Response to Ontario High-Cost Credit Consultation
Response to the Alternative Financial Services: High-Cost Credit Consultation Paper
March 30th, 2021
The Canadian Lenders Association (CLA) supports the growth of companies that are in the business of lending, or providing other means of credit, to small businesses and individuals. We represent over 100 companies across Canada. Our members are fintech innovators and our founding members include some of the leading financial technology companies in Canada. The CLA fintech members effectively and responsibly use innovative underwriting technology and practices to fulfill a demand for underserved Canadians. The CLA supports innovation across the home, auto, consumer and commercial lending sectors and works with the entire ecosystem to promote transparency and foster responsible and ethical lending practices.
The CLA and its membership appreciate the opportunity to provide feedback to the Alternative Financial Services: High-Cost Credit Consultation. The members of the CLA have collectively identified certain recommendations for the Ministry to consider in the process of drafting any statutory modifications. We aim to ensure that any proposed changes to the Consumer Protection Act function to support rather than encumber Ontario consumers.
High-Cost Credit Statutory Terms and Definitions
Payday vs. Installment Lending:
It is essential that the government accurately define this emerging sector and not conflate payday and installment lending. The definition of “payday loan” under the Payday Loans Act, 2008 is extremely broad and could inadvertently catch many products that do not warrant regulation as payday loans. In particular, installment lending is often mistakenly grouped together with payday lending because these types of loans can share certain features, like low principal amount of credit extended over a short term. However there is often no consumer protection basis for such regulation since installment lending is often offered to consumers at no cost or at a low cost, relative to typical payday lending products. We recognize that payday lending warrants strict regulation and we note that the CLA Lender Certification Program specifies that member companies must not participate in Canada’s payday loans industry, in any province or territory in Canada. Installment lending can provide creative and alternative lending options that benefit consumers while still being subject to regulation under the consumer protection regime, and these products should not be stifled by being inadvertently subject to payday lending legislation.
Alternative vs. Fintech Lending:
It is essential that the Government of Ontario uses terms that accurately reflect this emerging sector. CLA members represent a contiguous spectrum of lending options that provide essential credit to millions of Canadian including many unbanked and underbanked borrowers. Several members of the CLA use new financial technologies and non-traditional business models to provide credit to over the 8.6MM Canadians who do not qualify for prime financing. For this reason, we refer to our lenders as fintech lenders. Many of our lenders offer loans to individuals who are new to credit, have little credit history or are temporarily going through difficulties financially but are likely to repay their debts. Our lenders seek to provide credit to “invisible primes” that can be found in our fast-changing workforce, that include gig drivers, influencers and an army of Zoom-based workers. Fintech lenders effectively and responsibly use innovative underwriting technology and practices to fulfill a demand for underserved Canadians. In this regard, we are not an alternative form of credit but, in many cases, the future of how Canadian borrowers are more effectively and timely served.
Key Considerations in the High-Cost Credit Consultation
To improve the regulation of high-cost credit agreements, we recommend the Government of Ontario takes measures to ensure that any new statutory provisions: (i) allow for maintained access to open credit (ii) become aligned with pre-existing legislation in other Canadian provinces (iii) strengthen consumer protection measures such as licensing and disclosure requirements without overly bureaucratizing the lending process.
Maintaining Access to Credit:
Open access to credit is a key principle of the CLA. Over 8.6MM Canadians are unable to walk into their local bank to access credit. The fintech lending community offers affordable credit to both prime and non-prime consumers. Across Canada and across the globe, the fintech lending sector plays an invaluable role in expanding access to credit products. This has been further underscored by the recent COVID crisis. As noted in a recent press release by the World Bank, “Fintech innovations are helping reduce the cost of providing services, making it possible to reach more people, and reducing the need for face-to-face interactions, essential for keeping up economic activity during the pandemic.” By leveraging innovative, digital-first technologies to streamline the delivery of loans, the fintech industry has proven its ability to close major gaps in the non-prime lending sector. Fintech lenders use innovative technology and effective underwriting procedures that prevent the need for borrowers to require the services of payday or unregulated lenders and, in many cases, help graduate non-prime borrowers to better credit scores and ultimately prime loans. Constraining access to capital for Ontario consumers does not eliminate the consumer’s capital needs. Restricting credit to segments of the non-prime consumer population will result in individuals becoming stranded with nowhere to turn to for their credit needs. We ask that any regulation in the sector focuses on providing open access to needed capital.
