Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 27 - Evidence - April 23, 2015
OTTAWA, Thursday, April 23, 2015
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:31 a.m. to study Bill S-210, An Act to amend the Criminal Code (criminal interest rate).
Senator Céline Hervieux-Payette (Deputy Chair) in the chair.
[Translation]
The Deputy Chair: Welcome, everyone. Today, the Standing Senate Committee on Banking, Trade and Commerce is holding an introductory meeting on Bill S-210, An Act to amend the Criminal Code (criminal interest rate), introduced by our colleague Senator Pierrette Ringuette.
I must say, on a personal basis, it is a pleasure for me to welcome you as a witness, Senator Ringuette. With that, Senator Ringuette, the floor is yours.
Hon. Pierrette Ringuette, sponsor of the bill: Thank you, Madam Deputy Chair. Good morning, honourable senators.
[English]
I'm here to today to answer your questions on my bill, Bill S-210, An Act to amend the Criminal Code (criminal interest rate).
The focus of the bill is to change what is known as the criminal interest rate, which is effectively the cap on interest, which currently sits at 60 per cent annually.
My bill aims to lower the rate, which has been in place since 1981 — for 34 years — to 20 per cent above the Bank of Canada overnight rate for personal, household and non-profit loans. The overnight rate currently sits at 0.75 per cent, which means the limit would be 20.75 per cent.
The bill will also leave the current limit of 60 per cent in place for business and commercial loans under $1 million and remove the limit for business and commercial loans of more than $1 million.
[Translation]
First, let me quickly address these two most recent amendments. In the course of my research, it has become clear to me that companies need to have access to short-term loans, such as bridge loans. As the interest on those loans is based on a short period, the annualized interest rate is much higher.
So the bill provides for a rate of 60 per cent for small and medium-sized businesses and still more flexibility in granting bigger loans for larger companies, which have greater negotiating power.
The bill is designed not to impede companies' ability to negotiate the loans they need, but to tackle the problem of excessive interest rates charged to consumers.
It is important to look at the historical concept of a criminal interest rate, the origin of which goes back more than 100 years.
[English]
In 1906, the first "criminal interest rate" was established in Canadian law. It was called the Money-Lenders Act. The law limited interest to 12 per cent on loans of $500 or less. This limit stood for 33 years.
Then, in 1939, Parliament passed new legislation to replace the Money-Lenders Act. It was called the Small Loans Act, and it required anybody who offered loans on less than $500 to charge a maximum interest rate of 1 per cent per month. If they wished to charge more, they had to apply for a licence or exemption from the federal government. This limit stood for 42 years.
In 1981, Parliament abolished the Small Loans Act and introduced the criminal interest rate, section 347 of the Criminal Code. The criminal interest rate was set at a rate of 60 per cent per year.
It should be noted that when Parliament approved the criminal interest rate of 60 per cent, the Bank of Canada rate was about 21 per cent. So 60 per cent was roughly three times the Bank of Canada rate.
At the time, some senators suggested 60 per cent was too high. The Department of Justice initially suggested a limit of 45 per cent, which would have been similar to the outcome of my bill.
[Translation]
That percentage was fixed 34 years ago. If we used the same calculation today, the criminal interest rate in section 347 of the Criminal Code would be about 2.25 per cent. My bill sets the limit at a relatively more modest level of 20 per cent above the Bank of Canada rate, which would be 20.75 per cent at the moment. It would also provide the room needed for the rate to increase when the Bank of Canada rate increased to the same extent.
Current rates are very low, but, if we go back to 2006, rates were around 4.5 per cent. As I pointed out earlier, in the 1980s, the rates were a little over 20 per cent.
What I am trying to point out here is that, in the light of my research, a variable interest rate of 20 per cent above the Bank of Canada rate seems reasonable. However, I am prepared to adjust it upwards or downwards if, as the result of our discussions, we conclude that it would be preferable to do so. In my opinion, that is the most reasonable approach, and the fairest for individuals, households and families.
[English]
As the Bank of Canada rate has dropped since the 1980s, why have interest rates on credit cards, utility late fees and small loans either stayed the same or gone up? If one of the most important rates for the financial industry, the Bank of Canada rate, has gone down by over 90 per cent, why are interest rates for consumers not reflecting that change?
