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Credit, when used responsibly, can help people reach their goals. However, millions of Canadians have little or no access to the lending market. They face constant battles when securing credit products and routinely have their applications rejected.
According to a May 2021 white paper released by the Canadian Prepaid Providers Organization, about 10 to 20 percent of Canadians are either unbanked or underbanked. Those classified as unbanked have no direct relationship with a traditional bank or credit union, meaning they don’t have access to even a bank account. Underbanked individuals may have a bank account, but their financial circumstances preclude them from being eligible for loans and other financial products.
Excluded from mainstream financial institutions, this class of borrowers must seek financing solutions elsewhere. Often, this entails turning to the alternative lending market, an industry rife with high-cost loans and, at times, predatory lending practices.
To better protect vulnerable borrowers, provinces have enacted legislation that sets boundaries on what they can and can’t do in the course of their business.
What Is High-Cost Credit In Canada?
Alternative lenders are high-cost loan providers that operate outside of traditional banking institutions. Some of the credit products offered by alternative lenders include installment loans, lines of credit, payday loans, and debt consolidation loans.
At the federal level, regulations aimed at alternative lenders are sparse. The only law applicable nationally stipulates the maximum interest rate an alternative lender may legally charge under the Criminal Code, an effective rate of interest (EAR) of 60%.
At the provincial level, there are more specific laws that govern alternative lending practices. Some provinces’ laws are more stringent than others. Still, collectively they’ve dramatically reduced the rates alternative lenders can charge on credit products, particularly payday loans.
As more and more alternative lenders establish their presence in Canada, legislative efforts are likely to accelerate to ensure borrowers receive fair and honest treatment when they seek out these financing sources.
Danger Of High-Cost Credit In Canada
High-cost credit products can impose financial hardship on borrowers who rely on them too liberally and are not attuned to the inherent costs and risks. These include:
Alternative lenders set high-interest rates for borrowers on credit they extend to them to lower their risk. Because they cater almost exclusively to customers with bad credit, they can justify the above-average rates as compensation for the increased risk of late payments and outright default. Often, high-cost credit products are unsecured, meaning borrowers pledge no collateral, which poses an additional risk for the lender.
Whether or not such high-interest rates are reasonable or not, there’s no denying that they can be costly to borrowers. It’s not uncommon to see loans with an annual percentage rate (APR) near 50%. In only a short period, the interest that accrues can exceed the principal.
Though some provinces have implemented legislation to cap interest rates, others are far behind and have yet to introduce concrete plans. The result is a significant disparity between rules governing alternative lenders at the provincial level.
Steep Fees And Hidden Fees
The numerous and high fees levied on loans by alternative lenders can impose an additional financial strain on borrowers.
Lenders can tack on origination fees, disbursement fees, refinancing fees, NSF fees, and more. These fees may be hidden in the terms and conditions of the loan contract or not included, with the implicit assumption that the borrowers understand their obligations. One reason for this is because provinces don’t have regulations that specify what details lenders must provide in the loan contract.
Unethical And Illegal Debt Collection Practices
While all lenders have the right to pursue collection strategies on past-due debt, certain provincial legislation prohibits them from employing tactics deemed abusive. Despite this, certain firms may engage in harassment and intimidation campaigns to reclaim unpaid debts. These may include:
- contacting the borrower frequently
- contacting the borrower on weekends and holidays
- making unauthorized and repeated withdrawal attempts, thus racking up NSF fees for the borrower
- Initiating contact with the borrower’s employer or family
- Using threatening language
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High-Cost Credit Legislation In Canada
Below is a brief overview of a few provinces’ regulatory frameworks that govern alternative lenders.
The High-Cost Credit Regulation in Alberta outlines a set of rules aimed at firms that issue high-cost credit products, such as title loans, lines of credit, installment loans, rent-to-own transactions, and pawn loans. The regulations are part of the province’s Consumer Protection Act, whose goal is to address, discourage, and punish unethical business practices online and offline. The High-Cost Credit Regulation became effective on January 1, 2009.
In Alberta, any credit product with an annual interest rate of at least 32% is designated as high-cost and subject to the legislation. This threshold applies to both fixed credit products and open credit products, like a line of credit.
Alternative lenders who wish to issue high-cost credit products must obtain the proper licensing, which costs $1,000 per year, plus $500 per year for each additional location. Licenses must be displayed on lenders’ physical premises, or in the case of an online presence, near the top of the homepage.
To ensure borrowers are adequately informed about the nature of high-cost credit offerings, lenders must:
- Provide loan information in a standardized and consistent format.
- Provide information about optional related products
- Provide confirmation that optional products have been cancelled
- Provide borrowers with details about their loan during the entirety of the loan term.
