Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 29 - Evidence - May 13, 2015
OTTAWA, Wednesday, May 13, 2015
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-210, An Act to amend the Criminal Code (criminal interest rate), met this day at 4:18 p.m. to give consideration to the bill.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good afternoon and welcome to the Standing Senate Committee on Banking, Trade and Commerce.
There is one item I would like to deal with before we begin today's meeting. Honourable senators, Senator Tannas has made a written declaration of private interest regarding Bill S-210, An Act to amend the Criminal Code (criminal interest rate). In accordance with rule 15-7, the declaration shall be recorded in the minutes of proceedings of the committee.
With that out of the way, today is the third meeting on Bill S-210. The purpose of Bill S-210 is to amend section 347 of the Criminal Code to change the criminal interest rate, which is currently defined as interest rates exceeding 60 per cent per annum.
To date, we have heard from the bill's sponsor, Senator Ringuette, as well as academics, a legal professional and a not-for-profit organization. Today, our meeting will be split into two one-hour panels.
Moving to our first panel, I should say our first witness, I am pleased to welcome, from the Saint John Human Development Council, Mr. Randy Hatfield, Executive Director. Based in Saint John, New Brunswick, the Human Development Council identifies and addresses social issues through research, information coordination and networking. Mr. Hatfield, it's a pleasure to have you here. The floor is yours, sir.
Randy Hatfield, Executive Director, Saint John Human Development Council: Thank you very much, Mr. Chairman, and good afternoon, everyone. Thank you very much for the invitation to attend and to make a few comments on Bill S-210 and then hopefully to engage in a conversation about some of the merits that we believe exist within the legislation and hopefully convince you of some of the sound reasoning and policy behind it and why we should, in fact, adopt it.
I don't think it will come as any surprise that I am here speaking in support of Bill S-210. I do that for two principal reasons: one, because I consider it a very pragmatic piece of legislation; and two, I consider it a very timely one.
It is pragmatic in the sense that it stands on the shoulders of Bill S-19 in 2005 that was reported out of your chamber and was given first reading in the House. Bill S-19 at the time talked about capping the criminal interest rate at 35 per cent and also dealing with insurance and calculating and including that within what would be considered a criminal interest rate.
Over the 10 years, we haven't had the reasoning that was adopted and used at that time change a lot. In fact, if anything, we have had circumstances arise that I would suggest would be reason to stand on the shoulders of Bill S-19 and to adopt Bill S-210. It did take into account and what this particular bill in front of you does is take into account three Supreme Court of Canada decisions on commercial law that dealt with section 347.
The bill before you of course places no limit on business and commercial loans greater than $1 million. It maintains the rate of 60 per cent for those less than $1 million. Importantly, it introduces a variable rate of 20 points plus the Bank of Canada rate, in this case 20.75, for loans to individuals, families and households. It provides, in my opinion, immediate and practical protection for low-income Canadians.
Significantly, Bill S-210 does not address payday loans. I think the horse has left the barn in that particular case. Despite some evidence from other witnesses that would suggest that we should do away with the payday loan provision that allows provinces to regulate it, I think since 2006 and Bill C-26 we have had a track record there that suggests that that's going to be in place for quite some time.
When I speak about of the pragmatism of Bill S-210, I speak of its ability to take into account the fine work that was done a decade ago, take into account the Supreme Court of Canada decisions since then, and take into account the growing number of working poor that need some protection from interest rates that are way too high.
I say that this is a timely piece of legislation because it addresses the growing crisis of the working poor. I can't state enough the challenges that too many of our neighbours are facing in this country when it comes to income inadequacy, when it comes to opportunity, when it comes to a burden and a cycle of debt that is just overwhelming and very difficult to get out of. That's something I hope we can all turn our minds to.
The Human Development Council became familiar with the issue when we submitted a brief to our provincial financial and consumer services commission. New Brunswick will be the eighth province to regulate payday loans. It's very late to the game. Although legislation was passed in 2007 and last year to deal with Internet banking, regulations were never promulgated and, without regulations and a regulatory framework, the bills really just wait for regulations to be put in place.
We have not had a full-blown regulatory hearing in New Brunswick. Instead, the commission introduced draft regulations and asked for comments. What we did is take a look at the full-blown regulatory hearings that Manitoba conducted in 2013, the Utility Review Board hearing in Nova Scotia that just completed that again had witnesses, exhibits, cross-examinations and a full-blown hearing.
As well, there was a consensus report last year prepared in Ontario by Deloitte that I think is appropriate for us to consider when we look at Bill S-210. Strengthening Ontario's Payday Loans Act was a report that emerged from a consensus group that included the CPLA, the Canadian Payday Loan Association, the national interest and lobby group. It represented consumers. It had a wide range of interests at the table that put together a consensus report. In Chapter 4, they pointed out something that I think is worth noting. They said that when talking about payday loans and when talking about small, unsecured, high-interest, short-term loans to consumers, the greatest potential risk may be the development of small-dollar-value instalment loans. That, honourable senators, is in fact something that we have to be alert to. We have seen a number of fringe banking institutions start to develop instalment loans that are trapping people into a cycle of debt that is just as overwhelming as the payday industry itself.
Lenders tend to find ways around rules. I have had one public servant in New Brunswick describe the payday industry and the fringe banking industry and instalment loans as the whack-a-mole game. You may recall that's that carnival game where you have a mallet and a mole that comes up out of a circle. You whack it and it goes down, but they just keep on coming. They are random and they are incessant, and they always find a way of rearing their heads. That seems to be what happens in many cases when we try to impose a regulatory regime that will monitor and restrict or at least govern the acts of lenders.
The new danger, I believe, is instalment loans. I feel that this bill would be able to deal with that conundrum. It's time for some federal leadership, in my opinion, on this particular issue.
When Bill C-26 was passed through the House of Commons, Senator Grafstein commented about the danger of a patchwork quilt of regulations across the country where, depending upon which province you lived in, that would determine the interest rate and length of a loan. Sure enough, when New Brunswick promulgates its regulations, we will have eight jurisdictions that vary in a number of key elements when it comes to the payday loan industry.
For the reasons of pragmatism and timeliness, I would urge you to look with favour upon Bill S-210. I would be happy to have a discussion.
The Chair: Thank you, Mr. Hatfield, for your opening comments. I just wanted to clarify several situations. First of all, am I correct in understanding that you are not a credit counselling service?
Mr. Hatfield: That's correct. We are a social planning council.
The Chair: You're a social planning council. Do you deal directly with individual consumers, or do you do it more from an overview situation?
Mr. Hatfield: It's broad. Social planning is sometimes a difficult concept to wrap one's head around because we are not direct servers. We neither feed the hungry nor shelter the homeless nor teach the illiterate. I tend to describe our work as flying at 30,000 feet and looking at the community and seeing where are the holes, what are we missing, where are the pieces that we need to cobble together and how can we create the capacity within communities to start addressing some of these issues.
Our recent foray into the payday lending industry caused us to consult with consumer credit organizations, to put the call out and actually to interview and work with citizens that have taken out payday loans and find themselves in this debt cycle, and similarly with the instalment loans. We had an individual in just two weeks ago who was explaining the cycle of debt that happens when lenders will easily and on their own, with consent, increase the limit that can be made available and charge interest rates that really don't allow the debt to be acknowledged and paid off in reasonable time.
