CLA Response to the Department of Finance consultation – Including Insurance Charges under the Criminal Rate of Interest in the Criminal Code
Canadian Lenders Association, Non-Prime Roundtable Response to the August 2024 Legislative Proposals Relating to the Maximum Allowable Rate of Interest under the Criminal Code
September 11, 2024
POSITION STATEMENT
The Canadian Lenders Association (CLA), representing a broad spectrum of stakeholders in the Canadian financial services industry, firmly opposes the proposed amendments to the Criminal Code that aim to revise the definitions of “insurance charge” and “interest,” which were announced in the Department of Finance’s consultation released on August 12, 2024 (“the Consultation”).
The Consultation proposes to amend the definition of “insurance charge” to specify that the definition includes the cost of insuring the risk of credit that is paid for by the person to whom the credit is advanced or to be advanced, for any face amount of the insurance charge. The definition of “interest” would also be amended to include all loan insurance charges, resulting in loan insurance charges being included in the calculation of interest. If enacted, these changes would exacerbate existing challenges in the credit market, particularly for Canadians already at risk of being excluded from reputable lending options. By classifying insurance costs as interest, the amendments would not address illegal lending or the root causes of high borrowing costs. Instead, they would likely render credit-insured loans unavailable to higher-risk borrowers, pushing them towards unregulated and illegal lending markets.
Our primary concern is to ensure that all Canadians, regardless of their credit standing, have access to fair and transparent credit and optional insurance products. The proposed amendments, in their current form, would undermine this goal by making it increasingly difficult for compliant and responsible lenders to operate within the legal framework, thereby reducing the availability of credit and optional insurance products for those who need them most.
The proposed changes would introduce considerable uncertainty and complexity into the calculation of interest under the Criminal Code, making it operationally challenging, if not impossible, for lenders to comply.
Moreover, by expanding the Criminal Code to regulate insurance, the proposed changes stray far from the original intent of regulating illegal loan sharking, raising significant constitutional issues related to federal overreach into provincial jurisdiction. This could create an unmanageable operating environment for credit providers and further restrict access to essential financial services.
BACKGROUND
The CLA appreciates the opportunity to contribute to the Consultation on the proposed legislative changes to the Criminal Code.
During previous consultations, concerning the lowering of the maximum allowable rate of interest, the CLA provided extensive data highlighting the potential adverse effects of further reducing the maximum allowable interest rate. Our analysis, supported by empirical evidence, indicates that lowering the interest rate cap below the current threshold would disproportionately impact non-prime borrowers, who rely on compliant, regulated lenders to manage significant financial needs and maintain financial stability.
We respectfully submit that the proposed legislative changes in the Consultation to amend the definitions of “insurance charge” and “interest” in the Criminal Code represent a significant overreach by the federal government and the Minister of Finance. It not only ignores the complexities of the credit market and the aforementioned constitutional issues, but it also fails to consider the unintended consequences of such regulation, particularly in terms of access to credit and consumer protection for those borrowers most at risk.
INSURANCE AND ACCESS TO CREDIT
The proposed changes introduce a range of challenges that could significantly disrupt the provision of credit and insurance products across Canada. In discussions with insurance stakeholders, the CLA has identified widespread concerns about the negative impact these changes could have on both the credit and insurance industries.
One particularly concerning scenario involves the inclusion of post-sale insurance charges in the APR calculation. Consider a situation where a consumer takes out a personal loan from a regulated lender to cover the cost of home improvements. At the time of the loan origination, the consumer opts not to include insurance, preferring to keep the initial costs lower. However, six months later, due to changes in their financial situation, the consumer decides to add insurance coverage to protect against potential job loss or health issues that could impede their ability to repay the loan.
Under the proposed changes to the Criminal Code, the insurance charge must be included in the APR calculation from the outset, regardless of when the insurance is added. This creates several layers of complexity. First, the lender would need to retroactively adjust the APR to account for the insurance, which is administratively burdensome and technically challenging. Such recalculations would require sophisticated systems capable of tracking and updating APRs dynamically—systems that many lenders may not currently possess. Moreover, this scenario could lead to confusion for consumers, who might receive conflicting information about their total cost of borrowing over time. The consumer might originally believe they were taking a loan with one APR, only to find that it has changed due to the later addition of insurance.
The CLA’s members are committed to transparency and clear disclosure regarding optional insurance products. Consumers choose these products for the peace of mind and protection they offer against events such as job loss, critical illness, injury, unpaid family leave, and death. CLA membership data suggests that a large proportion of borrowers opt not to purchase optional insurance, underscoring its voluntary nature. Moreover, provincial consumer protection laws ensure that consumers can cancel their optional insurance after purchase, reinforcing their autonomy in financial decision-making.
