British Columbia: Stakeholder Feedback, High-Cost Credit Products & Alternative Lending Industry
To: British Columbia Ministry of Public Safety & Solicitor General
Thank you for this opportunity to provide stakeholder feedback around the subject of high-cost consumer credit products and the alternative/innovative lending industry. We are grateful to be part of this important conversation which affects the ability for millions of Canadian consumers to access credit. We are committed to working together in a way that provides for much needed access to credit, while also fostering transparency and options for consumers, by allowing alternative lending businesses to effectively operate in British Columbia.
Canadian Lenders Association: Background and Objectives
The Canadian Lenders Association (CLA) was established to provide a platform for businesses involved directly or indirectly in the provision of financial services (both for commercial and consumer purposes), and principally the provision and supply of credit to certain segments in the marketplace that may have challenges to accessing to credit due to their credit risk profile. The CLA has broad membership (currently numbering 60 businesses), who are alternative and innovative lenders that carry on business in Canada (other than payday lenders) or technology and service companies that support these lenders. The CLA promotes good governance and strong internal standards across the industry in order to strengthen and support the development of this important business activity.
The CLA’s members provide services to the prime and non-prime markets for SMEs and individuals. The CLA supports lenders that are seeking to bring access-to-capital to markets not served by traditional, incumbent lenders through legacy underwriting practices, practices that make it too difficult for incumbent lenders to service this market. In this marketplace, there is a real need for consumers to access credit effectively and efficiently through the use of innovative underwriting practices, intelligent risk-assessment tools and properly risk-adjusted credit granting, and the CLA’s lending members are better able to serve borrowers who do not meet the criteria of traditional lenders.
The Canadian Lenders Association works both nationally and internationally to champion initiatives that promote transparent and responsible business practices in Canada for Canadians.
CLA Membership – Consumer Lenders
Although the CLA does represent commercial lenders who provide loans to small and medium sized businesses, our submission is in respect of consumer lenders, as we expect that any proposed legislation will apply only to loans made to individuals primarily for personal, family or household purposes. As a result, references to CLA members in the remainder of our submission refers to those CLA members who provide consumer loans.
As indicated above, the CLA does not represent the payday lending sector. CLA members are non-prime lenders that provide products with interest rates well below the payday lending interest rates and are an alternative option for consumers who are denied or do not have access to credit from traditional lending institutions.
CLA members are governed by Section 347 of the Criminal Code, which caps the maximum amount of interest that these lenders can charge or collect at 60%. The aggregate interest rates charged by the CLA members are risk adjusted and range from 19.9% – 46.9% per annum.
Many CLA members provide alternative lending options for consumers who can become caught in a difficult lending cycle. Based on the structure of their business models, CLA members are able to provide loan options to non-prime consumers who are considered too high a risk for incumbent lenders to service. Many of these consumers are living pay-cheque-to-pay-cheque. They have little flexibility to manage unanticipated crises: for example, when work hours are unexpectedly reduced, when there is a family medical issue or when a furnace or car breaks down. Traditional financing solutions typically do not assist consumers in these moments of need, due to past credit circumstances.
CLA members provide solutions for these consumers. CLA lenders allow these consumers to address their immediate financial needs with financings that they can afford to pay back.
Equally important, many consumers work with non-prime or near-prime lenders due to their credit rating. These lenders provide the services which allow consumers to rebuild their credit history to qualify for traditional financing in the future. The CLA’s non-prime lenders are inextricably part of a larger lending ecosystem servicing the Canadian market.
For these reasons, we urge the BC government to consider the needs of these consumers as it consults in this area. We encourage the BC government to see lending in Canada as a contiguous marketplace with various options to service a wide range of borrowers with different needs and different lending profiles.
The CLA submits that any policy changes that would result in limiting access to credit for this group of consumers, or that would unduly increase the compliance costs required to service this group of consumers, would cause more harm to consumers than good. The CLA supports transparency and education for our consumers to make them aware of options, so that they can make the best decisions for their life needs.
Size of the Non-Prime Market in Canada and Customers Served
Based on studies conducted by certain CLA members and by TransUnion in 2016, it is estimated that the size of the Canadian non-prime consumer credit market is $165 billion and that over 7 million Canadians have credit scores that are too low to qualify for traditional financing. These are average working Canadians with credit scores below the threshold amounts (i.e. below a credit score of 700) must often turn to alternative lenders for their financing needs, because prime financing is not available to them.
Since the global financial crisis in 2008, governments around the world have responded with regulation, which has required banks to take larger reserves for risk-related lending. These larger reserves, coupled with the reputational risks of being a lender in this space, have forced many financial institutions to exit the non-prime lending space. In Canada, we have seen the exit of several international banks from the consumer lending space, including Wells Fargo, HSBC and Citigroup.