When you look at credit cards, interest rates range from 10 per cent to as high as 30 per cent. Telecoms charge 42 per cent annual interest rate on late charges. And short-term loans and instalment payment plans have annualized rates in the hundreds.
I can't speak for those industries and corporations, but it is an important fact to note the growing discrepancy between the very low Bank of Canada rate given to financial institutions and the very high interest rate faced by consumers.
According to TransUnion, the average Canadian had $21,428 in consumer debt — and that is without mortgage — in the fourth quarter of 2014, an increase of 2.3 per cent over the same time last year. The average line of credit debt increased by 4.4 per cent. The average credit card debt was $3,659 last year, a small decrease, offset by increasing use of lines of credit. Total credit card debt was $73.7 billion in 2012. That's the latest statistic.
From 2002 to 2012 — a period of 10 years — the number of credit cards in circulation increased from 49.4 million to 73.9 million in Canada. Net credit card purchases by Canadian consumers increased from $154 billion in 2002 to $355.64 billion in 2012. That's an increase of 130 per cent over 10 years.
[Translation]
Last December, Statistics Canada announced that Canadians' debt-to-income ratio had reached a new record of 162.6 per cent of disposable income, from 161.7 per cent on the same date a year earlier. In Canada, the level of debt in terms of income is therefore higher than in the United Kingdom, Japan, the United States, Germany, Italy and other OECD countries.
With Bill S-210, we would not be alone in setting more reasonable limits on interest rates. Of the 18 American states with maximum interest rates, 15 have set levels less than 20 per cent and some have limits that can be as low as 5 per cent depending on various factors. Several have adopted a system of variable rates, as my bill proposes, usually tying interest rates to those set by the Federal Reserve or to the six-month treasury bill rate.
I should also let you know that the American government has turned over the responsibility for establishing national interest rate regulations to an entity called the Consumer Financial Protection Bureau. The CBC's Amanda Lang reported on it on February 9, 2015.
[English]
The headline is: "As U.S. moves to regulate payday loan industry, why not Canada?" This is on a national scale. She investigated a few of the Canadian proposals in regard to payday loans. Let me quote here:
According to the Canadian Payday Loan Association, more than 760 quick-cash operators loan to about two million people each year. The average loan is $280 for a period of ten days, and most of those borrowers are in Ontario, where payday lenders can charge a maximum of $21 for a 2-week loan of $100. That works out to an annual interest rate of more than 500 per cent.
I have a list here of the different U.S. state regulations. Kentucky is at 4 per cent above the Federal Reserve; Alaska is at 5 per cent; Arkansas is 5 per cent above the Federal Reserve; California, 7 per cent; Delaware, 5 per cent above the Federal Reserve; Iowa, 12 per cent for loans under $25,000; Kansas is at 15 per cent; Minnesota, 8 per cent; Mississippi, 5 per cent above the Federal Reserve; Montana, 6 per cent above the Wall Street Prime; North Carolina, 6 per cent above the six-month U.S. treasury bill; North Dakota, 5.5 per cent; Ohio, 8 per cent; Oregon, 5 per cent; Rhode Island, 9 per cent; Tennessee, 4 per cent; and Washington, 4 per cent above the U.S. T-bill.
[Translation]
In 2006, something interesting happened with the criminal interest rate: the legislative provisions passed at that time resulted in an exception being made for loans up to $1,500 and for a maximum term of 62 days, as long as this is approved by the Governor-in-Council.
The effect was to give provinces the power to regulate payday loans and to make them subject to their own rules and even their own approval.
At the time, Senator Grafstein, who was the chair of this committee, raised concerns about the ability of the provinces to come up with uniform regulations and about the fact that Canadians would end up with different rules and would be paying different maximum interest rates depending on where they lived.
Senator Grafstein was prescient about that; different rules are now in effect in the provinces. The maximum interest rates that can be charged vary from $17 per $100 in Manitoba to $25 per $100 in Prince Edward Island. Nova Scotia is currently examining the limits. The provinces of Quebec and Newfoundland and Labrador do not regulate payday loans themselves; instead, they go along with the federal limit for the criminal interest rate. New Brunswick has legislation on the matter, but it does not impose a limit and therefore also goes along with the limit established federally.
