Lenders are weighing up the impact of new laws
Non-prime lenders are issuing letters to hundreds of thousands of Canadian borrowers regarding potential loss of access to credit due to potential new federal restrictions that would cap maximum interest-rate charges at 35%, according to The Globe and Mail.
The report indicates that Canadians who are clients of the more than 300 companies represented by the Canadian Lenders Association (CLA), including banks and instalment lenders but excluding payday loan providers, began receiving the letters in the first week of the year.
Those letters, bearing the title "Important notice affecting your access to a loan," inform clients about the potential negative consequences of federal plans to lower the allowable interest rate.
What do the proposed changes entail?
In the 2023 budget, Finance Minister Chrystia Freeland outlined plans to amend the Criminal Code to lower the criminal rate of interest to above 35% annual percentage rate (APR) from the current cap of 47%. In addition, the proposed change pledged to limit payday lenders to charging a maximum of $14 per $100 borrowed, aligning with the lowest provincial cap in Newfoundland and Labrador.
The government presented the new changes as a crackdown on predatory lending that would help the most vulnerable. It has received strong support from anti-poverty groups, including ACORN Canada. The report said the Finance Department has been consulting on details of the measures, leading to draft regulations that were then published in the Canada Gazette on December 23.
According to the Globe and Mail, these letters are part of a lobbying effort by the lenders association to encourage Ottawa to consider concessions for non-prime lenders that provide service to Canadians with credit scores below 720 (credit scores of 720 or more are required in the prime lending market). The letters afford clients the option to voice their opposition to the federal plans.
“While on the surface, reducing the maximum allowable interest rate may sound helpful, this change in fact means many borrowers may no longer be able to access a loan in the future, including from other regulated lenders across Canada,” the letters state.
“These changes will potentially make the loans from lenders like us unavailable for millions of Canadians. As a result, consumers may have to rely on other sources of credit, such as an expensive payday loan, which often costs more than six times the price of a loan from us.”
Research from the CLA that utilized TransUnion of Canada data shows 27.8% (8.2 million) of Canadians with credit reports in 2021 are considered non-prime. The association estimates that over four million of these individuals could lose access to traditional credit under the proposed rules.
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