Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue No. 33 - Evidence - February 7, 2018
OTTAWA, Wednesday, February 7, 2018
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:15 p.m. to study Bill S-237, An Act to amend the Criminal Code (criminal interest rate).
Senator Douglas Black (Chair) in the chair.
The Chair: Good afternoon. Welcome, colleagues and members of the general public who are following today’s proceedings of the Standing Senate Committee on Banking, Trade and Commerce either here in this hearing room or listening via the Web.
My name is Doug Black; I chair this committee.
Before getting under way, I’d like the senators to introduce themselves for our witnesses.
Senator Wallin: Pamela Wallin, Saskatchewan.
Senator Ringuette: Pierrette Ringuette from New Brunswick.
Senator Stewart Olsen: Carolyn Stewart Olsen, New Brunswick.
The Chair: Arriving at the stroke of the hour, Senator Tkachuk from Saskatchewan.
For your information, we are ably served by the folks who are here with me at the table — the clerk and our analysts.
Today our committee continues its hearing on Bill S-237, An Act to amend the Criminal Code (criminal interest rate).
During our meeting today, there will be three panels. For our first panel, from 4:15 until 5 p.m., we welcome Charles Docherty, Senior Legal Counsel, Canadian Bankers Association; Marc-André Pigeon, Vice President, Financial Sector Policy, Canadian Credit Union Association; and Kate Martin, Senior Policy Advisor, Community Impact, also from the Canadian Credit Union Association.
Welcome to you all. We’re very pleased that you found time to be with us to help us with our deliberations.
Charles Docherty, Senior Legal Counsel, Canadian Bankers Association: Thank you for inviting the Canadian Bankers Association to appear this afternoon to participate in the committee’s review of Bill S-237. While the CBA regularly engages with this committee to assist in its important work, this is the first time for me to appear on the CBA’s behalf, and I welcome this opportunity.
Canada’s banks fully support the need to protect borrowers from questionable lending practices. Several decades ago, when section 347, dealing with criminal rate of interest, was added to the Criminal Code, the intent was to protect borrowers from the usurious loan charges not made by traditional financial institutions. The section’s placement in the Criminal Code between sections addressing robbery and extortion and breaking and entering provide useful context.
While fully supporting the objective of establishing the criminal rate of interest, the banking industry has expressed concern over time that the definitions in section 347 are too broad and could inadvertently capture legitimate loan products already regulated through the Bank Act. This concern relates to the overly inclusive definition of interest.
Although clearly well-intentioned, Bill S-237, in our industry’s view, would have unintended consequences that could negatively impact the availability of credit in the financial services marketplace for short-term lending products and other products.
An example of a short-term loan product that would be affected by Bill S-237 is a consumer bridge loan. Consumers occasionally need a bridge loan to fund the purchase of a residence pending the completion of the sale of another property. These loans are for a very short period of time, and a fee is charged to cover the cost of the work required to process and complete the transaction. Bill S-237 would undermine the ability of consumers to access these loans, which could impede the potential purchase of a new property.
Access to bridge loans, as well as to other short-term products, would be significantly diminished if the amendments proposed in Bill S-237 are implemented. This is because the inclusion of fees in the definition of interest artificially increases the annualized interest rate on certain loan products that are complex and costly to administer, regardless of the size and length of the loan.
In addition, there are other products that may be affected, including some credit cards and other types of loans, as some of these products have an interest rate above the proposed Bank of Canada overnight rate plus 20 per cent.
If these products are more difficult to obtain, more consumers may be inadvertently pushed toward non-traditional lenders, who are ultimately not captured by the legislation and not required to perform the same level of due diligence.
In the testimony that the committee has heard to date, there has been significant focus on the payday lending industry. Members of this committee, some of whom were part of the deliberations at the time, will know that Bill C-26 was adopted by Parliament in 2007 to exempt payday lenders from section 347 in those provinces with legislation to govern payday lenders’ practices. This was done to facilitate provincial regulation of the payday loan industry, which was not subject to any regulation at the time. The CBA was a strong supporter of those efforts.