The Chair: You use the term an individual's "debt cycle.'' If this were to be put through, if Bill S-210 were to be approved, what would be the impact? What do you think would happen to the individuals who at the present, I suspect you are suggesting, are abused at this point? Do you think they are not going to go out and buy the things that they want? What do you think will happen as a result of the implementation of this bill, were it to be passed?
Mr. Hatfield: That is a very good question that really requires some unpacking, because there is a lot to something like that.
With the payday industry, the debt cycle that is created happens with repeated, concurrent borrowing. I know the payday industry is not under examination here, but with the payday industry, if you had an emergency arise and you needed an injection of cash, you would go to one of these payday lenders and pay based upon the $100 that was borrowed. In the lowest jurisdiction in the country — in Manitoba, for instance — it's $17 per $100. In P.E.I., the larger, it's $25.
In P.E.I., if you needed to borrow $400 to get your car back on the road, you would walk in and get that, subject to presenting a pay stub and showing that you had employment income. Then you would prepare and leave a post-dated cheque or provide banking particulars so that your chequing account could be debited after 14 days. So you are taking an advance on a payday, really. So after 14 days, you have $400 but you have to pay back $500.
Given the nature of inadequate incomes these days, when you take a hit of $500, the likelihood is that you will still have rent to pay, food to buy and the cost of living. Then you get into the cycle of having to take out another loan.
If you borrow $500 this time, then in 14 days, you owe $625. That tends to go on until you maximize what you can take out of one payday lender, because they typically restrict the overall amount to be let out to between 30 and 50 per cent of a person's net income. So when that threshold is reached, then people tend to go next door and start another cycle with another payday lender.
So you have repeat loans with one lender until you maximize your ability to access the credit that's available, and then you're walking across the street.
The Chair: I understand that, but what is the implementation of Bill S-210 going to do?
Mr. Hatfield: First off, for instalment loans, which is what we were warned about with this consensus report, not only with the Canadian Payday Loan Association but with other consumer advocacy groups, we are going to see a drop from interest rates that are very close to the 60 per cent now down to 20 per cent.
So we will clearly see a lower rate of interest, obviously, and therefore a smaller amount that is required to be repaid — and opportunity to actually start biting into the equity and paying down a loan in a reasonable period of time.
The Chair: To take your example, the individual who has to get $400 to get their car fixed still needs the $400. Where are they going to go and get it, in your view? They're not going to simply say they can't charge me enough interest now, so I can't get my car back.
Mr. Hatfield: No. I think there are some interesting consumer products that are becoming available to borrowers. When I look at the Desjardins caisse system in Quebec and at Vancity, the credit union in Vancouver and British Columbia, there are tools and instruments that can address some of the issues and concerns that we have. In the U.K., using the faith community as a major backer and proponent, we are seeing examples of credit being made more reasonably and payments at the level where some of the outstanding indebtedness can be resolved faster.
The Chair: I hear you saying that if I need the $400 to get my car out, and if this current source is not available, there are other alternatives, and if I work hard to find them, I'll find them somewhere. Is that what you are saying?
Mr. Hatfield: That's subject to where you live. I can speak with some authority on New Brunswick and less so when it comes to other provinces and jurisdictions.
This is very much tied to the poverty file overall. When we talk about income inadequacy, we talk about debt cycles and debt levels. We have to take into account a host of considerations if we're going to really tackle this one.
But to try to answer your question directly, because you've asked it a couple of times, this 20 per cent cap clearly will reduce the amount that is owed by a borrower. We can play with numbers for a while if you'd like. When Bill C-26 came in, when the 60 per cent rate was set, I think the Bank of Canada rate at the time was over 20 per cent. So we do know that the Bank of Canada rate is very low right now. In terms of the likelihood of it increasing, if you leave out the national newspapers or others reporting it, it's not going to increase markedly in the next little while.
A 20 per cent return, I would suggest, is fairly handsome. I would think that should satisfy shareholders of the corporation.
Senator Tkachuk: Thank you for your presentation, Mr. Hatfield. I have a number of questions. Because you're a social service agency, maybe you can help us out here. Are people in debt because of payday loans, or are people going to payday loans because they are in debt?
Mr. Hatfield: Well, I think it speaks in large part to income inadequacy and poor incomes. People use payday loans because they can't make ends meet, because they are unable to meet the day-to-day costs of participating and belonging to the community.
In the province of New Brunswick, there are 750,000 people. We experienced last year the first time on record where the number of deaths exceeded the number of births. So we have a demographic challenge. The median age of the population is a couple of years higher than those generally across the country.
But of the 750,000 people, at any one time, there are 40,000 people on social assistance or welfare. At any one time in New Brunswick, there are 30,000-plus people on EI. I've seen customized reports from Statistics Canada suggesting that we have the highest percentage of our workforce earning minimum wage; I have seen official reports of between 8 per cent and 11 per cent.
Between social assistance, Employment Insurance, and low-wage work, a huge segment of our population is struggling to make ends meet.
Senator Tkachuk: I can understand that. We have a problem of these people not having jobs. But because you're poor doesn't mean you're in debt. It only means you're poor.
Are people in debt because of payday loans, which is sort of the overall political argument made, or are people in debt and then they go to payday loans? There is a big difference. Because if I'm poor, and I need $300, I'll go and pay the $25, and then a week later, pay back the $300 and I'm done. I may never see them again. There's nothing wrong with that; it was a service that helped me out, and it cost me 25 bucks.
What's the issue?
Mr. Hatfield: The issue, senator, is the cycle that can be created with repeat and concurrent borrowing. It's not just $25. On Prince Edward Island, for instance, it's $25 per $100. So if you borrow $300 or $400, you're paying back $375 on $300, and the period of time is 14 days. Bill C-26 set the limit of $1,500 in 62 days as the maximum length of time for the payday industry to seek regulatory regimes without the provincial level to get them out of section 347.
Senator Tkachuk: When we talk about payday loans, I hear the argument that they charge, as you just said, $25 per $100, $200 or $300. I haven't heard numbers that high, but nonetheless. We were also told at the last meeting we had on this issue that profits from payday loan companies, based on the research that was done — and it was from another social agency in the Maritimes — were around 16 per cent for payday loan companies, which seems to me not an exorbitant profit. It seems to be a reasonable one. There are obviously immense costs associated with making small loans to people. I can see that.
If that's all they're making, it's pretty hard to say that they're making too much money or that they're ripping off the customer when their returns are really not that great.
Mr. Hatfield: There was evidence before the Nova Scotia Utility Review Board that payday lenders tend to charge to the maximum. It's an oligopolistic sort of behaviour — a few players within the market can control the amount. In Manitoba, which has the lowest fees permitted under provincial law at $17, my argument and the Human Development Council put to the commission in New Brunswick that we ought to put a reverse onus on this; let's have a payday lender prove or show that they can't make a reasonable profit at $17.
Nova Scotia started at $31 and went down to $25. Then, when it was doing at that time $25 — I'm going by memory now but I believe Money Mart was charging about $21. As soon as they were allowed to charge $25, that's when it changed and the "ceiling effect'' became a floor.