Harmonization Across Provinces
As the Ministry continues to draft proposals for improved regulations of high-cost credit, it is important to be mindful of pre-existing regulations in other provinces. When drafting new legislation for core consumer protections such as rate caps, licensing measures, and disclosure requirements, the Ministry should strive for consistency between all jurisdictions. Legislative consistency between provinces decreases the number of regulatory obstacles for businesses operating in multiple jurisdictions. The Government of Ontario may look to Alberta as a province that has managed to set very effective consumer protection measures; including: an equitable APR threshold (i.e 32 per cent), a streamlined corporate licensing regime (i.e mandating that every lending company holds a license to authorize itself and its branches to undertake operations) and a cooling off period for consumers (i.e offering borrowers a two-day cancellation period after entering a new loan agreement). The harmonization of consumer protection measures across Canadian jurisdictions will enable fintech lenders to operate efficiently and effectively which in turn will allow for the better servicing of borrowers across the country.
Setting an Effective APR Threshold
The CLA recommends an alternative to the Ministry’s proposal to implement a variable rate (25% plus the bank rate of the Bank of Canada) as the threshold to identify which loans will be subject to high-cost credit regulations. Ontario consumers are likely unaware of the Bank Rate at any given time, and may not understand the rationale for its fluctuation. For this reason, the CLA would recommend basing an APR threshold off a fixed rate. For purposes of alignment and harmonization, Ontario should consider modeling its APR threshold on Alberta’s absolute standard of 32 per cent. This flat rate is clear and easier for borrowers to understand and will allow businesses to operate with minimal red tape. Furthermore, when attempting to define a high-cost credit agreement, consideration should be given to other benefits of the agreement; for example, whether promotional financing at a lower rate may be available. Although certain companies may offer loans at a 25% rate plus the bank rate of the Bank of Canada, borrowers may qualify for a financing option, for example, that allows them to repay their loan at a 0% rate. Regulating high-cost credit agreements exclusively on the basis of a company’s maximum interest rate or APR may not be in the best interest of consumers who benefit from low-cost promotions.
Strengthening Consumer Protections & Minimizing Red Tape
The CLA and the Government of Ontario both agree that clear and concise information and protections provided by lenders protects vulnerable borrowers; however, while it is beneficial for consumers to receive clear information from lenders, an unintended consequence is that more documentation to review at point-of-loan can create unnecessary confusion. Alberta is a good example of a province that mandates clear, prescribed disclosure requirements. Lenders in Alberta are mandated under the Consumer Protection Act to: (a) provide borrowers key loan information in a standard format, (b) provide borrowers with information about the loan details during the term of the loan, (c) disclose information about optional related products, and (d) provide written or electronic confirmation that optional products have been cancelled. These disclosure requirements ensure that Albertan borrowers are entering protective agreements wherein consumers are able to make informed decisions regarding the terms of their loan. By allowing disclosure agreements to be simple and concise, Alberta has been able to avoid excessive red tape which allows for more borrowers to be served effectively. The CLA does not believe that consumers would benefit from a more onerous licensing regime for high-cost credit lenders. Lenders in Ontario are already subject to substantial regulatory requirements under existing legislation. Adding additional licensing requirements could serve to decrease competition in the marketplace by adding barriers to entry. In our view, the existing requirements under consumer protection legislation provide sufficient consumer protection from a disclosure and transparency perspective. Additional disclosures based on one of the elements of a credit agreement – the APR – would only serve to confuse consumers who are attempting to compare their financing options. We believe it is important the Ministry work closely with the fintech lending sector to minimize any unnecessary barriers for the borrower.
Access to Insurance Protection
Access to insurance protection is vital for the consumer. A non-prime borrower’s income levels, income stability and employment characteristics are critical underwriting factors that make it difficult for them to access protection with traditional insurance markets. During the pandemic, involuntary unemployment increased 1000%, and some of our members witnessed their average annual claims jump 300%. We ask that the Ministry consider insurance to be an essential product that can be optionally purchased by the applicant. All components of the insurance declaration and buying decision should be considered separate from the lending decision.
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It is critical that the Ministry understand the distinctive nature of the fintech lending sector, as it seeks to transition to a new high-cost credit regime in Ontario. The CLA deeply supports the Consumer Protection Act’s goals in supporting a fair and competitive marketplace where consumers can make their own choices without being subject to unfair business practices. This response (i) advocates for consumers to have continued access to open credit, (ii) recommends the harmonization and alignment of statutes, regulations, and APR thresholds between provinces, and (iii) argues for the importance of strengthened and straightforward consumer protections. Finally, we ask that the Ministry will allow for the necessary time required for non-bank, fintech lenders to adjust to any new regulatory regime.
On behalf of the CLA and its membership, we would like to thank the Ministry for the opportunity to provide feedback to the Consumer Reporting Act Consultation. If the Ministry should have any questions for our members, or would like to seek clarification on any point, please contact us at the email addresses below.
Head of Policy President
Canadian Lenders Association