Opinion: Budget a chance for Ottawa to reverse course on misguided lending cap

35% limit on interest rates will drive sub-prime borrowers into the hands of predatory and illegal lenders

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Tucked away in the depths of last year’s federal budget, the federal government outlined bold plans to crack down on payday lenders — but instead, they’ve gone after Canada’s non-prime lenders.

Reputable non-prime lenders support Canadians with imperfect credit to raise their scores and access better loans. Payday lenders charge unregulated, predatory rates, that drive consumers into a deep cycle of debt.

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The government’s goal led to an ill-informed decision to cap the amount of interest lenders can charge Canadians at 35 per cent. Of course, at first blush the proposal seems reasonable. But unfortunately, the government failed to do their homework.

Over the past 12 months, academics, law enforcement, think tanks and industry representatives have poured over the proposal in detail. All reached the same conclusion: capping interest rates would do nothing to lower costs for Canadians. Instead, it will cut people off from the regulated financial sector and drive them into the hands of predatory and illegal lenders.

Research from Ernst & Young and the C.D. Howe Institute shows more than two million Canadians are at risk of losing access to a regulated loan as a result of these changes. The harsh reality is that Canadians with low or no credit, simply will not qualify at rates below 35 per cent. Just as car insurance companies charge more to insure a newly licensed driver or someone who has been in an accident, lenders must account for borrowers with no credit history, or a low credit score.

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People in need of these loans, which are often less than $1,000, have already been turned away by corner banks. Non-prime alternative lenders offer them somewhere to turn when faced with an unexpected car repair or an emergency visit to the vet. But if the government cuts them off, where will they go? According to law enforcement, the answer could be devastating.

The Ontario Association of Chiefs of Police has warned the government’s proposal could lead to a surge in illegal activity. What’s worse, if the only place to turn for people is a predatory lender — there is no way to ever rebuild their credit or gain access to lower rates.

On the evidence, the Liberals have gotten their interest rate cap proposal dead wrong. This leaves Finance Minister Chrystia Freeland with two options for her upcoming budget. One, reverse course and find more effective ways to meet the government’s policy goals. Or, two, ignore the facts and dig in her heels on an inevitably disastrous policy.

No one would fault Freeland for reversing course. In fact, a recent public opinion poll conducted for the Canadian Lenders Association found that most Canadians agree the government has a responsibility to ensure people have legal options to borrow money. On top of that, there is greater opposition than support for the plan to lower the maximum rate of interest.

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And non-prime lenders? They are eager to work with Freeland to help crack down on predatory lending and create more opportunities for people to rebuild their credit. There are already effective alternatives at the government’s disposal, such as capping loan sizes on high-interest loans or developing new programs to help people rebuild their credit.

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Yet, the government has been quick to paint the entire sector in a negative light, despite their significant contribution to Canada’s economy. In addition to hurting the very people the government set out to help, Ernst and Young estimates nearly $10.7 billion will be removed from the economy each year as a result of the new cap. One would think this sort of hit to the economy would be top of mind for Canada’s finance minister.

In this year’s budget, the minister has an opportunity to put good policy ahead of opportunistic politics. Together, with Canada’s lenders, the government could advance real solutions to our shared goals. But will they?

Gary Schwartz is the president of the Canadian Lenders Association 

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