Those are some of the issues that we have. You're absolutely right. It speaks to the lack of credit instruments available to the working poor. Chartered banks, for instance, are very reluctant to enter into agreements for under $5,000. They may issue a credit card or a line of credit, but they will quickly seek to increase the limit on that. It speaks to more underlying problems of income inadequacy and the lack of credit tools available to working poor that will allow them, over a reasonable amount of time at a reasonable rate of interest, to pay back indebtedness.
Senator Tkachuk: For example, if I go to a bank machine and get $10, it costs me $1.50. If I'm at the exchange, it costs me $3. Almost one third of my $10 is charged. If I ask for $100, it costs me $3. If I ask for $1,000, the percentage comes down all the time. My point is that when you're asking me to give you a $100 at a business, there's the same overhead as there'd be if you were asking me for $1,000. The costs are going to be higher.
A previous witness said they banned it. I can't remember what province it was. They actually got rid of payday loans. They now have non-profits supported by the federal government, provincial government, donations and charities. They give out money for free. It doesn't cost people anything. Why don't people do that? Why don't they go into competition with these people and help them out? If they're charity cases, then charities and churches and governments have a responsibility to help them out. Why don't they just help them out and put these guys out of business?
Mr. Hatfield: Well, that's a very interesting point. I think just to use your words, it calls for government investment. It calls for charitable investment. Perhaps it calls for a faith community engagement and involvement. That takes a level of coordination. I can only speak well about New Brunswick. I think one of the issues we struggle with there is capacity and scale. It's a huge question of scale in the Maritimes.
In New Brunswick, we didn't have a regulatory hearing to determine the rate structure and the length of loans or any of these good things that we can get out at full-blown regulatory hearings. We have to align ourselves. I'm getting a little off track, but in the Maritimes there has to be a substantial alignment amongst regulations and legislation when it comes to how we're going to define this question of scale, overcome it and put it together.
Senator Hervieux-Payette: What do they do if the person comes time after time and has reached their maximum and they don't honour their maximum? Do they seize their television, their iPod bought with a credit card, obviously? What is the outcome there? Winning the lottery is probably the only way they could get rid of the debt. How do these agencies deal with those who default on their payments?
Mr. Hatfield: Ultimately, a petition or assignment into personal bankruptcy will ensue.
Some of the literature I've reviewed says that by the time people are engaged with a payday lender, they have exhausted their line of credit, maxed out a credit card, and have availed themselves of whatever overdraft protection they may have had on their account. When trustees in bankruptcy review the debts that people present when it's time for that consideration, as little as 5 per cent of the overall indebtedness people have belongs to the payday loan industry. These are lenders of last resort.
Clearly, Parliament in its wisdom saw fit to exempt them from section 347 and the criminal interest rate by insisting that provinces put into place a regulatory regime. If they do that, then of course they can set the default fee structure and the penalties, fines and fees assigned with it.
It's not just dollars. Imagine the stress on people with that kind of financial burden and income inadequacy. If you go to a payday lender and have to pay $100 to borrow $400, you can't get out of that cycle. You take another loan, exhaust that and take a concurrent loan. That's an enormous stress on families and households; and that's why I look with favour on Bill S-210 to set that rate at 20 per cent.
Senator Hervieux-Payette: I am shocked and absolutely scandalized by $25 over one week or 10 days. Would you be satisfied if the 20 per cent applied over a year so that a person who paid the debt sooner would have their interest rate adjusted according to the split of the 20 per cent over the number of days?
Mr. Hatfield: Because the way Bill S-210 is structured, exempting and not touching payday loans, it's an issue that we would have to live with and to manage with individuals and borrowers to get them out of that hole they're in.
Highlighted by this consensus report in Ontario is the emergence of other credit instruments and tools, in particular instalment loans, that skirt the regulatory regime of payday lenders by offering more than $1,500 and by having periods of time and amortization periods greater than 14 days. Initially, a person is enticed into paying a monthly fee over three years that will allow them to get a chunk of change and make payments. The problem is that the interest rate is so high that even with monthly payments they're just nibbling at the principal. Then you have the calls to the customer and client that say, "I think we should increase your limit. How would you like another $100?'' The cycle is perpetuated. It's that hole that families and individuals fall into that has many more consequences to families and communities than just dollar amounts.
Studies in the United States have dealt with the payday lending industry. When you look at its net economic benefit or not to a community, we have to take into account that they create employment opportunities, pay taxes, rent facilities and buy computers. That has all been built into the models that these studies have done in the United States. In three states, in particular, they were thought to be net economic a lack of benefits, in fact. Imagine what it does to a neighbourhood.
In Saint John, I can speak with some authority as we just crunched the numbers. We have four wards in Saint John. After the last census, when the mandatory long-form census was disbanded if favour of the National Household Survey, we lost our ability to do small geography analysis. We lost our ability to look at neighbourhoods. But we were able to get that administrative data set of tax filers by census tract. We cobbled them together on the basis of our four wards. It's astounding that we would have child poverty rates of 47 per cent in Ward 3. One of two children in Ward 3 in Saint John is living in poverty, and 31 per cent overall are at the poverty level. The money sucked out of communities through interest payments is money that individuals, consumers or families could have spent on rents, food, necessities of life. Instead, they're paying enormous interest rates that frankly are going offshore and out of the neighbourhood and the community.
It depends what lens we put on it. Where you stand on a certain position depends on where you sit. I can sit and look at some of the neighbourhoods in my community that are under siege and see a proliferation of payday lenders. They locate near their market. Our submission contains some GIS analysis. We located payday lenders, and, sure enough, they locate in low-income working-poor neighbourhoods. They locate themselves next to their market. Over one dozen payday lenders are clustered within Ward 3 in Saint John.
Some municipalities are working on that, such as Winnipeg, Calgary and Surrey. Calgary is looking at imposing, through zoning bylaws and land-use regulations, some way of separating or controlling the proliferation of fringe bankers.
It's a complicated matter. No, it's complex. If it were complicated, you could just have a formula to get from A to B and fix it. Because it's complex, you're introducing a whole host of factors and variables in the confluence of matters that make it very difficult to get at. Payday lenders, instalment loans and fringe bankers are one piece of the puzzle when it comes to neighbourhoods and individuals in communities that are struggling right now.
Senator Hervieux-Payette: This is my last question. Let's say with payday loans, the way they operate, they change, and they comply with a more decent way of addressing the people. But if I want to help solve an emergency situation for these people, we have the Desjardins approach or we have the mafia approach. I'm saying that because they are lending at about that price, except they are not very regulated.
Would you say that the community approach, which is to have a reasonable institution that knows about finance evaluating the need of the community, is a better way of serving these people than having that type of service which is, in fact, plunging these people into hardship, difficulty and no hope for the future?
If you say the bill with a 20 per cent cap is not necessarily the solution, what would the solution be? That's what we have to address. How do we help the people who are not earning enough money to meet their basic needs, and when there is an emergency, how do we help them to get out of that?
Mr. Hatfield: One answer to your question is financial literacy and working with individuals to explain to them the consequences of certain acts. I was struck when I read the transcripts of Bill S-19. Senator Plamondon at the time was saying we wouldn't send somebody to the corner store to buy tomatoes where it would cost three times more than at a grocery store. We would educate people.
I believe it's time we have financial literacy programs that would point out options.
The other point you raise is a good one, the law of unintended consequences. We have to be careful what we wish for. If we want low, modest interest rates, then sure enough you'd find mafia-style loansharking, more pawn shops, a criminal element. As I understand it, section 347 was introduced to deal with loansharking, to deal with criminal elements creeping in to provide small unsecured loans to people who need them.
