Fintechs Canada is calling on the federal government to focus on the market conduct of predatory lenders, while ensuring the government’s proposed exemption of commercial loans from the new maximum allowable rate of interest is effective.
Last year, after the federal government announced it would protect Canadians from predatory lending with a new maximum allowable rate of interest, the government did two things. First, it opened another consultation on predatory lending to learn about additional measures it could take. Second, it released draft regulations to define the new maximum allowable rate of interest and exempt from it non-predatory loans, such as commercial loans.
Fintechs Canada participated in the government’s most recent consultation, submitting a letter to the government earlier this year. In the letter, Fintechs Canada encouraged the government to focus on the conduct of lenders, rather than the prices they charge, to protect Canadians.
“It is important to note that what makes a loan predatory is not whether it’s being issued at an interest of 36 percent or 34 percent,” reads Fintechs Canada’s letter to the federal government. “What makes a loan predatory has more to do with the structure of the loan, as well as the conduct of the lender vis a vis the borrower.”
According to Fintechs Canada, hidden fees, obfuscated terms and conditions, debt traps, and aggressive collection tactics are all features of predatory loans that aren’t effectively addressed by price caps. Rather than bringing the new maximum allowable rate down even further, argued Fintechs Canada, the federal government should focus its efforts on extinguishing the aforementioned predatory behaviours.
Fintechs Canada also submitted its perspective on the draft regulations, which were published in the Canada Gazette Part I late last year. The regulations attempt to exempt commercial loans from the new maximum allowable rate of interest because commercial loans are not predatory.
“Commercial lending does not require the same degree of regulatory oversight as personal loans,” read the government’s assessment. “Overly restrictive rules on these types of loans could have a cooling effect on transactions that, all factors considered, would be beneficial to both parties and the economy.”
“Moreover, commercial loans do not trap individuals in Canada in a cycle of debt,” the government added. “In addition to capturing certain commercial lending practices that are outside the policy intent, further lowering the criminal rate could restrict the ability of sophisticated commercial entities to engage in borrowing transactions.”
Based on its internal analysis, Fintechs Canada has determined that the government’s proposed exemption for commercial loans fails to exempt many commercial loans.
The draft regulations will create unintended consequences for borrowers and lenders alike, if the regulations are finalized without amendments. This is because the government’s proposed commercial exemption doesn’t apply to sole proprietors, and the proposed minimum threshold for a commercial loan is $10,000. Fintechs Canada members fund about $200,000,000 in commercial-purpose loans in any given year. According to internal data, which represents tens of thousands of commercial borrowers, the median commercial-loan value in 2023 was nearly $5,500. For sole proprietors, this median loan value was even lower, coming in around $4,000 in the same year.
Fintechs Canada has asked that:
- The government exempt from the new maximum allowable rate of interest natural persons taking out the loan for a business, trade or commercial purpose. This will ensure that sole proprietors still have access to credit.
- The government lower the minimum threshold for exempted credit to $2,500 so long as the maximum threshold is $500,000, the annual percentage rate of interest does not exceed 48%, and the borrower is taking out the loan for a business, trade, or commercial purpose. This will ensure that small businesses still have access to low-value credit.
- The government require that lenders conduct reasonable inquiries to ensure that a borrower is going to use the exempted loan for a business, trade or commercial purpose. The government should also require that lenders conduct reasonable inquiries that the commercial borrowers have an existing, operational business. This will ensure that the commercial exemption is not used as a loophole by predatory lenders who are looking to prey upon vulnerable consumers.
For Fintechs Canada’s full submission, click here.