Provincial limits are based on short-term loans, therefore implying an annualized rate that is extremely high.
[English]
To recap, in regard to payday loan legislation provincially: Alberta is $23 per $100 of loan; B.C., $23 per $100 of loan; Manitoba, $17; New Brunswick I just mentioned; Newfoundland and Labrador, $2.30 per $100; Nova Scotia, $25 per $100; Ontario, $21; P.E.I., $25; Quebec, N/A; and Saskatchewan is also at $23 per $100.
My bill does not touch section 347.1 of the Criminal Code and so does not affect the provinces that have payday loan regulations, but this may put pressure to lower rates to more reasonable levels. There are many newer and growing types of loan arrangements that would be reined in by this bill.
One growing issue is that of instalment loans — loans aimed at the most financially vulnerable and have rates that reach 60 per cent, and with various fees, possibly significantly above this rate.
"Marketplace," on CBC, recently looked into this and found a loan charging 57 per cent, another advertised rate that amounted to 71 per cent. These types of loans are growing fast and currently amount to $132 billion in debt or 8.7 per cent of Canada's total debt distribution.
Instalment loans are spreading online too, including names such as Eastern Loans; urLoan; Mogo; Customer First Financing; One Hour Loan; and, colleagues, that's not fast enough — there's the One Minute Loans; NCR Financial Services, Bucks for Canucks, easyfinancial. The advertising on these sites frequently includes lines like: "No credit check," "bad credit loans," "bankruptcy loans," "debt relief" and "better than a payday loan."
You can see this site for one called urLoan. The advertising says:
It is time for a better short-term loan.
This year alone more than 2 million Canadians will pay over half a billion dollars in payday loans.
Here is what you could pay for a $1,000 loan:
600 per cent For a payday loan in BC
548 per cent For a payday loan in ONT
And 47 per cent For a loan from urLoan
That is just to give you a preview of what is really happening in the marketplace.
They are targeting people with bad credit and bankruptcy. They are specifically going after Canadians with financial hardship.
The rates vary based on different factors, but urLoan and easyfinancial advertise loans at around 47 per cent. I'm not saying that they shouldn't be available but that the rates should be reasonable. Especially when targeting those already underwater, high interest rates perpetuate that debt cycle. In fact, many of these companies specifically push the loans to pay off and consolidate debts. These types of loans are not the same as payday loans and do not fall under its exemption provincially, and they should be controlled under the criminal interest rate.
In the last few years, the media have reported on some of these cases, and it seems that the federal government has not exercised its authority under the Criminal Code.
In the October 2013 Speech from the Throne, the government stated that they would act with the provinces to curtail abuses. Unfortunately, these words were not matched with actions. Bill S-210 would modernize and bring reasoned fairness to the criminal interest rate.
[Translation]
Thank you for your attention. I hope that I will be able to answer all your questions.
The Deputy Chair: Senator Ringuette, thank you for all the work you have done.
I would like to ask a question. Do payday loans exist in Quebec? I thought that kind of business was not allowed in Quebec.
Senator Ringuette: Yes, to my knowledge, they exist. However, in Quebec, the Consumer Protection Act imposes some conditions.
[English]
Senator Black: I would like to identify myself with the comments of the deputy chair. You are to be commended for your tenacity in bringing these types of matters forward, and I mean that sincerely. It's impressive to me.
I want to understand exactly what we're getting at here. If I understand it, when you take it all away, you're saying that if we charge an interest rate above a certain level, it becomes a criminal offence, and you want to reduce that from 60 per cent to 20 per cent, basically.
Senator Ringuette: For certain groups: for households, families and so forth — loans.
Senator Black: That's good. I understand. So the concept is that I will create a criminal offence if, in that category, I give the loan for 30 per cent, if we approve your bill. Thank you very much.
If you're successful with your bill, what will the consequences of that be?
Senator Ringuette: First of all, we have to understand that the legislation in regard to section 347.1, the federal government gave the power to the provinces to regulate payday loans. It was for a specific financial product.