I think the larger issue is distribution, income inadequacy, the lack of a living wage as opposed to a minimum wage, affordable housing. There are a number of factors to deal with.
This particularly narrow one, dealing on lending practices and interest rates and criminal interest rates, is a piece of the puzzle. I think financial literacy would go a long way. I like the community-based approach as you suggested. In Saint John we have the Saint John Community Loan Fund, which makes small unsecured loans for entrepreneurship reasons and to help people.
Again, the scale question I spoke of impacts their ability to move the needle a lot when it comes to people, but they do have a Money Matters financial literacy program. They are offering it in the schools. I think if we tie that to some aspects of social assistance and make sure people know of the options available, it's part of the answer.
The Chair: I'm going to interject. We have a number of questions to ask you. You're very interesting with your responses.
Senator Wallace: I want to begin by welcoming Mr. Hatfield, whom I know as Randy. We've known each other for many years. Some years ago, early in his career, Randy was a lawyer, and it shows a bit in how he presents himself, but we won't hold that against him. He has dedicated his last 25 or 30 years to working for the disadvantaged, and he's done tremendous work. I know that from first-hand experience.
Mr. Hatfield, as you point out, section 347 does not apply to payday loans, but we continually find in these hearings that we have a lot of discussion around payday loans. As you say, there are other lending instruments that you find being used for those who have limited ability to pay but have great need for money.
You've touched a little bit on what the terms of those loans might be, but I don't really have a sense of that.
What is the average amount of a loan — not a payday loan — that somebody is seeking to get, and what are typical terms applied to that loan? Are guarantees often required, never required, security ever taken? Just how does that work from your experience?
Mr. Hatfield: I think it goes back to the whack-a-mole analogy and what happens. Some lenders are seeking security and will take security against personal property or automobiles. That's another thing to look at. All of a sudden the length of time you can borrow money to pay on a vehicle has gone from five years to seven to sometimes eight years. Lenders will find a way to skirt rules and find new opportunities for their market.
Senator Wallace, the cases I'm most familiar with are individuals who have a level of indebtedness between $2,000 and $4,000, which puts them either into concurrent borrowing of payday lenders or finding some comfort initially in the instalment loans where you have a term of up to three years, you make monthly payments, blended principal and interest. But because the rates are so high, as it skirts very closely — the current interest rate defined as 60 per cent — there's very little opportunity and likelihood that that will be resolved and satisfied within that term.
The other practices, which I would describe as sharp practices, are overtures to clients to have limits extended, to be told that there's an opportunity to have your limit upped to $5,000 — Christmas is coming and you might like to. So we find people seduced in many ways by those sorts of overtures.
The credit instrument I find most appealing is what is happening in the U.K., and the Church of England is stepping up to the plate. The Archbishop of Canterbury is on the record making encouraging statements about the role of the community, the faith community and the way we would look after neighbours, neighbourhoods and that sort of thing.
This is not an easy issue to deal with, and when I spoke of the pragmatism of Bill S-210, I think it does what it can, taking into account what we've learned over the last 10 years, the landscape and the scope of the problem we're meant to deal with.
It's not going to be easy, and senator your last transcript talked about 2 per cent per month actually being 28 per cent. What are we doing here? Is there anything magic about 20 per cent or 35 per cent that was recommended back in Bill S-19 or 60 per cent? I'm not sure that there is.
Even with payday loans, I don't want us wrapped up in the difference between $17 in Manitoba and $25 in P.E.I., because that's a couple of bucks. What we're talking about is the debt cycle you can get trapped in with repeat and concurrent loans. You get in this hole and you just can't get out.
Senator Wallace: With the instalment repayment that you've described, we all know that with mortgages you can have the term of your mortgage to be three years or five years, which locks in a rate, but it's amortized over a greater period. The consequence of that is that the monthly cost is reduced considerably. Of course, it's all front-end loaded in interest, as we know, but it is spread over a greater period of time.
I'm wondering, with the types of loans you're seeing, and you spoke about a three-year term, when those terms are presented to the customer, the client, are they amortized over a greater period, or is it always the term is the amortized period?
Mr. Hatfield: The latter is my understanding. Again, it does vary from institution to institution. On the second reading debate, the sponsor of the bill, Senator Ringuette, listed the number of organizations and companies now offering these type of instalment loans, and the list seems to be get longer every couple of weeks. I'd have to take that question under advisement and get back to you on that one.
Senator Wallace: Dr. Lee from Carleton University was in last week. You seem to have looked at the transcripts. You may have seen his comments.
His thought to us was that these interest rates should not be dealt with through the Criminal Code at all. It arose back in the 1980s that this whole area of debt and borrowing is something that falls within provincial jurisdiction, and that's where it should be dealt with. Albeit, it's a 60 per cent maximum rate now, and I don't think anyone would argue that sounds reasonable. His point was that's not a federal jurisdictional problem or issue. It should be dealt with by each of the provinces separately, and we shouldn't Band-Aid the problem now by reducing the Criminal Code rate. It should be removed from the Criminal Code.
Do you have any thoughts on that?
Mr. Hatfield: I understand that argument. The question is, is the Criminal Code the best way to provide the best tool for consumer protection? I think we have to start with where we are. It is what it is.
It's the patchwork quilt, Senator Wallace, that concerns me, when I look at New Brunswick being the eighth province to regulate payday loans. Newfoundland is not even going to try. I noticed in December that, after a three- year investigation, they decided not to proceed with any criminal prosecutions. Those in Newfoundland, politicians there, were of the opinion that we don't need to regulate payday loans because we have the criminal interest rate as defined in section 347, but after an exhaustive, three-year investigation, it was determined to be not in the public interest to proceed with any charges. I'm not sure that that's the best way either.
Senator Black: Mr. Hatfield, thank you for being here. I want to align myself with the comments of my colleague, Senator Wallace. You are to be commended and thanked for the work that you do. You could be practising corporate law in St. John's or Toronto or Calgary, and you've chosen to dedicate your time and obvious skills to people who need this support. I think my colleagues would align with those comments. You are to be thanked, and we appreciate the work you do and your being here today.
We of course want to do the right thing here. We have certainly heard about the problem you have talked about in terms of poverty in Canada, but I'm not sure that what is being proposed here can or will make a meaningful difference to the very complicated social web that you have shared with us.
Let me just ask you a couple of questions, if I may. What if we recommended deleting from the Criminal Code any reference whatsoever to criminal rates of interest? Tell me what you think that would do, if anything.
Mr. Hatfield: I'm not sure that the market would regulate it and that there would be sufficient competition within the marketplace to keep rates at a level that small, unsecured lenders would need. I would be worried about interest rates skyrocketing. I'd be concerned about people being taken advantage of.
Senator Black: You think that that rate is in fact a real factor in the lenders' thought process?
Mr. Hatfield: I believe it has a chilling effect for what could be even higher rates.
Senator Black: Very well. Do you believe that the 60 per cent rate as it currently exists in the Criminal Code is in any way a deterrent to borrowers? I'm an individual who needs the money for the car. I have to get the car back on the road, but I recognize, "Oh, my goodness. Because of my debt history, I may have to pay interest rates of 59 per cent.'' Do I think I'm not going to do that and I'm going to start taking the bus, or do I go and get that money? From a social point of view, is 60 per cent a deterrent and then arguably perhaps a good thing?