These factors have resulted in fewer options in the non-prime lending space for the 7 million Canadians previously served by traditional financial institutions. This need for credit does not diminish simply because traditional lenders stop lending to these consumers. Consumers must meet their needs in other ways, and the CLA supports helping these consumers choose alternative and innovative lending options that supports their need. There are limited options available outside of traditional financial institutions: non-prime lenders, payday lenders, family and friends or black-market lending.
Potential Adverse Policy Results
It is important to understand the adverse impact on the availability and supply of credit to consumers if the government decides to pursue policy options that limit access to credit, such as setting interest rate caps lower than the established Criminal Code rate. The practical implication is that as lenders are forced to adjust to tighter regulations on interest rates, many British Columbians who are in dire need of credit will be denied access from alternative lenders; however, their need for credit will not correspondingly diminish.
Limiting access to perceived “high cost” credit essentially eliminates credit availability to borrowers who are not able to access traditional credit from institutions. This does not allow borrowers to rebuild and re-establish credit. It will also drive many consumers to unregulated loans, which carry significantly higher interest rates and, importantly, fail to help the Canadian consumer re-establish and improve their credit. We believe it is important to learn from the journey of other provinces when it comes to regulation, and to pull the best out of each to fashion an environment that doesn’t limit options, while protecting and educating consumers. Consultation with all parties, including those within CLA who offer these products, is a positive step in that journey, and we look forward to being an active participant with the Government of British Columbia in this regard.
Adverse Policy Results in Other Jurisdictions
It is important to note how this similar situation played out in the United Kingdom with corresponding negative results. After the UK Financial Conduct Authority tightened regulation of consumer credit in 2014, the result in the marketplace over an 18-month period was a 20% decrease in loan approval rates and a 50% reduction in the consumer base (from 1.6M to 0.8M). A further result was a significant fall out for industry players, including consolidation and exiting the industry, resulting in fewer lending options for consumers.
Limiting credit to certain segments of the non-prime consumer population resulted in these individuals becoming stranded with nowhere to turn to for their credit needs. It led to an increase in unregulated lending. The need for consumer credit did not disappear. Consumers simply had to pay more for unregulated options. Once lending moves into the unregulated space, society forfeits all protection and transparency. The UK example underscores how certain regulation can often have negative repercussions to the consumer.
Higher Risk for Non-Prime Lenders
It is valuable for regulators to understand the risk that non-prime lenders bear when financing non-prime consumers (for example, delinquency rate, charge offs, etc.). In order to extend this lending to this marketplace, non-prime lenders must secure financing in order to extend credit to non-prime consumers. Non-prime lenders themselves are not able to draw from traditional financial institutions for this lending, because of the real and perceived risks of lending to this segment of the Canadian population. The cost to supply this credit is significantly higher than what traditional lenders pay and this, in conjunction with the higher loss rates on this type of lending, is reflected in the higher level of interest rates charged to non-prime borrowers. Higher risk (administration / losses / delinquency) must inherently lead to a higher interest rate. These factors need to be included in the conversation.
Alternative and innovative credit products exist for a reason: to serve a segment of our population who cannot access traditional credit. This is not limited to a low credit score, but those who are new to Canada who also face a non-existent credit score providing a further barrier to establishing a strong financial future in Canada.
Helping consumers understand their situation and establish healthy, sustainable financial patterns should be and is the responsibility of regulators and the industry. This begins with clarity of communication when it comes to the products being made available, and the terms that are being agreed to. Education surrounding financial literacy is a part of the work of some of the organizations gathered under the umbrella of CLA. We are aligned with the British Columbia government’s desire to provide material, online and elsewhere, to students and adults alike helping consumers understand their options, and to make wise decisions that are in their best interest
Encouraging Successful Businesses in British Columbia
It is important to note that the marketplace seeks to provide the best possible rates for British Columbians, and all Canadian consumers. Companies that operate efficiently and provide innovative lending solutions, inherently optimize their interest rates to provide consumers the best possible options to stay competitive in the marketplace. While new market entrants may differentiate their business by competitive speed, approval rates or loan size, one of the key factors in winning the consumer is lower cost of capital.
Providing further barriers and restrictions could lead to a restriction in the supply of credit in the marketplace for the consumers most in need of alternative credit options. This will also lead to less competition in the marketplace, as higher regulation and lower margins will deter new market entrants, as well as cause some, who are currently providing credit at non-prime interest rates, to exit the market.
Businesses in Canada are successful when they provide viable services that meet a market need. If consumers do not see value in a service or restrictions are imposed that make the company’s business unprofitable, the company will not be able to be successful.
The innovative lenders that the CLA represents, both in British Columbia and on a national basis, have provided a tremendous benefit to many Canadian consumers, allowing for a healthy and competitive marketplace while acting within the required regulatory framework.
We trust that this feedback will assist in gaining a further understanding of the products and credit industry in Canada, and look forward to continued participation and productive dialogue the Ministry of Public Safety and Solicitor General as it seeks to ensure a strong financial future for British Columbians
Canadian Lenders Association
Michael Wendland, Chair, Advocacy & Regulatory Committee