High-cost lenders may not:
- Mislead borrowers as to the details of the loan products
- Threaten or harass borrowers about outstanding balances
- Contact borrowers before 7 am or after 10 pm
- Contact the borrower’s family members, friends, employer, or other third parties connected with the borrower.
Under Quebec law, a credit product is considered “high-cost” if it meets the following criterion: the interest rate is higher than the sum of the Bank of Canada’s Bank Rate plus 22%. This threshold applies to all types of credit products.
Any lender who issues you a high-cost credit loan must hold a permit from the Office de la protection du consummator. This permit is mandatory for both offline and online businesses. If the contract entails the lender loaning you money, they’re also required to have a money lender’s permit. To verify if your lender holds these permits, type in their name here.
Ontario is considering implementing stricter rules for alternative lenders to protect consumers better. In January 2021, a proposal was drafted outlining a series of steps to improve business practices in the high-cost credit industry. The proposal was prepared after a comprehensive review of the Consumer Protection Act, 2002, which governs consumer transactions in the marketplace.
Currently, the province imposes no limits on the interest rates and fees lenders may set on credit contracts, though the federal Criminal Code caps interest rates at 60%, which every lender must abide by. The Ontario government intends to institute a new set of rules to improve transparency, fairness, and disclosure.
Here are some of the key recommendations from the proposal:
- Label credit products as “high cost” if they offer an APR that’s higher than the Bank of Canada’s Bank Rate by at least 25%
- Establish a licensing regime with strict criteria to ensure only competent and ethical firms operate in the industry.
- Extend current payday loan regulations to encompass the broader high-cost credit industry.
- Enhance disclosure requirements for high-cost credit products
- Mandate cooling-off periods
- Ban abusive collection practices
- Consider imposing reasonable limits on interest rates, fees, and other charges
Manitoba legislation requires lenders to obtain a license before offering high-cost credit products to borrowers. Each lender must operate under only the name and style of business specified in the licence agreement. Should they wish to issue high-cost credit products in more than one location, they must obtain a separate license for each location.
In Manitoba, a loan is considered “high-cost” if the annual interest rate exceeds 32%.
The lender must disclose the following details to borrowers:
- Loan term
- Loan principal
- Annual interest rate
- Fees that will or may be payable
- Total cost of the loan
- Cancellation rights
In addition, borrowers have the right to cancel a credit contract 48 hours from the time it’s signed and pay back the loan early without incurring a penalty.
On February 26, 2019, Bill 7 – Business Practices and Consumer Protection Amendment Act, 2019 (Bill) was introduced to outline a series of proposed changes to rules governing high-cost credit products in British Columbia. The bill is part of the province’s Consumer Financial Protection Action Plan.
Key sections of Bill 7 include rules surrounding the:
- Licensing requirements for lenders
- Cancellation rights for borrowers (including a one-day cooling-off period)
- Disclosure requirements for lenders
- Remedies for borrowers in the case of breached or unlawful credit contracts
The government of B.C. will enact rules similar to those of other provinces, though their approach is expected to be more stringent on some matters. For example, when it comes to cancellation rights, borrowers can void the credit contract should the lender fail to:
- Include any of the requirements mandated in the proposed legislation (of which there are 28)
- Inform them of any critical matters that could sway their decision to sign the contract
- Advise of the cooling-off period
- Provide them with a copy of the agreement and cancellation notice
Lenders will also be prohibited in engaging in the following practices:
- Initiating wage assignments
- Offering rewards to incentive customers to enter into high-cost credit products agreements
- Attempting to collect payments before the due date
- Gaining direct access to borrowers’ bank accounts for reasons other than to set up direct debits
- Attempting to re-present a payment that fails to clear.
- Selling optional insurance to borrowers or requiring them to purchase insurance
Bill 7 would affect fixed credit products, open credit products, leases, and other high-interest products with an interest rate higher than the prescribed rate specified in the regulations. British Columbia will likely choose a rate of 32%, which would be in line with other provinces.
As more consumers seek alternative lenders to obtain high-cost credit products, governments across Canada will have to keep pace on the legislative front to ensure they operate their business fairly and ethically.
Borrowers with bad credit face many struggles and challenges regarding their finances, which makes them vulnerable to exploitation by unscrupulous lenders. Though most high-cost credit lenders operate in an honest, transparent, and ethical way, the few who do not can tarnish the industry’s reputation. For this reason, legislation in provinces like Ontario and Alberta can play a critical role in ensuring the industry works for both borrowers and lenders. However, most provinces have yet to follow in their footsteps – it may take some time before such regulations are instituted across the country.
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