Since then, businesses being very creative, and as I've indicated to you, there are instalment loans, easy-loans. There's also quite an issue in regard to car loans. These do not fall under the authority that we gave to the provinces.
So we have all these other loans, and more and more, we see abuses in these rates. Some definitely are higher than the current Criminal Code of 60 per cent, yet it seems that, although the Criminal Code is under federal jurisdiction, no action is being taken in regard to curtailing those abuses, although they are definitely being highlighted more and more in the media. Individuals are coming out and saying that. They're certainly right about it.
In regard to personal, household and non-profit organizations that need short-term bridging loans, this bill would bring reasonableness in regard to them. I certainly believe that it would help, also, in regard to the personal debt situation. For instance, if you look at those instalment loans that can go up to 500 per cent, people get into a cycle that they can never catch up to in regard to paying the capital on the loan. So it would capture that.
In regard to small- and medium-sized businesses, the criminal interest rate would stay at 60 per cent. Our research showed that it is not a major issue, because they have a capacity and equity to have a better interest rate on their loan.
Also, I want to share a point in regard to the effect. In our research, we went through a lot of court cases where either venture capital issues or short-term bridging loans — the 60 per cent criminal rate was very low in regard to ensuring a five-day loan of $10 to $20 million. A lot of these cases would be brought in front of the courts because of the 60 per cent Criminal Code rate. For instance, if this committee would invite the Council of Chief Executives before it, they would corroborate this issue that the big businesses really need some more flexibility in regard to bridge financing and so forth.
So this bill would allow big business to have access to those loans that, in reality, are higher than the 60 per cent.
Senator Black: Just to follow up, I understand that you have responded to what the effect would potentially be on consumers.
Senator Ringuette: Yes.
Senator Black: What do you believe the effect would be on the businesses that are currently in this business?
Senator Ringuette: First of all, the bill includes the flexibility of the 20 per cent criminal interest rate being added to the overnight bank rate. Honestly, if a lending business cannot survive with a 20 per cent interest rate, they're in the wrong business.
Senator Black: Thank you very much.
Senator Tkachuk: I have couple of questions. Is this bill targeting payday loans or is it targeting credit cards or is it targeting both?
Senator Ringuette: This bill is targeting any business that is using usurious fees.
For instance, Bell Aliant in Atlantic Canada will have an interest rate for non-payment on time of 42.87 per cent. Senator Tkachuk, with regard to payday loans, for the payday loans that only issue the financial product for which the provinces were given regulatory authority, it will not affect that product line.
However, we have similar businesses with payday loans, and I gave you some examples of those earlier, which have created a different kind of financial product. Some are very similar to a line of credit. These products go far beyond the 60 per cent currently criminal rate. There is —
Senator Tkachuk: Then they'd be covered if they go beyond the 60 per cent. They would already be covered.
Senator Ringuette: Absolutely. These new financial products would be covered under this bill. They already are at 60 per cent, but they would be subject to the 20 per cent plus the Bank of Canada overnight rate.
Senator Tkachuk: When the rates are calculated for a payday loan — I've never had one — my understanding is they charge a fee. If a person wants an advance on his income tax, or he is going to have a paycheque in five days but wants the money right now, he goes and gives them $25 and they give him the money, and at the end of the week they get his paycheque. That $25 may seem like an exorbitant interest rate, but as far as a purchase of a product, it's not a bad rate.
Senator Ringuette: The specific example that you're talking about is, for many Canadian provinces, under their regulations. I have stated the amounts. This bill would not change the situation with regard to the provincial regulation for the specific product that we gave them the authority to regulate.
Senator Tkachuk: The other question is on credit cards. You gave an outline of people in credit card debt. Are people in credit card debt due to the interest rate or due to the fact that they spent too much money on their credit card?
Senator Ringuette: The indication we have from our research is that most of the credit card debt, or any other kind of debt, is to pay for essential services. Again, people get caught in situations.
For instance, since I've been involved with these two issues, the merchant fees and the interest rate, people have sent me their stories. What we can see is that the bank will offer you a credit card with a $2,000 credit limit. After a few months, at the beginning, you pay the full amount when you get your statement. After a few months, especially during the winter months where the cost of living is higher, they get into a situation where they cannot pay the full amount. The first step the bank will take is to call them to offer them an increase in their line of credit. That goes on again for five, six months. That increase makes the consumer pay less and less on the capital.