Mr. Hatfield: It's a very good question, and I'm not sure I'm the best person to answer that. I think people avail themselves of payday lenders or instalment loans out of pure desperation.
Senator Black: That is the motivation, in your view? People are desperate?
Mr. Hatfield: Absolutely.
Senator Black: As they have defined desperation.
Mr. Hatfield: As they chose to define it.
Senator Black: Absolutely. If we were to pass this bill, what effect would it have on the lenders? I understand the effect on the borrowers. I get your evidence on that. What effect do you think it would have on the lenders? I now can charge only up to 20 per cent, as a lender. What do I do?
Mr. Hatfield: The first thing you do is look for ways to skirt it. I think that's a question best put to a lender, senator. I'm not sure I'm the best person to try to answer that question.
Senator Black: It goes to whether or not this would actually be effective or whether or not this is just window dressing.
Mr. Hatfield: I don't think it's window dressing to decrease from 60 to 20 per cent an interest rate that would be applicable to, for instance, instalment loans for those who do require and want to make monthly payments on a principal over a period of time. I'll have to let the lenders speak for themselves.
Senator Black: I appreciate that.
Mr. Hatfield: On payday lenders, as I say, for some reason, the industry seems to survive and in fact thrive in Manitoba at $17. We're not privy to balance sheets and to rates of return and that sort of analysis, but where I stand and where I sit is with the lens of income inadequacy and people seeking to make ends meet.
Senator Black: I completely understand that and appreciate that.
[Translation]
Senator Bellemare: You talked about instalment loans. You said that those loans were on the rise in Canada, thereby making the cycle of poverty worse. Could you tell me what an instalment loan is? We know that, in Quebec, there are no payday loans as such. Are they loans from furniture stores, and would they be governed by Bill S-210?
[English]
Mr. Hatfield: Great question. I'll try to answer that. Instalment loans, as I understand it, are being offered by a host of companies. Easyfinancial comes to mind. There are others that credit counsellors can advise you on. Their number seems to be increasing. They are seeking a market that exists of those who don't want to use payday loans and who do find seductive the notion of paying over time an interest rate and a principal that allows them to satisfy an obligation. I know CBC Marketplace recently did an exposé on easyfinancial and on instalment lenders.
I know it's a huge issue south of the border. It's interesting how many of the issues that arise and end up being regulated finally in the United States migrate north and actually start infecting communities in jurisdictions in this country until some regulatory efforts are made to step in.
All sorts of instruments are available. You spoke of furniture companies and used car lots. There are all sorts of places that will seek whatever security they can for high-interest loans. It's something that we have to be on guard for.
I don't profess to be an expert on these matters at all, other than we do confront and face a number of individuals that are struggling with these. As I said, I think we have to understand that it's not just dollars and cents. The impact on families and on individuals and on communities and neighbourhoods is profound. I would like to think there is an obligation, an opportunity here, to understand that we're not talking about business and commercial loans to sophisticated clients who understand risk and that when there is a huge enumerator and a small denominator you would end up having annual percentage rates that would astound you and that would be hard to defend at any rate. We're excluding that. We're excluding under the terms of this legislation commercial and business loans under $1 million. We're keeping that at 60 per cent. This particular bill, as I understand it, is meant to deal with individuals and families and households.
[Translation]
Senator Bellemare: This type of longer term loan would be governed by Bill S-210. So instalment loans of over 20 per cent would not be possible?
[English]
Mr. Hatfield: That's my understanding, yes.
[Translation]
Senator Bellemare: How are usurious interest rates governed in other countries? Are there criminal interest rates elsewhere, or are they a typically Canadian concept?
[English]
Mr. Hatfield: It's not common to use the Criminal Code and criminal measures to regulate interest rates. In 15 American states, there are interest rates caps that are set at levels below the 20 per cent that is suggested in this legislation. I haven't done a European scan. That's too far across the pond to have relevance for my community and jurisdiction. However, I think we can look south of the border for some guidance — certainly the Obama administration with its Consumer Financial Protection Bureau and the stuff that's coming out of Dodd-Frank. The consequences of that might have some interesting aspects. We may want to look at more closely at that as they start to roll out that regulatory regime in the United States.
[Translation]
Senator Bellemare: So there are 15 or so American states that are already regulating consumer loans with rates — Do you know what the rates are? Are they around 20 per cent?
[English]
Mr. Hatfield: In some, it's less than 10 per cent. In fact, the sponsor of the bill, Senator Ringuette, during second reading debate listed fairly exhaustively the 18 jurisdictions, 15 of which have rates lower than the 20 per cent.
Senator Greene: I would like to get a handle on how large a problem it is that we're trying to fix. Let's take your community, which you obviously know well. I imagine the population of Saint John is 200,000 or 250,000?
Mr. Hatfield: The census metropolitan area is about 128,000, and that has sort of stayed constant over time. But it's my opinion that CMA data really dilutes the story of my community. I could go on but will not.
Senator Greene: How many people in Saint John would be positively affected by this bill, in percentage terms?
Mr. Hatfield: That's a good question, and I don't have a precise number for you. I can speak of 12 payday lenders located within census tracks within Ward 3, which would have a population of 20,000 to 30,000. There is a saturation point for these, and their own market will figure it out.
There is also a range of variability among payday lenders.
Senator Greene: So 20 to 25 per cent of the population of Saint John, New Brunswick, would be positively affected by this bill?
Mr. Hatfield: That sounds a bit high at first blush. There are certainly 12 lenders having books of business that are able to satisfy their bottom-line requirements.
I can tell you that the City of Saint John has a low-income measure of poverty — an income measure of poverty of 19 per cent. The CMA I spoke of earlier is about 14.5 per cent. At first blush, if you typed into Statistics Canada "poverty Saint John,'' it will show 14 per cent, and you might think "that's not bad'' — Winnipeg, Vancouver, Montreal.
But the story of my community is to peel the onion away a bit more and take off suburban municipalities that surround the core. There are eight cities in New Brunswick, and some have 5,000 people. But there are two towns that adjoin the city of Saint John — 30,000 people. So the urban core of the city of Saint John itself has about 70,000 people.
Senator Greene: I understand.
Then you're saying 7,000 people in Saint John would be positively affected by this? I'm just —
Mr. Hatfield: I appreciate the effort to get at scope and scale, but I don't have a number that is that precise.
Senator Greene: What would be the percentage, then, of people who would make it almost part of their daily living?
Mr. Hatfield: That's a fair question, and one we struggled with when we tried to present to our financial commission as they seek to regulate payday loans. Because it's not regulated, we don't know officially how many payday lenders there are in New Brunswick. We don't know how many loans are being made. We don't know how many repeat customers there are.
But we are able to look at neighbouring jurisdictions to extrapolate. That's why we looked at Manitoba in 2013 and Nova Scotia in 2015. Our neighbouring sister province, Nova Scotia, with 920,000-some — compared to 750,000 — has 52 per cent of the payday loans being repeat loans. It's an $89 million industry. In 2013-14, 206,000 payday loans were issued.
Senator Greene: Earlier, you mentioned the positive impacts and importance of financial literacy. Do you have any tools that target those people in Saint John who need that kind of help?
