Government of Canada’s Interest Cap Risks Criminal Surge
New research paper from the Ontario Association of Chiefs of Police and the Canadian Lenders Association
TORONTO, February 5, 2024 – The Ontario Association of Chiefs of Police (OACP), the voice of police leadership in Ontario, and the Canadian Lenders Association (CLA) are raising concerns regarding legislation introduced by the federal government which could lead to a dangerous rise in criminal activity.
A new study by the OACP and the CLA indicates the government’s recent decision to decrease the maximum allowable rate of interest may lead to a rise in illicit financial activities, endangering Canadians who are already at risk of not making ends meet.
“The legislation has the potential to create a vacuum for criminals to fill,” said Barry Horrobin, Co-Chair of the OACP’s Community Safety and Crime Prevention Committee. “Under the legislation, illegal predatory lenders could take advantage of Canadians by operating online from 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.”
The comprehensive study further highlights:
The government’s proposed interest rate reduction from 47% to 35% APR will restrict access to essential credit for approximately 4.7 million Canadians.
These Canadians will be forced to payday or illegal lending to meet their credit needs, as was the case in three other markets that imposed rate caps.
A range of consequences which will limit the ability of non-prime borrowers to meet essential financial requirements.
Case studies, including Quebec, California, and the UK demonstrate the various unintended, negative consequences of interest rate caps, underscoring the potentially disastrous repercussions this policy will have for the broader financial ecosystem, including illegal activity and organized crime.
“The facts say this is a bad policy that is going to leave millions of Canadians without access to loans during an affordability crisis.” said Gary Schwartz, president and CEO of the Canadian Lenders Association. “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.”
Ultimately, the paper’s findings show a comprehensive review of the government’s new interest rate law is needed to prevent potentially adverse outcomes for millions of Canadians. It also highlights the critical need for a balanced approach that protects Canadians' access to credit while safeguarding the integrity of the financial system.
Key Facts and Findings
Overall, this paper examines the impact of the proposed reduction in the maximum allowable interest rate from 47% to 35% APR for non-prime borrowers in Canada.
Many Canadians, including newcomers,and individuals with limited lending history, will no longer qualify for loans at 35% APR.
A significant number of regulated lenders will need to exit the market due to their inability to serve the higher-risk non-prime segment following the rate decrease, potentially leading to an increase in criminal activities, including illegal lending and loan sharking.
Canadians should not be relegated solely to the realm of predatory payday lenders or noncompliant/illegal lenders when seeking financial assistance. Instead, they should have the opportunity to establish and bolster their credit histories over time with the assistance of responsible and regulated lenders.
International case studies from Quebec California and the UK reveal the outcomes of lowering interest rates are diverse and complex. Significantly, these examples show a constriction in legal lending markets, accompanied by a rise in illegal, high-interest loan products. This comparative analysis underscores the need for careful consideration of the broader financial ecosystem when implementing such policies.
In 2019, the California Legislature passed the Fair Access to Credit Act, which capped interest rates at 36%, for personal loans between $2,500 and $10,000, but failed to address payday lenders who were able to still charge triple-digit interest on loans. The study reveals this change led to the collapse of the state-regulated installment loan market, pushing borrowers to payday loans and unlicensed markets with interest rates as high as 950%.
An analysis of the lending market in Quebec following the province’s decision to set their own licensing limits on interest rates, outlines how strict interest rate caps lead to de facto online market for high-interest microloans, with many providers based internationally, circumventing provincial regulations and offering rates well above the legal limit.
The Ontario Association of Chiefs of Police (OACP) is the voice of Ontario Police Leaders. In 1951, the OACP was created to be the voice of Ontario's police leaders. The association provides a channel for police leaders to share ideas and cooperatively create solutions to meet the challenges facing police leadership in Ontario. Our association is not-for-profit and we are based in Toronto.
About the Canadian Lenders Association
The Canadian Lenders Association (CLA) supports the growth of bank and non-bank companies that are in the business of lending. We also support lending adjacent sectors including BaaS, Core Banking, Open Banking, DE&I and Sustainable Finance Frameworks. We currently represent and advocate for over 300 companies across Canada that participate in SMB, consumer, home, equipment, automotive and mortgage financing. The CLA does not represent the Payday lending sector.