CLA Non-Prime Roundtable Submission on Potential Carve-Outs to the Maximum Rate of Interest

The CLA’s Non-Prime Roundtable asserts that reducing the maximum allowable rate of interest will not lead lenders to provide lower-cost credit to individuals with higher risk. Instead, it will force higher risk non-prime borrowers to resort to more costly options like payday loans or to try to obtain loans from noncompliant lenders. This is because this group of non-prime borrowers will not qualify for credit due to their low credit score, and corresponding high risk profile. Moreover, this could give rise to a worrisome situation where non-compliant or illegal lenders, who disregard regulatory and other obligations and may employ illicit lending and collection practices and exploit the difficult situations of non-prime consumers seeking credit. Therefore, if the maximum allowable rate of interest is decreased, we anticipate an escalating exposure of non-prime consumers to non-compliant lenders.

These consumers will not be eligible for access to credit at the lower 35% rate of interest due to low credit scores, lack of credit history, and the credit risk tolerances of companies lending in the space. More specifically, this group has a much higher risk of defaulting on loans and thus is not deemed to fall within the risk tolerance of a non-prime lender. This is contrary to the government’s stated policy objective of cracking down on “predatory lending” and protecting Canadians from being trapped in “debt cycles.” It is our view that without reasonable exemptions to the new maximum allowable rate of interest (i.e. 35% APR), upon which consumers can rely, the government’s policy will have unintended negative consequences and will disrupt access to affordable credit and the lending ecosystem in Canada. This will result in a significantly negative impact on a large number of Canadians (approximately 4.7 million) and the Canadian economy. This discussion is especially pertinent at this time, given the increased cost of living for many Canadians who need access to credit as a temporary measure to help them manage their finances. Reducing access to credit at this time and forcing consumers to resort to costly payday loans would be detrimental to millions of Canadians.

Members of the CLA’s Non-Prime Roundtable believe that through thoughtful consideration and collaboration, industry and government can strike a balance between protecting consumers and fostering responsible lending practices.