Mr. Hatfield: Yes, we have tried to embed that within certain self-esteem programs. There is a woman's empowerment network in Saint John that offers training programs for women in some of our priority neighbourhoods. Part of the core curriculum of that 10-week program is a financial literacy component.
The Credit Counselling Services of Atlantic Canada —
Senator Greene: Does the program actually work?
Mr. Hatfield: I want to say yes. I want to say that any time somebody has that information and is empowered in the sense that they are aware of options and they have an element of choice in their life, choice gives people hope, so, yes, I would like to think so.
We have done some follow-up and measures. Those programs, the Money Matters in particular, is very well received and well reviewed by participants in this power-up program.
I just met with the Credit Counselling Services of Atlantic Canada yesterday in preparation for this hearing. I was told by the Atlantic regional person that between May 1 and May 12, 389 sessions have been booked. That is a lot. I think it speaks to a fair amount of income inadequacy and financial stress.
When you look at people impacted, I don't think it's the contractor necessarily; it's the borrower and the borrower's extended family, their relations and neighbours. It affects and impacts entire communities and neighbourhoods when you have that kind of lurching from payday to payday.
Senator Tkachuk: We're dealing with a social issue, I think. We're trying to solve the problem with legislation that I don't think will solve the problem. Senator Gerstein alluded to the fact that the guy who needs to fix his car still needs to fix his car, so he will need the money from somewhere. What I don't understand is why isn't the marketplace or the government's social agencies or cultural agencies fulfilling the void and helping these people?
I'm going to use the example of gambling. Gambling is a huge social problem among the poor, from my experience and reading. I know that in bars across the country, there are video lottery terminals, VLTs, and people pouring down their paycheques that way. They're going down to lotteries at corner stores and spending $50 or $100 a week to get rich. But governments are making all the money.
In other words, here is a worse social problem, but because the governments are making a lot of money on it, they're not interested in solving this problem. But somehow they're interesting in solving this problem by legislation, as she calls it, and making the payday loans some horrible group of people. I still think they supply some kind of a service that's necessary.
Mr. Hatfield: I think you're right. Certainly in the absence of credit instruments that are reasonable for the working poor, you are always going to have those that are prepared to lend high-interest, short-term, and then turn those around.
As far as the gambling analogy goes, senator, I'm not sure that is directly applicable. Again, you are talking about social issues and programs. The complexity of this file is huge. Which thread do you want to pull?
The Chair: There is a final question for you from the sponsor of the bill.
Senator Ringuette: First of all, I want to apologize. I was in the Legal Committee with another very important issue for all Canadians. That said, I'm happy that you are here to provide your expertise to the members of this committee.
The bill is not to address social issues, per se. The bill is to address what we have now within the federal legislation: a criminal interest rate at 60 per cent that was put there 34 years ago and never revised. As far as I'm concerned, it's very abusive in regard to family loans and so forth.
I'd like to have your perspective on the current 60 per cent criminal interest rate and the rate of 20 per cent plus the overnight interest rate of the Bank of Canada, 0.75 per cent. Do you see this as a major improvement to help the working poor in respect of potential abuse of interest rates?
The Chair: I will let you reply shortly because I know you did respond to that very clearly earlier in the meeting. Please proceed.
Mr. Hatfield: Yes. It's almost like Goldilocks: 60 per cent seems way too high, and 20 per cent I think runs into the issue that Senator Wallace raised at 2 per cent per month. You are dealing with a host of credit cards and other instruments that will be captured by this; and I'm not sure what the magic number is. I'm concerned about the impact of the debt cycle with repeat borrowing and the hole that people find themselves stuck in that they just can't get out of. We can quibble about numbers and have honest disagreements about whether 60 per cent is too high, and I personally think it is. It's quite usurious, really.
In terms of 20 per cent, Senator Tkachuk raised some good questions on fixed costs available. It is a business enterprise, and there has to be return on investment. We have to be careful what we wish for. If we outlaw or ban payday lenders, what would take their place? Who would walk in and fill that void? It is a delicate balancing act, and a number of factors have to be considered.
To answer your question directly, I think 60 per cent is too high. You've carefully carved out sophisticated consumer and business clients and other commercial transactions. We're looking at families, individuals, neighbourhoods and communities. I think 20 per cent would be adequate, subject to somebody proving otherwise — almost a reverse onus. Let's see how you can produce the numbers.
The Chair: On behalf of the Banking Committee, I would like to express our great appreciation for your being here today. Each of us would echo the words that Senator Wallace and Senator Black recognized you with in terms of the service you are providing to the community and the work you are doing. We are very appreciative. Thank you very much for being with us today.
I am pleased to welcome our second witness tonight, from the Canadian Institute of Actuaries, Ms. Kelley McKeating, FSA, FCIA. Based in Ottawa, the Canadian Institute of Actuaries is the national organization of the actuarial profession. The institute is member-driven and dedicated to serving the public through the provision of actuarial services and advice. Ms. McKeating, welcome. The floor is yours.
Kelley McKeating, FSA, FCIA, Canadian Institute of Actuaries: Thank you, and good afternoon, honourable senators. Thank you for inviting me to speak on behalf of the Canadian Institute of Actuaries, the national voice of the actuarial profession in Canada.
Actuaries have a unique interest in section 347 of the Criminal Code. The current and proposed definitions of "criminal rate'' specify that the annual effective interest rate be calculated in accordance with generally accepted actuarial practices and principles. Also, section 347(4), which would not be changed by Bill S-210, states that certification by a fellow of the CIA is proof in the absence of evidence to the contrary of the effective annual interest rate being charged.
Because of the requirement that individual actuaries act in an independent and objective manner when involved as experts in civil and criminal litigation matters, the institute will limit its comments today to the technical aspects of the proposed amendments. It's important to remember in this that the CIA's first guiding principle is to keep the public interest top of mind.
We understand from Senator Ringuette's remarks on April 23 that the primary objective of the proposed legislation is to prevent individuals in financial difficulty from exacerbating their situation by borrowing money at interest rates that are so high the debt cannot be repaid. The secondary objective is to ensure that large businesses wishing to borrow money and willing to pay high interest rates are not constrained from doing so. These goals are to be achieved, as you know, by implementing three changes: eliminating the criminal interest rate threshold for transactions over $1 million; maintaining the current 60 per cent threshold for other business and commercial loans under $1 million; and for all remaining loans, reducing the criminal interest rate from 60 per cent to the sum of 20 per cent plus the Bank of Canada overnight interest rate, which, as you know, is 0.75 per cent. Much of the committee discussion I have heard has focused on this latter change; so I will address it first.
The CIA agrees that a review of and a decrease in the level of interest deemed to be criminal is appropriate. As others have noted, the current maximum of 60 per cent was introduced in 1981 when inflation and interest rates were very high. By contrast, rates today are currently at historically low levels. This said, we recommend that care be taken to ensure that one, the new definitions are clear and unambiguous, and two, the most appropriate formula for achieving the stated objective is selected. I'll be pleased to answer questions about how those goals might be achieved.
It should be understood that it is not only payday loans in unregulated provinces and credit cards and utility charges that will be captured under the proposed rules. Private mortgages, for example, sometimes fall afoul of the 60 per cent maximum. Criminals who engage in lending also tend to charge very high interest rates. Although admittedly rare, there are criminal trials in respect of section 347. In those that I'm aware of, interest rates charged have ranged from 60.1 per cent to almost 800 per cent.
