Gary Schwartz Remarks to Senate Committee Regarding Bill S-237
Remarks for Senate Committee Meeting RE: S-237
Good afternoon, members of the Senate Committee on Banking, Trade and Commerce. Thank you for inviting me to attend your Committee meeting today, as you examine Bill S-237, Senator Ringuette’s Private Member’s Bill as it relates to the “criminal interest rate” definition currently in the Criminal Code.
CLA Introduction and Background
My name is Gary Schwartz and I am the President of the Canadian Lenders Association (CLA).
The CLA was established to provide a platform for businesses involved directly or indirectly in the provision of financial services, and principally the provision and supply of credit to certain segments in the market place that are of higher risk and that can be served through the use of technology in decision-making.
The CLA’s lending members provide credit to both the SME market and the consumer market. Their innovative models service the needs of Canadian businesses and individual borrowers nationally.
The CLA seeks broad membership from all lenders (other than payday lenders) that carry on business in Canada and seeks to support the establishment of good governance and strong internal standards 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.
Through the use of innovative underwriting practices, intelligent risk-assessment tools and properly risk-adjusted credit granting, the CLA’s lending members are better able to serve higher-risk borrowers who do not meet the criteria of traditional lenders.
We currently have 48-member companies which are collectively focused on fostering an environment of competition and innovation in Canadian lending. Our association works both nationally and internationally to champion initiatives that promote transparent and responsible business practices in Canada for Canadians.
We have partnered with leading organizations globally, such as the ILPA (Innovative Lending Platform Association), to bring best-of-breed solutions to the Canadian market.
I am here to provide you with an industry point of view, and to represent companies that are successfully and responsibly operating in the innovative lending space. Many of these companies are presently extending non-prime credit to individuals and/or businesses across Canada.
As mentioned above, the CLA does not represent the payday lending sector. The CLA’s non-prime lenders 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.
Our lending 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’s lending members are risk adjusted and range from 19.9% – 46.9% per annum.
I am sure that this Committee has previously heard stories of Canadians who become caught in onerous lending cycles. Our lending members work to provide alternative lending options for these consumers.
Based on the structure of their business models, members of the CLA 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.
Our lending members provide solutions for these consumers. These lenders allow them to address their immediate financial needs with financings that they can afford to pay back.
Equally important, by making loans that consumers can pay back, consumers will be able re-build (or improve) their credit score, so that these consumers are more likely 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.
With the understanding that the Senate Banking Committee is studying Bill S-237, the CLA has reviewed the content of the bill and in consultation with our Advocacy & Regulatory Committee would like to advise the following.
- Proposed change to Interest Rate
Bill S-237 proposes to change the criminal rate of interest from 60% to the Bank of Canada’s overnight rate plus 20%. This change would only be applicable to certain loans, which we understand to be personal loans, such as loans entered into primarily for family or household purposes.
The current 60% interest rate would continue to apply for loans entered into for business or commercial purposes. That said, we understand that credit advanced to businesses that exceeds $1 million would be exempt from the offence of charging a criminal rate of interest. We understand that the practical effect of this is that lenders who lend to businesses would be able to charge such businesses an interest rate that is higher than 60% for loans over $1 million.
Canada’s current laws provide for full spectrum lending, from prime loans and non-prime loans to payday loans. My remarks today will focus predominately on non-prime loans for consumers, as this is the area which will be most impacted by the proposed legislation.
- Market Demand, Average Consumer and Impact of Reduced Credit Availability
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. 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.
This group of 7 million are average working Canadians whose credit score may be too low to seek prime financing. There is a need in the Canadian marketplace for alternative sources of funding.
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 Wells Fargo, HSBC and Citigroup.
These facts have resulted in fewer options in the non-prime lending space for the 7 million Canadians previously served by traditional financial institutions. Without the innovation of the remaining non-prime lenders in the Canadian market, their appetite for calculated risk, their investment in smart data solutions and easy-to-access digital engagement platforms, nearly 7 million Canadians would have been stranded with no viable option for financing.
As I have discussed, there is a need for credit and this need does not diminish simply because traditional lenders stop lending to these consumers. What are the alternatives for Canadians outside of the traditional financial institutions? These Canadians have limited options. Outside of family and friends or the black market, there are only two sources for immediate funds: non-prime lenders and payday lenders.
It is important that this Committee understands the adverse impact on the availability and supply of credit to consumers if Bill S-237 came into effect as drafted and lowered the cap on “criminal interest rate” under the Criminal Code. As lenders are forced to adjust to tighter regulations on interest rates, many Canadian consumers who are in dire need of credit will be denied access.
Limiting access to perceived “high cost” credit essentially eliminates availability to higher risk borrowers. Limiting access to credit eliminates a path for them to rebuild and re-establish credit. A change in the Criminal Code will push lenders to move up market and leave many Canadian consumers stranded with no access to credit, putting additional pressure on them and their families.
This inevitable void in the market may 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. The current proposal will thus further erode options for these 7 million Canadians.
Canadians need to have access to affordable and reputable non-prime lending options.
I would ask this Senate Committee to note how this 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. We urge this Senate Committee to study the UK market and how the regulation of interest rates has negatively impacted that market.
- Non-Prime Lenders and Competition
It is important for policy makers 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. 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.
This Committee can appreciate that 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.
Canadian consumers win when availability to credit is expanded and barriers to entry are lowered. The consumer loses when innovative lenders cannot compete with cost of capital, scale and efficiency. Keeping the interest rate as currently provided in the Criminal Code allows for continued availability of credit to Canadian consumers.
It is important to note that the marketplace seeks to provide the best possible rates for Canadian consumers. Companies that operate efficiently and provide innovative lending solutions, inherently optimize their interest rates to provide consumers the best possible options. 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.
The Senator’s proposal to lower the Criminal Code interest rate will 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.
The innovative lenders that the CLA represents have provided a tremendous benefit to many Canadian consumers, allowing for a healthy and competitive marketplace in compliance with the maximum rate of interest permitted under the Criminal Code.
Thank you for your time this afternoon and I look forward to any questions that you may have.