Another one of the most concerning aspects of the proposed amendments is the potential impact on the availability and affordability of crucial insurance products. Group credit insurance, for example, is not a form of “default insurance” and does not insulate lenders from the risk of borrower default. Instead, it provides protection to borrowers against life events such as death, disability, critical illness, or involuntary job loss. This distinction is critical because the premiums paid for group credit insurance should not be classified as “insurance charges” under the Criminal Code’s interest calculations. The proposed amendments, however, fail to recognize this differentiation, potentially jeopardizing access to vital insurance products.
Optional insurance products play a role in helping non-prime consumers manage their financial obligations during difficult times. If implemented, the proposal could deprive these consumers of this safety net, increasing the risk of loan defaults in the face of life-altering events. This could lead to deteriorating credit scores and further restrict their access to credit from licensed, compliant lenders, exacerbating their financial challenges.
The CLA challenges the federal government to provide concrete data and analysis to justify these regulatory shifts. The proposed amendments redefine insurance as “related to insuring the risk that is or is to be assumed by the person who advances or is to advance the credit,” yet fail to acknowledge the substantial consumer benefits these products offer. Data from CLA members shows that restricting access to insurance products, particularly in the non-prime sector, could have severe consequences. Consumers who lose access to group insurance due to these changes would be left without practical alternatives, potentially leading to greater financial vulnerability. (SEE APPENDIX BELOW)
CONSTITUTIONAL AND JURISDICTIONAL CONCERNS
Budget 2024 outlines the Government’s intention to collaborate with provinces and territories to cap the costs of optional insurance products for high-cost loans. However, the Proposal extends far beyond merely capping these costs. If implemented, it could effectively eliminate the ability of consumers with lower credit scores to purchase optional insurance products with their loans, depriving them of crucial protection in the face of unforeseen life circumstances.
This unilateral decision by the federal government to regulate insurance—despite prior commitments to work with provincial authorities—undermines the established jurisdictional framework. Insurance regulation has traditionally been the domain of provincial governments, and this sudden federal intervention risks destabilizing the regulatory environment. Such disruption could lead to financial losses for provinces that depend on insurance-related revenues. Given that consumer protection concerning optional insurance falls under provincial jurisdiction, the CLA strongly recommends that the Government collaborate with provincial governments to assess the necessity or desirability of additional regulations for these products. Any review should be based on comprehensive studies that include data on how consumers use these products.
Moreover, including charges for optional products in the calculation of interest contradicts the intent of the criminal interest rate provision, originally designed to protect borrowers from loan sharking. These charges are not mandatory for obtaining credit, and their inclusion in the interest calculation does not align with the policy rationale behind this provision of the Criminal Code.
Finally, the CLA urges the Government to allow the pending changes to the criminal interest rate provision—introduced in 2023 and set to take effect on January 1, 2025—to be fully implemented and assessed before considering any further amendments. Understanding the efficacy and impact of these updates is crucial before making additional changes that could negatively affect credit access for consumers underserved by mainstream financial institutions.
CONCLUSION
The CLA strongly recommends that the federal government and the Minister of Finance reconsider the proposed amendments outlined in the Consultation. Responsible policy-making requires a thorough assessment of the regulations set to come into force on January 1, 2025 before any additional changes are introduced. The proposed amendments, as they stand, would do more harm than good by restricting access to credit, taking away borrower choice for insurance products, pushing consumers towards unregulated markets, and creating legal and regulatory uncertainties.
We urge the federal government and the Minister of Finance to engage in meaningful dialogue with industry stakeholders, including insurance stakeholders in particular, to develop a more balanced approach that protects consumers without undermining access to essential financial services. The CLA remains committed to working with the federal government and the Minister of Finance to ensure that any legislative changes are both practical and equitable, safeguarding the interests of all Canadians.
Sincerely,
Gary Schwartz,
President,
Canadian Lenders Association
APPENDIX
Calculating the Adverse Impacts of Including the Cost of Insurance in the Maximum APR Calculation on the Canadian Non-Prime Population
Developed by the Risk Roundtable of the Canadian Lenders Association
September 11, 2024
EXECUTIVE SUMMARY
A potential change to the APR calculation for the maximum allowable 35.00% rate to be inclusive of the cost of insurance – specifically loan protection insurance – would negatively impact 3.5M people, which accounts for over 37% of Non-Prime Canadian Customers. This is in addition to the approximately 5.4 M Canadians who will already lose access to credit on January 1, 2025, due to the reduction of the maximum allowable rate of interest to 35%.