It's more common, as you heard last week, for allegations of a criminal interest rate to arise in civil litigation. For example, an individual who has borrowed money at a high interest rate may apply to the courts for the agreement to be set aside on the basis that it was illegal. The cases that go to court usually involve tens of thousands of dollars. Unless there's a class action, it's very unusual to see litigation for a loan of only a few hundred dollars. Access to the justice system is very expensive.
With regard to having two different criminal rates, the distinction between commercial and non-commercial transactions is not always clear.
I would like to make two final points.
In previous committee meetings, members have asked about which fees and charges are included when calculating the interest rate. The definitions of "credit advanced'' and "interest'' in section 347 are quite specific, and the courts, including the Supreme Court, for instance, in Garland v. Consumers' Gas Co. back in 1998, have weighed in on the correct interpretation of those terms.
I also know that committee members have speculated that if one takes a lender's fixed transaction costs into account, then a seemingly high rate of interest might actually turn out to be not unreasonable. We've performed a sample calculation for you using accepted actuarial principles. In the example that I believe is in front of you, the effective yield to the lender is 190 per cent. So from the lender's perspective, the interest rate is 190 per cent. From the borrower's perspective, not taking the fixed costs into account, the rate is in excess of 33,000 per cent.
In the interests of time, I'll stop here. I would be happy to answer questions about the technical aspects of the proposed legislation and to speak further to the example. Thank you.
The Chair: Thank you very much. Spoken well. An actuary.
Ms. McKeating: Sensitive to the time pressure.
Senator Ringuette: Thank you. I have great respect for the work that you do, because to me sometimes it's quite a puzzle. Thank you for agreeing that this bill is required to set a new, more adequate or appropriate criminal interest rate.
You said that we need to clarify the commercial and non-commercial aspects within the bill. I certainly would welcome any suggestions in that regard to amend the bill to make sure it is as clear as possible for not only the users but also potential future court proceedings that may arise.
Ms. McKeating: I don't know if I have a suggestion, but I do have the observation that it's not a clear distinction. I'll give a couple of examples. One is the case of an individual who was an unincorporated small business owner. If they take out a loan, it's not completely clear whether it's a loan for personal needs or for the business. I run my own business. I'm now incorporated but, when I wasn't, my business transactions flowed through my personal bank account. While I did keep separate books very carefully, not everyone does. A person might go and take a loan out privately where interest rates are not quite as favourable as at a financial institution, and they'll say that it's for personal reason and therefore the cap is at present as proposed, 20.75 per cent, but they really need it for their business and that sort of thing. That sort of thing also applies with mortgages. You can say that you're borrowing money for a house that's going to be your personal residence, but your real intention is to use it for an income property. I think there's the potential for people to work around that in a way that it's perhaps contrary to what the intent of the legislation is. I don't have a solution, but it is something that we see as a potential problem.
Senator Ringuette: Would you see maybe a greater division between small and medium-sized businesses in regard to the $1 million, maybe that small businesses up to maybe 100 employees would fall under the same category as the family loan? Would that help in regard to the situation you're talking about?
Ms. McKeating: That's really a question, I think, of public policy, where the actuarial profession is not the best group to be answering. I think that whenever you have a dividing line and there is a very clear advantage to being on one side of the line and not the other, people are going to find ways to be on the favourable side of the line. With the $1 million threshold, some lender is going to come up with a creative way of getting a loan over the $1 million threshold when it's really not.
Senator Ringuette: But the banks do the same thing. With a small and medium-sized company, they ask the owners to guarantee their personal belongings, their house and so forth, if they want to have a loan for their business.
Ms. McKeating: It's a complicated thing. I have a business credit card and a personal credit card. If I couldn't pay my balance in full every month, and if one charged 21 per cent interest and the other charged 60 per cent, I would put my business expenses through on the personal card and reimburse myself. I'm not sure what the answer is, but it's a distinction that is imperfect, I would suggest.
Senator Ringuette: On the other side, if you had a business credit card that was charging you 60 per cent, I don't think you would have one.
Ms. McKeating: Exactly.
Senator Hervieux-Payette: We already have in the fiscal law the definition, especially for tax purposes, of what is a small business. We cannot re-legislate something that has already been accepted by the government. I feel that we were using the same criteria as the government, because the provinces and federal government have their own definition by which they qualify for one or the other, because the tax percentage is different.
Ms. McKeating: True.
Senator Massicotte: Thank you for being with us. Relative to the example you gave, I'm very sensitive to the point that it's an issue, and we have in this committee, if you look at the history, talked about that quite a bit. From a lending sense, it makes normal sense that there is fixed amount of time for doing a transaction, whether it's $100 or $100,000. There is some paperwork and some expertise, hopefully not the use of a law firm, but there's a fixed cost to making the deal. It would be normal from a lending sense if you want to create a marketplace that that party should get reimbursed for his costs. Then when we talk about interest, people think interest is always profit, but usually it's not because usually you're borrowing somebody else's money. Irrespective of that, there is that concept.
You have given an example where you can easily go above the 60 per cent if you lend $100 for one month and you have a fixed cost of $50. What do you do with that? I think we understand the issue. Do you do what some provinces do where the legislation really says we will let you charge $15 or $20 per transaction plus a certain interest rate? What do you do with that problem?
Ms. McKeating: Let me take this opportunity to explain what's behind this graph. Because we had read transcripts of earlier discussions and understood that this was something of interest, these are examples where the lender is allowed to charge $25 on every $100 loaned, and the loan has to be repaid in two weeks. The fixed transaction costs are $20. So you have the lender paying out $100 to the borrower and $20 is spent in transaction costs. In theory, at the end of two weeks, they get back their $100, they get back their transaction costs, and they get this extra $5. Under that scenario, assuming a willing borrower lined up to take the money the next time, if the fixed transaction costs are always at $20 per $100, for a $200 loan it's a $40 cost, so you've actually got escalating costs, and then the lender will almost triple their money in a year. They will end up, on that initial $100, having $289. They are earning 190 per cent interest, and that's a yield rate. So that's a pretty good investment.
The criminal definition does take the perspective of the borrower. The legislature of the day in 1981 decided that if a borrower has to pay more than the effective annual rate of 60 per cent, it's a crime.
In this case, we didn't have enough paper to show that right-hand column, but if that borrower had to keep rolling and rolling that loan at those interest rates, they would be out over $33,000 at the end of the year.
Senator Massicotte: I would have thought the closer reality is a fixed cost and a loan, no matter what a quantum is, if you're looking at provincial legislation. In your case you're saying $15 per transaction, per $100 sums. Consistent with the provincial legislation, I would have said — in Edmonton there is new legislation — it should have been a fixed-cost reimbursement instead of $15 or $20. Plus, if you want the maximum of 20 per cent, 30 per cent, before it becomes user rate, you can reimburse your fixed cost, and not for every $100 you get an extra $50. I think the paperwork is the same whether it's $100 or $200. It's the same example.
You will find out quickly after one month that you do exceed the existing legislation of 60 per cent. But that's why the federal government did not do very much with that legislation, because they do acknowledge out of fairness that the lender has a right to reimburse their fixed costs, and he has the right to earn 15 to 20 per cent depending on the credit risk. So they did nothing with it.