The other step being used is that instead of having your credit card interest rate at 19.9 per cent, they'll increase it to 25 and then they'll increase it to 30. Then the next step they take is they further increase your line of credit.
Senator Tkachuk: Who does that? What credit card company does that?
Senator Ringuette: It's not the credit card —
Senator Tkachuk: I've never heard of that.
Senator Ringuette: It's not the credit card company that does that. It's the financial institution that issues the credit card.
Senator Tkachuk: I understand that. Which one in Canada does that?
Senator Ringuette: Senator, most of them do. From the feedback I'm getting from the population, this is the scenario that they're using.
It is also a fact, if you look into the media, that every once in a while there's a battle between financial institutions to acquire the credit cards of a certain brand. There were quite a few between the two of the major banks with regard to acquiring a percentage of the Canadian Tire MasterCard.
There's no question in my mind that a credit card is a substantial financial contributor to the banking industry in Canada.
Senator Tkachuk: Of course it is, but you can get a credit card for 5, 6, 7 per cent.
Senator Ringuette: I haven't seen those.
Senator Tkachuk: There are credit cards, if you get the credit card without the bells and whistles. If you want points —
Senator Ringuette: A credit card without the —
Senator Tkachuk: I'm just asking you. I want you to go through it all, because if you want all the points and everything then you're paying for a high-priced credit card, and a lot of times credit card companies will charge a large interest rate as a deterrent fee to make sure you pay your money.
For example, if you have an American Express card, their interest rate is 28 per cent. But when you make your purchase there is no interest cost. It's zero. You don't pay any interest until your deadline date. If you pay it on your deadline day they've given you credit, for whatever amount you have as a limit, for free. But if you're late, they hammer you with 28 per cent. The reason they hammer you with 28 per cent is they don't want you to extend your credit; they want you to pay. The easy calculation would be it's better for me to pay than not to pay.
They would be prevented from doing that. They may have to go the old credit card route of Visa and Master Charge, where they charge you interest from the time you make your purchase.
Senator Ringuette: Our research indicates that the lowest interest rate credit card on the market right now is at 10 per cent.
American Express is a different entity from Visa and MasterCard. It is also a banking institution of its own. It is the bank, the credit provider and it is the issuer. It is not the same situation in regard to Visa and MasterCard.
I believe that still, whether you are looking at an up-front loan or what I call a line of credit on a credit card, 20 per cent plus the Bank of Canada overnight rate is a very reasonable proposal.
Senator Tkachuk: Thanks, I've taken up too much time.
[Translation]
Senator Bellemare: I must congratulate you for all the research you have conducted. Like my colleagues, I am impressed by the scope of your research.
I read on the Internet that some provinces, particularly British Columbia and Saskatchewan, have regulated payday loans. Are you aware of those regulations?
Senator Ringuette: Yes. At the end of 2006, this committee authorized the provinces to have legislation specifically on the products of payday loan organizations — if they made application to the Governor-in-Council. Those loans can be up to $1,500 for a maximum period of 62 days. That was the reality in 2006.
A lot of those companies have displayed a great deal of creativity with the financial products they offer. Some companies offer "lines of credit." Although the provinces allow payday loans for that specific product, lines of credit in the context of payday loans come under the Criminal Code. They are not a provincial matter. They come directly under the Criminal Code, which is a federal responsibility.
Senator Bellemare: I am not very familiar with those lending institutions. You also talked about loans made over the Internet. With digital currency, we know that loans can be offered at exorbitant rates.
Does your bill provide for regulating that kind of loan?
Senator Ringuette: Yes, absolutely. According to our research, all the online organizations providing loans, like the ones I gave as examples, operate all over Canada. They are not limited to one province as such. They do not necessarily have licences. So they come under the federal Criminal Code.
Senator Bellemare: At that point, does the bill call for reporting? Will a person who has been charged a rate of interest be able to register a complaint? If a company's head office is outside Canada, will this cover —
Senator Ringuette: It will cover the operations in Canada.