Banks’ lending decisions take place in the context of a strong supervisory and regulatory framework in Canada. Banks in Canada are prudent lenders that manage risk carefully, lending to clients who demonstrate the ability to repay their loans. The vast majority of Canadians are responsible borrowers who use credit wisely.
Banks and other financial institutions offer short-term loans or revolving credit to help consumers meet their financial needs. These products include lines of credit, credit cards — including cash advances — and overdraft protection.
All of these options are available at a far lower cost than payday lending products. In its publication Payday Loans: An Expensive Way to Borrow, the Financial Consumer Agency of Canada provides an illustration of the comparative costs of a $300 loan taken out for 14 days. According to the FCAC, over that time period, a line of credit from a financial institution would cost $5.81 while a payday loan would cost $63.
We fully welcome the discussion about the management of household debt generated by Bill S-237. I can assure this committee that banks work hard to assist their clients who are having difficulty repaying their debts and always work with them to find a solution. Instead of adding to a customer’s debt load, banks would rather help consumers with tools and advice such as loan consolidation, hardship programs, money management advice and not-for-profit credit counselling.
Banks provide significant financial support to not-for-profit credit counselling agencies across Canada so that these agencies can help over-indebted individuals repay their debts and better manage their money and credit in the future. Individual banks are leaders in supporting financial literacy activities in communities across the country. In addition, the banks have jointly supported the CBA’s financial education initiatives, Your Money Students and Your Money Seniors, which have been developed in co-operation with the FCAC.
Banks want to help their customers meet their financial goals. Many legitimate products would be unnecessarily captured by the changes proposed in Bill S-237. This would negatively impact the availability of credit products that meet an immediate financial need. We firmly believe that many of the concerns raised by the introduction of Bill S-237 would be more appropriately addressed by the ongoing work of banks, the government and a range of stakeholders in improving the financial literacy of Canadians.
I look forward to your questions.
Marc-André Pigeon, Vice President, Financial Sector Policy, Canadian Credit Union Association: Thank you, Mr. Chair. Thank you to the members of the committee for inviting me to meet with you today. Our association represents 275 credit unions and caisses populaires outside Quebec. Our members are financial institutions that provide comprehensive services to more than 5.6 million Canadians. The caisses contribute $6.5 billion annually to the Canadian GDP, and more than 58,000 jobs are directly or indirectly related to their activities.
Today, my comments will focus on the objectives that this bill seeks to achieve: to promote the well-being of Canadian families and households, and to recognize that the criminal rate of interest is one of the many tools to preserve the financial well-being of consumers. My comments will be divided into two parts: I will first explain how we put people before profits, and then why the caisses have a head start on providing affordable small loans to consumers.
Let’s start by putting people before profits. Because of their cooperative structure, the caisses make their profits available to their members and their community, so that the money continues to serve local interests. The caisses return profits to members in the form of dividends and rebates, use them to reduce the cost of their financial products and services, and retain some for growth and sustainability. In a market where certain financial products have excessively high interest rates, we are on the side of caisse members and the community to promote the creation of responsible lending products on reasonable terms.
As some of you are already aware, in many parts of the country, the credit unions owe their creation to Father Moses Coady and the Antigonish movement that, during the Great Depression crisis, brought together, fishermen, miners and their families to help create an instrument, an inclusive savings and loan tool. Father Moses Coady’s goal was to give people on the margins of the economy a way to collectively lift their spirits, their circumstances and the state of their community, just like Alphonse Desjardins and his wife Dorimène had done in rural Quebec in previous years.
Today, all the credit unions are inheritors and guardians of their vision: they are cooperative financial institutions based on the simple but noble idea that people must go before profits.
I’m now going to talk about the second part, innovation.
As inheritors and guardians of a vision to put people before profits, credit unions are today active laboratories experimenting in growing and building affordable, accessible and sustainable financial products and services that put their members’ well-being first.