Ms. McKeating: Being an actuary, I think my question would be with that 15 or 20 per cent, is it the goal of the legislation and, at the end of the day, the objective, to allow the lender to earn 15 or 20 per cent a year on their investment, or every month? Because in this example, what happens is that as soon as that loan is repaid, you lend it out again. Because the money is constantly rolling over, in this example, the situation where the lender is tripling their money in a year, they're only making $5 off of every $100 lent every two weeks. But it adds up, and every time you make $5, you can lend it out again.
Senator Massicotte: And you would argue from a quantum sense —
Ms. McKeating: This is actually increasing. The fixed costs here are escalating. They're not staying at $20. When you go through that cash flow, even when you take those fixed costs into consideration, it's still not a bad business to be in.
Senator Massicotte: If you asked me to lend Senator Tkachuk $100, and you asked me the risk of him paying it back, I would say I'm not sure.
From a quantum sense, it doesn't seem to be unreasonable. Now, you're right with the point you're making. It does represent an extremely high level of interest rate, but for me to do a transaction every time and have a little bit of paperwork, it's not unreasonable. But that's the problem —
Ms. McKeating: If you start out with $100 and make $5 every two weeks, ignoring everything else, you have made $130 that year, so you have more than doubled your money.
Senator Massicotte: Is it the same borrower every time?
Ms. McKeating: It doesn't matter. As long as someone is giving you $5 every two weeks, you don't care. You're getting your $100 and paying it out again, and you don't care whether it's —
Senator Massicotte: You're using this expression. You think $5 to make a profit is unreasonable.
Ms. McKeating: I don't have an opinion on whether it's reasonable or unreasonable, but it is what it is.
Senator Ringuette: I'm fascinated by the numbers in front of us. Essentially, the annual rate of return for lenders and the annual interest rate for borrowers that you have here is based on the current criminal interest rate, the 60 per cent.
Ms. McKeating: The 60 per cent, yes.
Senator Ringuette: Could you provide us with the same kind of analysis so we could compare with 20.75 per cent?
Ms. McKeating: Yes. It's showing in the left-hand column. Do you mean if taking fixed costs into account? I'm not sure.
[Translation]
Senator Ringuette: In the second bar of your graph, you have a capital of $100, a loan of $100 at 60 per cent, and you have the same loan of $100 at 60 per cent that yields $189. Is that correct?
Ms. McKeating: No, it's $160.
[English]
[English]
Ms. McKeating: That is an illustration based on provincial payday loan rates.
Senator Ringuette: Okay.
Ms. McKeating: In one of the provinces, I know that the rate is $25 on the $100, and it's actually on each $100. There's an illustration on the Government of Ontario website where I think it is $21 per $100, and the government shows that if you borrow $300, you will have to pay $63 in two weeks. They show that. So it is for each $100.
In this particular example, you pay $25 for your $100 loan. So you receive $100 today. Two weeks from now you have to pay back $125. If you have to continually roll that because you can't repay it, then at the end of the year you will be indebted over $33,000.
The borrower's perspective is the fourth bar. The third bar is the lender's perspective. As Senator Massicotte has said, he wants to understand whether this is profitable to a lender, because of course he has fixed costs. So in this scenario, I assumed that the lender has fixed costs of $20 for every $100 they lend. That means that if the lender lent $200, he would actually have $40 of fixed costs, which is perhaps not reasonable and realistic. Maybe it would always be $20.
Senator Ringuette: On a downward scale, yes.
Ms. McKeating: But we assumed they would escalate, so the fixed costs are always 20 per cent of the loan and the profit, the little piece that is left over, is always 5 per cent of the loan. In that example with the $100 loan, they are getting this $25 extra payment in two weeks, but they actually have to pay $20 —
Senator Ringuette: Interest.
Ms. McKeating: — to their lawyer and whatever, and the person who is drafting up the contract. Under that scenario, the lender is looking at it like, "I have to give out $120, and then when I get back $125 I'm only ahead $5.'' Then they turn around and do the same thing in two weeks, and every two weeks with all of their money, and they continue to do this.
Under that scenario, having done it 26 times, at the end of the year he would have $289, which is his original hundred plus another $190 that he has earned from the excess of what the borrower pays him over his fixed costs.
Senator Ringuette: Yes, thank you.
Senator Wallace: I'm going to corkscrew myself into the ground on this one, but since I can't resist, I'll go back to your chart, Ms. McKeating.
The second example you provided is the current criminal interest rate. You show $100 borrowed at an annualized interest rate of 60 per cent, which would be $60. The total to be repaid over the year would be $160. That's an annualized, simple interest calculation — no compound interest. They're the same.
Ms. McKeating: Over a year, they're the same. Yes. If you borrow money on January 1 and you have to repay it on December 31 at a rate of 60 per cent, that's exactly right.
Senator Wallace: So $60 would be the interest paid over a year. On a monthly basis, it would be $60 divided by 12 months. It would be $5 a month, but I thought you said the charge was $5 for a two-week period, not for a month.
Ms. McKeating: If you charge someone 5 per cent per month, unless they actually make that payment, they end up paying interest on their interest. If you borrow the money at 5 per cent per month, at the end of the year, if you have not made any periodic payments throughout the year, you're going to owe more than $160.
Senator Wallace: Okay. Maybe there's a point I missed. I thought that in the example you gave, somebody has a loan of $100 that has to be repaid in two weeks.
Ms. McKeating: Yes.
Senator Wallace: I thought you said that at the end of two weeks, there would be the transaction fee of $20, plus, I thought you said, $5. There would be $5 paid for the extension of credit over the two-week period. Am I wrong?
Ms. McKeating: It's my not explaining it clearly.
The second column is just an illustration of the criminal interest rate as it currently stands so that you can see the contrast. The first column is the proposal. The second column is the current and what would be going forward still as the rate for some smaller commercial transactions. So those are just for comparison. The third column is the lender's perspective. The person will have to pay back $125 at the end of two weeks, but the lender is looking at this as not really getting $25 on top of their original loan.
Senator Wallace: Okay. I'll take one more crack at this. In that example, for a $100 loan for two weeks, the lender will receive $5. The $100 will be repaid, plus $5, plus the $20 transaction fee. Right?
Ms. McKeating: Perhaps what's not clear is that the lender is loaning that $5 outs to someone else.
Senator Wallace: I'm just trying to get down to what the effective cost of borrowing is to the person who went in and got $100 for two weeks and paid $5 for it.
Ms. McKeating: It's 33,000 per cent.
Senator Wallace: It's above 60 per cent because $5 would be 5 per cent for the month, but we're talking two weeks here.
Ms. McKeating: Well, it's $25 to the borrower. The borrower is getting $100 and having to repay $25 two weeks later, which is more than $50 every month. They're having to borrow money every month in this scenario to repay.
Senator Wallace: That's all right. I'll give it up.
The Chair: Senator Wallace, I think we're going to conclude. You may have to stay after class.
Senator Wallace: I can see clearly that I'll have to do that.
The Chair: Ms. McKeating, you have been a great witness and a great teacher. You have almost made actuarial calculations sound easy, which they are not. For those of us who have not grasped it totally, you'll have a number of us at your class after we adjourn. Thank you for appearing before the committee today.
The meeting is concluded.
(The committee adjourned.)