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Alternative lenders are financial institutions that operate outside the traditional banking industry. They offer credit products like any bank or credit union, but their lending standards are more relaxed, thus enabling borrowers with lower credit scores to obtain financing.
Due to their flexible lending standards, many borrowers rely on alternative lenders when they need credit but have no other options. However, the credit products alternative lenders provide come with certain risks, such as excessive interest rates, numerous fees (sometimes buried deep in the fine print), and unethical business practices.
There are some federal laws in place to protect borrowers from being misled or exploited by alternative lenders. Under the Criminal Code, the most prominent one prohibits lenders from charging an effective annual interest rate (EAR) greater than 60%.
However, regulations at the federal level are sparse and fail to address many aspects of the alternative lending industry. As a result, certain provinces have stepped in to enact stricter laws, such as capping interest rates at a lower level than the 60% federal maximum. Another common regulation at the provincial level is licensing requirements for anyone wishing to operate in the industry.
Loans Canada recently conducted a study on alternative lenders – find the results here.
Importance Of A Business License
Licensing is one of the most important tools provinces have utilized to minimize unethical and fraudulent business practices. A valid license signals that a company operates under the minimum standards set by the province.
Establishing a licensing standard for the alternative lending industry offers regulators greater scope in supervision, enforcement, and punishment for non-compliance. With proper licensing, regulators gain access to valuable market data that can help them assess firms’ business practices and identify consumer risks. Licenses can be issued, reinstated, or suspended based on a series of objective criteria evaluated by regulators. Special terms and conditions can also be imposed on lenders to ensure they operate fairly and ethically.
Licensing works to the benefit of consumers. It provides them with access to vital information that can help them determine if a lender complies with the rules and regulations that govern their industry. In addition, the requirement to hold a valid license dissuades lenders with a history of unethical or criminal conduct from participating in the industry.
Need a license for your business? Find out how to get one here.
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In Which Provinces Do Alternative Lenders Need A License?
Alberta, Manitoba, and Quebec all have legislation in place that requires alternative lending firms to hold a license to conduct business. British Columbia is also in the process of implementing legislation that would necessitate licensing for alternative lenders.
In Alberta, licensing requirements are part of the High-Cost Credit Regulation that came into effect on January 1, 2019. This set of regulations applies to both offline and online lenders.
Under the rules, a credit product is considered “high cost” if the annual interest rate exceeds 32%. Thus, any alternative lender who issues such products must obtain the necessary license, which costs $1,000 per year per location. If the lender operates out of multiple locations, they must purchase an additional license for each location at the cost of $500 per license.
Licenses must be displayed where they are easily visible to the public, both on the lenders’ physical premises and website.
The Ontario government is in the process of instituting more stringent rules around alternative lending, one of which focuses on establishing a licensing regime. Currently, alternative lenders can operate freely with no specific license.
A report released concurrently with a comprehensive review of the Consumer Protection Act, 2002 (CPA) in January 2021, outlined a licensing regime for the alternative lending industry to bring it in line with the regulations currently governing payday loan providers. Should the legislation be implemented, a lender would only be allowed to offer high-cost credit products with a high-cost credit business license.
Under Quebec law, alternative lenders who offer high-cost credit products must hold a permit from the Office de la protection, regardless of whether they operate offline or online. A high-cost credit product in Quebec is defined as one where the interest rate exceeds the Bank of Canada’s Bank Rate plus 22%.
If the credit contract is for a loan of money, the alternative lender must also possess a money lender’s permit.
In Manitoba, alternative lenders must possess a license from the Consumer Protection Office to offer high-cost credit products to the public. They may only conduct their lending practice under the name and style of business listed on their license. Should a lender wish to operate at more than one location, each one requires a separate license.
On February 26, 2019, Bill 7 – Business Practices and Consumer Protection Act, 2019 (BPCPA) was introduced in British Columbia. The bill intends to add a new section, Part 6.3, to the BPCPA, which will institute a new set of rules to regulate high-cost credit products and the firms that issue them.
Part 6.3 specifies that alternative lenders will need to obtain a license to operate in the province. The amendment also outlines new rules surrounding cancellation rights, disclosure requirements, and remedies for consumers who’ve been misled or subjected to unethical treatment by a lender.
Alternative lenders increasingly play a prominent role in the lending industry, offering credit products to borrowers who don’t qualify for financing from traditional banks and credit unions. The industry is growing remarkably quickly online, where borrowers benefit from an easy and streamlined application process.
However, regulatory oversight of the alternative lending industry varies significantly from province to province – and a critical component of that oversight involves proper licensing.
Though many provinces still permit alternative lenders to operate without a license, the trend points to this reality changing soon. As more provincial governments realize current regulations are inadequate to protect consumers, they’ll likely impose licensing requirements, bringing them in line with Alberta, Manitoba, and Quebec.
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