We see this in micro-lending to entrepreneurs and small-business owners who are struggling on social assistance, and most recently and most importantly for this conversation, in our efforts to partner with governments to introduce small-dollar consumer loans at rates that are a fraction of the cost of those offered through both unregulated online lenders and fringe financial institutions.
To date, eight credit unions — and we think there will be more soon — have brought payday lending alternatives to market, and more are sure to follow.
These products, like Vancity’s Fair & Fast Loan in British Columbia and Windsor Family Credit Union’s SmarterCash loan in southwestern Ontario, are in addition to a suite of other products, like overdraft protection, credit cards and lines of credit that the credit unions have long offered to their members.
To build financial well-being, several of the alternatives are accompanied by opportunities to enhance financial education and build credit. Just to illustrate, Vancity’s Fair & Fast Loan offers a low and transparent interest rate with no application fees or requirement for credit checks. It also helps the member build a credit history, includes a loan term up to two years, can be accessed online and is packaged with a financial education component.
It’s important to stress that these products and offerings are not offered without their own set of challenges. As regulated financial institutions, we have our fiduciary responsibility to our members and to regulators to safeguard our members’ deposits by offering financially sustainable products.
And our regulators are vigilant about this. We have capital liquidity and market conduct rules that we have to abide by, and we’re very careful to do that.
So those contextual pieces influence our behaviour, just as surely as do our corporate mission, the Moses Coady and Desjardins mission, and our culture.
From that perspective, it’s important to underline that we are encouraged to see a critical discussion happening about this issue about how Canadians can access responsible, sustainable lending products. And we’re also happy to share our experience of those laboratories and that research I talked about with the committee so that we can learn about what works and what doesn’t and stop the cycle of high-cost credit.
At the same time, again, it’s important to emphasize we’re mindful that we need flexibility so that we do not jeopardize the good work we’re trying to do in partnership with provincial governments to offer these small-dollar loan alternatives. So that’s a really important consideration. We want to ensure that our members can access these alternatives so that they can avoid putting a lot of hard-earned money into unsustainable loans.
In closing, I would like to emphasize that we think of this problem of credit cycles in a holistic way. It’s not just about the lending side of things. It’s also about the income distribution side of things. A number of our members are offering living wages to their employees and the employees of the people they service. We’re paying well above market wages to those people and the contractors we work with, so we’re doing our small part to help address that side of this debate.
With that, I’d like to close and thank you very much for this opportunity to share our perspectives on this issue. We look forward to a good discussion.
The Chair: Thank you very much, sir.
We are ready to move to questions. Before doing so, a couple of senators have joined us since we got under way. I think it’s important you know who we are here.
Senator Tannas: Scott Tannas, Alberta.
Senator Dagenais: Jean-Guy Dagenais from Quebec.
Senator Day: Joseph Day from New Brunswick.
Senator Wetston: Howard Wetston, Ontario.
The Chair: We’re going to move on to questions for our witnesses. Has the deputy chair a question?
Senator Stewart Olsen: For my clarification, I listened with interest, and I’m assuming the banks don’t like this legislation. It wasn’t clear to me what the credit unions’ feelings are about it.
Mr. Pigeon: We are encouraged by the fact there’s a conversation happening on this topic. That’s our position. We are concerned that the rate could kneecap some of these efforts I talked about, our efforts to offer competitive alternatives. We would support the point raised by my colleague that if this were to go through in the way it’s being proposed, there could be a consequence of people going to the unregulated sector. We share that concern that that could be a consequence of this.
Senator Stewart Olsen: That’s what I don’t understand. That’s what you both were saying. If you offer loans at a decent rate of interest, or you’re willing to help people who are in need, why would they be turned away or forced to go to a place that has higher rates of interest?
Mr. Pigeon: I talked about those members who are offering these alternatives, and the rates range widely. Some would be over the rate that’s being proposed in this legislation. Again, the sector is experimenting with where that equilibrium is between the sustainability of the product, from the financial institution and regulator perspective, and our strong desire to help those members with their situation.
