobin said.
The report estimates 4.7 million Canadians will see their access to credit restricted by the cap. It particularly highlights newcomers and individuals with limited lending history as most at-risk, given their barriers qualifying for traditional loans at reasonable rates of interest.
The OACP and CLA report studied other jurisdictions including Quebec, the United Kingdom and California where similar caps were put in place and resulted in “unintended” consequences.
The report found that the Quebec’s licensing limits on interest rates led to more business in online markets for “high-interest microloans” as providers circumvented provincial regulations and offered rates above the legal limits.
“The report’s finding that this change might contribute to an upsurge in criminal activities and disproportionately impact already at-risk Canadians is yet another clear demonstration the government has failed to think this through,” said CLA president and CEO Gary Schwartz in a statement.
The CLA represents alternative lenders in Canada, but not payday loan providers, according to its website.
The group’s call on the federal government to conduct a review of the policy and find an approach that protects Canadian access to credit while safeguarding the security of the financial system.
A spokesperson for Finance Minister Chrystia Freeland said in a statement to Global News that its amendments to the criminal interest rate are in the best interest of vulnerable Canadians.
“Predatory lenders can take advantage of the most vulnerable people in our communities, including low-income Canadians, newcomers, and seniors — often by extending very high interest rate loans,” said spokesperson Katherine Cuplinskas in an email.
Cuplinskas also put the blame for any Canadians left unable to access credit after the updated regulations on lenders themselves.
“Given the notable profit margins of many of these lenders, suggestions that lenders might deny credit to some of the most vulnerable people in our communities is entirely irresponsible,” she said.
Ottawa could lower criminal interest rate even more
In the fall of 2023, the Liberal government launched a consultation about the lowering the criminal rate of interest even further, as well as if it should address exemptions in the payday loan.
The 2023 budget already put a limit of $14 charged per $100 borrowed from payday loan centres, bringing other provinces in line with the lowest rates seen in Newfoundland and Labrador.
Ottawa did a cost-benefit analysis of the proposed limits ahead of the 2023 budget found that 44,000 fewer Canadians would access payday loans as a result of the proposed legislation.
While this could be beneficial for some Canadians, it also found that some subprime borrowers would face other financial penalties tied to late payments on other obligations like utilities.
The federal government’s analysis also found that profits from impacted lenders could decrease by as much as 50 per cent in the first year of the policies, leading to consolidation in the industry.
This may also lead to a jump in the number of Canadians accessing payday loans from online or black market providers, the analysis stated.