Study warns Canada's lending cap could invite illicit finance
Canada's initiative to cap the top annual consumer lending rates at 35 percent, a significant reduction from the previous 47 percent, has sparked concerns about the unintended consequences of such regulatory measures.
According to a Reuters study, this decision, announced by Finance Minister Chrystia Freeland in the 2023 Federal budget, could inadvertently fuel an increase in criminal activities by providing an opening for illicit financiers to exploit distressed customers.
This legislative change, aimed at combating predatory lending practices, represents the first adjustment to Canada's peak lending rates in over four decades.
The Ontario Association of Chiefs of Police (OACP) and the Canadian Lenders Association (CLA) have expressed worries that the reduction in maximum lending rates for regulated institutions might endanger Canadians, especially those grappling with the rising costs of living.
Barry Horrobin, the co-chair of the OACP's Community Safety and Crime Prevention Committee, highlighted the potential for this legislation to create opportunities for illegal predatory lenders to operate beyond Canadian legal jurisdiction, particularly online.
The study, drawing on case studies from Quebec, California, and Britain, predicts that approximately 4.7 million Canadians, or 16 percent of the nation's population with active credit files, could find themselves with restricted access to credit. This limitation might push these individuals towards payday or illegal lending options to fulfill their credit requirements.
The CLA, representing over 300 lenders and covering around 8.5 million Canadians who depend on non-prime lenders, has voiced its concern over the possibility of legitimate lenders denying credit to vulnerable Canadians, describing such a scenario as "entirely irresponsible."
Katherine Cuplinskas, a spokesperson for the Finance Department, has criticized the high profit margins of many lenders, suggesting that denying credit under the new regulations would be irresponsible.
Meanwhile, the Bank of Canada's decision to raise its benchmark interest rate to a 22-year high of 5 percent to counter inflation means that prime lending rates are around 7 percent, with sub-prime borrowers facing even higher charges.