INTRODUCTION
Recently, the Department of Finance of the federal government issued a consultation, in the form of draft legislation, to determine whether a further change to the Maximum Rate of Interest (MROI) APR calculation in the Criminal Code should be pursued. The Canadian Lenders Association (CLA) has conducted research that provides a better understanding of the unintended consequences of including the cost of insurance in the maximum APR calculation.
The Canadian Lenders Association’s Risk Roundtable (“Risk Roundtable”), which represents risk officers from across the lending spectrum, has utilized a quantitative methodology to estimate the impact of including the cost of loan protection insurance in the criminal code APR calculation.
CLA Members are permitted to reference these estimates as part of any representation to the Federal Government provided the appropriate notation is included with their submission.
BACKGROUND
Beginning on January 1, 2025, the government intends to reduce the Criminal Code’s effective annual nominal annual percentage rate (“APR”) to ~35%. That APR calculation is inclusive of all interest and loan related fees scheduled to be paid by the borrower. The Government’s recent consultation proposes to further amend the definition of Interest, so that now “all insurance charges” are included in the calculation of APR. This proposed change will materially increase the APR for loans that include optional insurance.
The purpose of loan insurance is to cover either a portion or all a customer’s loan payments in the case of unexpected events. Typical events covered include job loss, disability, illness, and death. The insurance ensures the customer remains up to date on their loan payments in situations where they would otherwise not be able to do so. This enables the customer to both avoid delinquency, and bankruptcy as well as degradation to their credit score, allowing them to maintain their credit standing despite their facing adverse circumstances. Loan Insurance is a valuable added service utilized by a large proportion of borrowers, specifically important to borrowers in the Nonprime space who disproportionately struggle with unexpected life events, due to limited discretional income and savings.
Because of the costs to both the lender and insurer to provide insurance (for example, insurance claims cost, operating costs), the insurer is required to charge a minimum amount for the product to generate sufficient returns. If the government caps the amount a lender can charge for insurance (through requiring it to be included in the maximum APR calculation) the lender will no longer be able to provide insurance to a subset of customers.
METHODOLOGY
To determine the impact of requiring insurance to be included in the APR calculation, an analysis was performed on the maximum amount of insurance that could be charged for loans of various sizes, terms, and interest rates. The Risk Roundtable analyzed the maximum insurance cost to the customer set by the insurer, combined with expected insurance claims costs, and minimum expected rates of return for both the lender and insurer to assess if economically, the product could still be offered. The conclusion was that for customers who based upon their credit risk, would be offered loans with interest rates between 27.99% and 35.00%, the lender would rarely be able to provide the customer with insurance. This would impact approximately 3.6M people, who would no longer be protected in the case of unexpected life events such as job loss and critical illness, resulting in a higher risk of loan delinquency and bankruptcy.
Table 1
Quantification of the economics of offering loan protection insurance in a regulatory environment where there is a 35.00% maximum APR inclusive of insurance.
Key Assumptions:
- The expected monthly claims costs would be 5% of the customer’s principal and interest payment. This is based on historical claim rates for Non-Prime Installment loan borrowers.
- The lender would require a minimum return equal to the expected claims costs as well as an additional $5 per month to cover product operating costs including administration, policy and claims processing, staff training etc.
- Based on insurance industry operating and administrative costs the insurance provider would require a premium/fee return of ~$12 per month to provide the insurance service.
Based on the above table, any customer with an interest rate of >27.00% would likely not qualify for loan protection insurance. As part of a previous analysis performed by the Roundtable of the Canadian Lenders Association “Calculating the Adverse Impacts of a Reduction in the Qualifying APR” submitted January 29, 2024, the total number of Canadians falling into the >27% to 35% interest rate range would be 3.6M.
Table 2
Quantification of the Population of Lending Eligible Canadian Consumers Potentially Excluded from Insurance.
CONCLUSION AND IMPLICATIONS
The Federal Government’s consultation to determine whether a further change is required to the maximum allowable rate calculation to include the cost of insurance, could have negative impacts on a significant portion of the Canadian population, specifically Non-Prime Canadian borrowers in the form of no longer being able to purchase loan insurance. These borrowers will not be able to access insurance to cover their loans in the event of: illness, job loss or other unexpected life circumstances and thus are at higher risk of loan delinquency and bankruptcy.
Therefore, any steps to constrain or eliminate their access to various forms of loan protection insurance should be carefully considered in an appropriate timeframe by consulting with a wide variety of stakeholders, given the large number of consumers who would be negatively impacted by a change of this nature.