We’re not sure where that rate is yet, but so far it looks like it could be over the threshold that’s being proposed.
Senator Stewart Olsen: The 20 per cent, you mean?
Mr. Pigeon: Yes.
Kate Martin, Senior Policy Advisor, Community Impact, Canadian Credit Union Association: As Marc-André noted, credit unions are very much trying to enter the space and put skin in the game, if you will, in terms of offering alternatives to payday loans, also recognizing that there are other products such as instalment loans and pawn loans that require our attention too.
In an effort to innovate in that space, there are lots of examples across Canada of attempts to design a financially sustainable product both for members and for the institutions.
As a result of that, we’re willing definitely to share the best practices and the learnings, but it is very much a journey of learning about what these rates will look like and what terms these loans will take on.
We want the flexibility and the space to explore that in a way that these rates and loans would be much more affordable than some of the alternatives that folks are faced with today.
Mr. Pigeon: If I may add, before passing it to my colleague here, our central one, which sells the banking platform for a lot of our credit unions, is developing a tool that could universalize this capacity to offer these loans. Again, we’re in that phase where we’re looking to roll this out, but we don’t know yet where that sustainable rate is. We don’t want to cut that off. That’s our concern.
Mr. Docherty: I would agree with those comments. It’s also important to note that section 347 of the Criminal Code exempts payday loan companies that are provincially rated. In that fashion, they wouldn’t be covered by this law.
As a result, that would mean that people may end up going to those companies as a result because they would be forced to get the higher-rate loans, whereas other institutions that are covered by the law would be forced to offer — sorry. The problem is that section 347 exempts provincially regulated payday loan companies; so they will continue to offer higher rates, potentially. As a result, that means that the people that we’re trying to protect will still end up being potentially subjected to the higher rates.
Senator Stewart Olsen: Thank you.
The Chair: The bill’s sponsor, Senator Ringuette.
Senator Ringuette: The first thing I’d like to clarify is that the provinces regulate a specific financial product from payday loans, that is a loan not more than $1,500 for not longer than 62 days, period. Everything else — lines of credit and instalment loans and all the rest — comes into the Criminal Code in regard to interest rates.
Mr. Docherty, I’m usually very tough with your boss. I’ll give you a chance because it’s your first appearance before the committee. I appreciate your presentation. Could you tell us which financial products and which of your members would have an interest rate higher than 21 per cent?
Mr. Docherty: I can tell you that the vast majority of banks’ products — for instance, credit cards — start off at just over prime and then maybe go to 19.9 per cent.
Some credit card offerings out there have an interest rate higher than 20 per cent. There are a lot of good reasons as to why that might be the case.
It’s important to remember that, in some cases, a customer chooses a product because it has rewards and benefits associated with it. That client makes a conscious decision to use that credit card where that interest rate applies.
The other point I’d want to make is that the majority of credit card holders in Canada pay off their balance in its entirety. I think it’s 58 per cent of credit card holders pay off their balance in full. For them, there is no interest rate. There is no interest charge applied to that balance.
Senator Ringuette: The only financial product that you see your members providing to Canadians or their customers that would have a rate higher than 21 per cent might be a few credit cards?
Mr. Docherty: That’s not indeed the case.
Senator Ringuette: That’s the question I asked.
Mr. Docherty: I gave an example, and I’m happy to provide more. In my opening remarks, I spoke to the consumer bridge loan example.
Senator Ringuette: How much would that be?
Mr. Docherty: You could get a consumer bridge loan for 6 per cent of the amount that’s borrowed, but the problem is there’s a fee that’s charged at the outset. When you use the annualized fee and you use the interest calculation in section 347, what that means is it artificially increases the interest rate that’s paid. As a result, there’s a danger. It could go over the 20 per cent threshold.
Senator Ringuette: Listen. If you have a bridge loan, as an example, of a mortgage for a month and you manage to have 21 per cent on that loan, it’s a pretty good deal.
