The federal government released its highly anticipated Criminal Interest Rate Regulations (Regulations) in the Canada Gazette on December 23, 2023. The proposed Regulations have important implications for lenders across Canada. Along with the Regulations, the government also released its Regulatory Impact Analysis Statement (Regulatory Analysis). Despite not having the force of law, the Regulatory Analysis provides useful context and insight for the government’s rationale for the exemptions included in the draft Regulations. The Regulations follow significant amendments introduced as part of the Budget Implementation Act, 2023, No. 1 (for more information, please see our May 2023 Blakes Bulletin: Budget Bill 2023: Changes for Financial Institutions).
Criminal Rate of Interest
Under the Criminal Code, it is an offence to enter into an agreement or arrangement to: (i) receive interest at a criminal rate, or (ii) receive a payment or partial payment of interest at a criminal rate. For the purposes of the Criminal Code, the “criminal rate” means an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds 60% on the credit advanced under an agreement or arrangement.
This equates to an approximate 48% annualized percentage rate (APR). Under the Budget Implementation Act, 2023, No. 1, the criminal rate of interest will be reduced to 35% APR when the amendments come into force by order-in-council.
As of the date of this bulletin, the federal cabinet has not granted this order.
Background
The criminal rate of interest amendments are the most significant changes to this area of law in over 40 years. The recent actions by the federal government, which aim to combat predatory lending practices and promote fair lending conditions for borrowers began in 2021, culminating with Budget 2023 that announced the government’s intention to lower the criminal rate of interest to 35% APR from approximately 48% APR. Prior to Budget 2023, in 2007, the government introduced the payday loan exemption in the Criminal Code.
The amendments are largely motivated by the government’s aim to improve affordability for Canadians. However, given the higher interest rate environment, for many sub-prime borrowers, the amendments may result in a loss of access to sub-prime credit altogether, moving such high-risk borrowers to payday loans or illegal sources of credit.
Rationale for Changes
The Regulatory Analysis underscores the government's focus on issues related to predatory lending practices and the challenges they pose for consumers in overcoming debt cycles.
The government has engaged in several consultations with stakeholders from the lending industry and consumer groups, beginning in Fall 2022. Industry lenders have proposed extensive exemptions to the criminal rate of interest. However, no exemptions for sub-prime lending have been provided.
Criminal Rate of Interest: Proposed Exemptions
In its Regulatory Analysis, the government indicates that it believes commercial loans and pawn loans do not trap borrowers in a cycle of debt.
As a result, the Regulations exempt loans that the government views as non-predatory. These exemptions are:
A. Commercial Loans: Section 347 of the Criminal Code will not apply to an agreement or arrangement for a commercial or business purpose (commercial loan) when the borrower is not a natural person in the following circumstances:
Commercial loans over C$10,000 and up to C$500,000 are exempt from the criminal rate of interest, so long as the APR does not exceed 48%.
Commercial loans above C$500,000 are not subject to the criminal rate of interest or any other interest rate cap.
However, commercial loans of C$10,000 or less will be subject to the criminal rate of interest (35% APR).
Notably, under the proposed Regulations, commercial loans over C$500,000 will have no cap, whereas under the current criminal interest rate provisions, non-payday loans, including those over C$500,000 are subject to the criminal rate of interest.
B. Pawn Loans: Section 347 of the Criminal Code will also exempt certain pawn loans. The exemption for small dollar, non-recourse collateralized loans will apply to pawn loans valued at less than C$1,000, provided the APR on the loans does not exceed 48% and certain other conditions are met. This includes the requirement that the agreement or arrangement provides that the only recourse available to the pawn lender in the event of the borrower’s default under the terms of the agreement or arrangement is the seizure of the pawned property.
Notably, pawn loans that do not meet the exemption criteria and those valued at C$1,000 or more will be subject to the criminal rate of interest.
Payday Loans: Cost of Borrowing Limits
The Regulations will also impose a federal limit on the cost of borrowing for payday loans across Canada. These limits are outlined as follows:
Federal Borrowing Cost Limit: A new federal limit on the total cost of borrowing under a payday loan agreement of “14% of the amount of money advanced to the borrower under the agreement” will be established. This limit of C$14 per $100 borrowed would apply in all provinces with an approved payday loan regime and aims to create uniformity in borrowing costs, preventing variations based on consumers’ provincial residence. Notably, under the proposed Regulations, the federal limit will not include a fee, fine, penalty or other charge that is specifically authorized under the applicable provincial law and imposed on the borrower for default of payment, or for providing a dishonoured cheque or other dishonoured instrument, if the amount of the fee, fine, penalty or other charge is C$20 or less. Based on their current frameworks, there is variability in the provincial payday loan limits on the cost of borrowing, each of which are set out under the respective payday loan regimes, and all of which are similarly expressed as the maximum cost of borrowing for a C$100 payday loan. Currently, these vary from C$14 in Newfoundland and Labrador to C$17 in Nova Scotia, Manitoba and Saskatchewan. In Ontario, British Columbia, Prince Edward Island, New Brunswick and Alberta, the cost of borrowing limit for payday loans is C$15.
Nationwide Fee Cap for Dishonoured Cheques: A nationwide cap of C$20 will be imposed on the one-time fee that payday lenders charge for dishonoured cheques.
Application and Timeline
Once in effect, the Regulations will apply to all loans, including payday loans, that are entered into on or after the date the Regulations came into force. The Regulations will come into force concurrently with the enactment of the associated Budget Implementation Act, 2023, No. 1 amendments to the Criminal Code related to the criminal rate of interest, as ratified by an order-in-council. If the Regulations are registered after this enactment, they will instead take effect on the day they are registered.
The Regulatory Analysis indicates that the proposed Regulations are set to take effect three months after their publication in the Canada Gazette, Part II, which aligns with the enforcement of the Criminal Code amendments regarding the lowered criminal rate of interest. This three-month transition period is designed and intended to provide lenders sufficient time to implement the necessary changes to comply with the new requirements.
Next Steps
The public and lending industry have 30 days to provide comments to the Department of Finance on the Regulations.
The government has also signalled it is considering another reduction of the criminal rate below 35% APR. The consultation period for the further lowering of the criminal rate, as outlined in the Budget Implementation Act, 2023, No. 1, has been extended to January 7, 2024.
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