Senator Maltais: I would like to ask a question. One of the major problems with credit cards is that consumers do not pay their first bill in full. For example, if a consumer spends $1,000 with his credit card in a given month, and only pays the minimum amount of $10 in subsequent months, that is when problems arise.
If the interest rates are reduced, that consumer will pay $5 instead of $10. Are you not afraid that the effect will be the opposite, that consumers will become even more indebted?
Senator Ringuette: No. I don't think so, because —
Senator Maltais: The consumer then ends up with another credit limit he did not want.
Senator Ringuette: The interest rates have nothing to do with the credit limit that a financial institution extends to a consumer.
Senator Maltais: I probably did not explain myself very well. I was referring to credit cards, like Visa. A consumer spends $1,000. He gets his statement at the end of the month and makes the minimum payment of $10. The $990 he owes increases the following month because of the interest rate. Then he pays the $10 minimum again. After six months, he has paid $60 and actually owes more than $1,000. It is as simple as that.
If they pay less interest, consumers who are not able to manage their payments may well end up with more credit on their cards. Is that not an incentive to buy more than you can pay for?
Senator Ringuette: No. As I indicated, our research shows that Canadian consumers' increasing levels of indebtedness are also linked to essential services. We see levels of indebtedness increasing during the winter months.
In my view, the credit limit extended to an individual also comes with a responsibility. Just like financial institutions, consumers bear their share of the responsibility. In the last five years, most of the people coming to meet me in my office to tell me about their situation had been given a certain credit limit by their financial institutions and only managed to repay a part of it. The financial institutions granting those credit limits should be able to determine that a consumer is having problems paying. Why do those financial institutions continue to increase those consumers' credit limits?
As I see it, the financial institutions issuing those credit cards must bear their responsibilities too.
Senator Maltais: I quite agree with you. The responsibility for increasing credit limits belongs with the financial institutions. What bothers me is when a consumer manages his credit card poorly. He is not going to manage it any better by having his credit limit increased. That is how I see it. Maybe I am wrong, but I feel that, in most of the cases where people have problems with their credit cards, it is because they are managing them poorly. Or they have run into some misfortune. Apart from that, it's poor management.
Senator Ringuette: Just to clarify my comments, in my speech, I pointed out that TransUnion, which does the same thing as Equifax, determined that, at the end of December 2014, the average Canadian was carrying more than $21,000 in debt, with only $3,600 of that on credit cards. So credit cards are not the biggest part of the problem. They are part of the problem, but not the major part. There are financial products on the market that are far more harmful to Canadians' debt levels than credit cards.
Senator Massicotte: Thank you, Senator Ringuette. We respect your work a great deal and your goal is commendable. Clearly, we all agree that there is a problem, and your efforts to solve it are much appreciated.
However, I would like to clarify that the amendment to the legislation you are proposing does not apply to payday loans. They are completely excluded because all the provinces, with the exception of one, have to assume their responsibilities and, according to the 2006 amendment, section 347 does not apply.
Senator Ringuette: For one specific financial product.
Senator Massicotte: Payday loans. You do not touch them. It is not possible to touch them without amending other parts. However, I note the effort you make with the $1 million means that business loans, investment loans, are excluded.
I have two comments for which I have no solution. I would suggest that $1 million is too high. For venture capital investment, for example, on average, for every 10 investments, eight fail, one of them returns the money invested, and the hope is that the tenth makes 10 times the amount to make up for the eight losses. But often, these investors are people who put in $50,000 or $100,000. That is a lot of money with a risk like that. Cases like that would violate section 347; the $1 million figure should be reviewed. It should be lower.
Senator Ringuette: Like what?
Senator Massicotte: Take the provincial government, for example. Any loan of $97,000 is excluded. The amount should be closer to $100,000 or $50,000.
Anyone lending $50,000 has some sophistication. A person like that certainly knows a little about investments and risk.
My second comment — and we heard about this from witnesses in 2005 and 2006 — is that, when someone makes a loan, there is a fixed cost, an administrative cost. Let's say you lend $100 or $200; the documentation alone will cost $10 to $15 to prepare. I do not remember the testimony any more, but there is a fixed cost.
The lender needs to recover that amount before even earning interest. Perhaps he will make five to 10 per cent in interest, but that is 10 per cent plus the $15. For example, if he lends $10 and charges $15 plus an interest rate of 10 per cent, after one month, that would be 150 per cent or 200 per cent. So the profit that he makes is not unreasonable. It is maybe about 15 per cent. However, in having to get the $15 back, he comes into conflict with the legislation very quickly.
I do not know the solution. I looked to the United States and other jurisdictions, but I have not found a solution to the problem of having to calculate this cost. The legislation could easily provide for the recovery of the fixed cost plus an interest rate that does not exceed yours. But it is difficult to get to that point.
Even in the United States, I looked at what Mr. Obama has done in the past two weeks; he did not set the interest rate. He simply said that every lender should make sure that the payment is reasonable and predictable.
Senator Ringuette: He also gave the responsibility to the Consumer Financial Protection Bureau, the institution I mentioned earlier, in consultation with all the stakeholders in the lending industry dealing with small personal loans, to develop national regulations that are acceptable. Clearly, they will have to consider the state legislation in place, as I said. There are 18 pieces of legislation right now.
However, Senator Massicotte, in 2006, when we looked at the possibility of empowering the provinces to regulate payday loans, I remember very clearly that the association appeared before our committee —
Senator Massicotte: Which association?
Senator Ringuette: The Canadian Payday Loan Association. The association indicated that the fees. . . I think it said $20 for a loan of $100 for a maximum of 62 days was very reasonable. Afterwards, the Canadian Payday Loan Association visited each provincial legislature to ask them for the regulations that each province had put in place.
We must then conclude that those in the industry seem to be thriving with the legislation in place right now. In Alberta, for example, from the $23 for a $100 loan, they collect a lot more than their business costs.
Recently, hearings have been held in Nova Scotia, and the Canadian Payday Loan Association asked for an increase in the fees it could charge. No conclusion has been reached yet, but a lot of Nova Scotians and a lot of groups concerned by personal debt spoke out; they said that, instead of being increased, the fees need to be reduced.
Senator Massicotte: I am trying to understand. You are talking about Alberta. Let's take a specific example. Someone comes to you and tells you they really need $100.
Senator Ringuette: For how long?
Senator Massicotte: For one month. We might assume that the paperwork costs $20, but let's say that it costs $15 just to make the transaction. You tell yourself that you are taking a $100 risk, since you don't know the person, and you are going to aim for a $10 profit. That seems reasonable to me. However, you collect, much like in Alberta, $10 plus the $15 in fixed costs. You did not make any money. It costs you $15 and you make a $10 profit. But, for $100, you make $125 in one month. That comes to 250 per cent or 280 per cent. That is contrary to your regulations. It means that if your amendment is passed, this entire sector will be excluded. The need is there, it is real. So how is this issue being addressed?
Senator Ringuette: Senator Massicotte, it was this very committee that recommended that the Senate give this responsibility to the provinces for one specific financial product.
Senator Massicotte: For payday loans.
Senator Ringuette: Yes.
Senator Massicotte: My example also applies to credit cards. The amendment you are proposing makes it no longer acceptable. Even if the profit is reasonable, the interest rate gets up to 280 per cent on an annual basis. Are we ignoring that problem? Are we just telling consumers that they "are out of business"?
Senator Ringuette: I have a hard time understanding your example. First, that's what the situation seems to be for payday loans.
Senator Massicotte: We are not talking about payday loans because your amendment does not deal with that kind of loan.
Senator Ringuette: No.
Senator Massicotte: All the same, short-term loans represent 80 per cent or 90 per cent of the market. Nevertheless, you are stating that the act must be amended in order to deal with other financial products and that is the area to focus on. I lend $100 at a fixed rate of $15, hoping to make a profit of $10, which is reasonable. But it means that if I lend $100, the borrower has to pay back $125 the following month. That is 280 per cent.
Senator Ringuette: Yes.
Senator Massicotte: Making that kind of loan would be against the law, even though it is reasonable and despite the demand for transactions of that kind.
Senator Ringuette: According to my research, loans cannot be made to individuals and families if the rate would be, in today's situation, higher than 20.75 per cent.
That would be an abuse. I could give you a number of examples of abuse. But I do not agree with you about the example you quoted.
However, your idea of reducing the limit for small and medium-sized businesses, say to $100,000, would probably be a good thing. But before I confirm that for you, I would have to analyze the impact of reducing the maximum rate on small and medium-sized businesses.
Senator Massicotte: A solution has to be found. We have to be conscious of fixed transaction costs. If we quickly do the calculations, we get to a very high figure that has no resemblance to reality, to what it costs to complete the transaction. There should be an interest rate of X and a way to recover the fixed costs.
Senator Ringuette: The fixed costs vary from one institution to another.
Senator Massicotte: Choose an amount by way of an example.
Senator Ringuette: We cannot compare the fixed costs of an organization that makes payday loans, that has a physical presence and human resources, and Internet organizations where people fill in forms online. The fixed costs for the two organizations are different.
So how do we determine a fixed cost? No.
Senator Massicotte: It is a dilemma. Alberta has found a solution.
The Deputy Chair: We have often referred to the consumer, the borrower. But we have not talked a lot about the rules that apply to the companies. How is it that there is no limit and no regulation governing the students who get credit cards when they have no income? When students enter university, they are given a credit card almost right away although they have no fixed income.
I do not know whether entering adult life includes the risk of serious financial difficulties. This is not just a problem for students, but also for people with no job who are given credit cards and lines of credit. It seems to me that you generally have to have an income if you are borrowing money, because you have to have a way of paying it back. That is Economics 101. So, when there is no income, what are the rules? Our banks are still governed by the federal government. Our act is in a document six inches thick.
Does that mean that no financial institutions have rules to determine the conditions that people have to fulfill in order to borrow? It is all very well to make loans, but if people cannot pay them back, who is going to pick up the tab?
Senator Ringuette: I understand your question and your concerns. The purpose of my bill is not to set rules for the risks taken by banks or financial institutions. Instead, it seeks to set the criminal interest rate at a responsible level for Canadian consumers.
The Deputy Chair: I assumed that it was to protect consumers. Go back to Senator Maltais' typical example, where a consumer has $1,000 on a credit card and only pays $10 at the end of the month. You had to do the math. That consumer probably owes over $1,500, if not more. The outcome is that the consumer will have paid $120 by making the $10 monthly minimum payments, if he has the $10.
Senator Ringuette: Are you asking what we should do in those cases?
The Deputy Chair: Yes.
Senator Ringuette: If I had the answer, I would have a bill to solve that problem too. I would like to take this opportunity to tell you that every time we discuss the issue of credit cards or interest rates, and so on, the organization that comes to give testimony on behalf of the financial institutions is the Canadian Bankers Association, which never has any answers to questions like the one you have just asked.
The rules vary from one institution to another, be it the Royal Bank, Scotiabank, CIBC, and so on. For us to get answers to our questions, the management of each bank would have to appear before our committee. The financial institutions are really the ones that know their figures.
We should stop making do with the presentations and comments from the Canadian Bankers Association, which, based on my long experience on this committee, is never able to give us a straight answer. I think our committee should take a different approach in order to get clearer answers.
The Deputy Chair: I will take your comment under advisement and, when we prepare the list of witnesses to be heard in relation to your bill, I will discuss it with the chair. But personally, I feel that the issue is broader than that.
Earlier, you talked about telecom firms. You talked about a company charging up to 41 per cent.
Senator Ringuette: 42.87.
The Deputy Chair: I think all public services, which those companies are certainly not — and now, I don't know whether this is the case in the rest of Canada, but now, we can use our credit cards at supermarkets, which was not possible before. So now, to be able to eat, people very often have to use their credit cards because they don't have money to buy food. I am telling you this, because we are talking about a debt level of 160 per cent or more, $21,000 per person. Just between us, I don't think we are the only ones worrying about this. The Governor of the Bank of Canada and other players are worrying about it too and are wondering how we are going to manage to bring that debt level down. That is why I am talking to you about how people can get into debt, often for reasons beyond their control. For instance, if a person has an accident or is ill, I can understand that they don't always have an income. But when you offer them a credit card and they don't have any income, I really wonder.
We will be looking very carefully into this issue. Thank you very much, colleagues.
(The committee adjourned.)