Mr. Docherty: The actual interest rate that’s charged is, say, 6 per cent, but then there is a reasonable fee applied at the outset because the bank has to apply due diligence in determining whether it’s going to make that loan.
The problem with the way section 347 works is that that fee is included in the annualized interest rate. So even if you have a short-term loan for 10 days, that fee is basically included in the calculation, and you’re paying that fee every 10 days for 365 days. That artificially increases it when, in fact, that’s not the case. That’s not what actually is happening.
Senator Ringuette: I’ve been following what the credit unions have been doing, and I congratulated them last week, and you’re here and I want to congratulate you.
In regard to the different laboratories that you have in different regions, I believe that one of them right now is supplying short-term loans for 12.9 per cent.
Mr. Pigeon: That’s true. I think Kate can tell you more about that.
Ms. Martin: Credit unions are offering a range of different alternatives. The rates can range from 12 per cent upwards, but there are also some other factors that are included in those.
I can speak to some of those other factors if that’s part of your question.
Senator Ringuette: No.
The Chair: Thank you very much.
Senator Tannas: I’m the critic of the bill, and I agree, just based on knowledge and on explanations that you’ve made and others have made, that 20 per cent is too low, but let’s have some context.
This 60 per cent was established in this bill in 1980, when the risk-free rate of return, guaranteed by the Government of Canada, was 13 per cent at the beginning of the year and 18 per cent at the end of the year — the risk-free rate of return. Now, for the sketchiest loan you can imagine and a cost of funds for whoever is making the sketchy loan, because they weren’t CDIC-insured, 60 per cent would actually be quite reasonable. It’s not reasonable today. So my question to you is what is reasonable? What is the right number? I’ll leave it there.
Mr. Docherty: I think the provision at the 60 per cent rate actually probably might strike the right balance because of the issues associated with the interest rate calculation. Again, there’s the fact that there are some payday loan companies out there that are charging well above those rates, so you always have to keep that in mind as well.
In determining a rate, for instance, the bank has to offset the risk associated with a particular loan, and it needs to protect the deposits that it holds. There’s a balance that needs to be struck there. I’m not in a position to say what the rate should be, and I’d be willing to go back to my membership, if there was a proposal on the table, to determine that. That would be my position at this point in time.
Mr. Pigeon: Our thoughts on that are really framed by the conversation we just had, which is that we’re experimenting and trying to figure out where that balance is. So we can’t give you a definitive answer now. What we have been able to determine is that it varies a little bit by region. Some regions will have an inherently riskier context because of the labour market or the economic context, those types of contextual features, and then how the credit union has been partnering with other sectors to bring those services to the community. That’s one consideration.
I might point out in passing — and we’re not advocating for this, but it’s instructive to note — that Quebec, as I understand it, has a 35 per cent cap. So that’s something we’ve looked at as well.
Senator Tannas: Are you aware that there’s a shortage of folks willing to lend money on sketchy loans in Quebec? Is there a big difference between Quebec and the rest of the country?
Mr. Pigeon: I can’t speak to that. It might be worth inviting Desjardins to come and speak, but we can’t speak to that.
Senator Tannas: We’ve all watched the banks close branches, computerize, ATMs, et cetera. So it is a bit of a nose stretcher to say that what was good enough in 1980, 60 per cent, is still comfy now. I’m having trouble with it, and I’m the critic of the bill.
Any guidance you can give once you leave here and have a chance to think about it would be appreciated.
The Chair: I would just say in that regard, any guidance you could give, it would be best if we could have it by tomorrow morning because we’re considering the clauses of this bill. To Senator Tannas’s point, that would be very helpful. There’s your homework.
Senator Wallin: Thank you very much. Just a comment because we were having this discussion last week. This was the simple example that I could grasp, that if you go and get an advance for 100 bucks and there’s a $2 fee on that annualized, that’s 24 per cent, which would put you over the limit. I think that’s where everybody has gotten to the point that it’s too low. There seems to be general agreement on that.
We heard testimony last week from a Professor Robinson, and he was quite entertaining and very straightforward. He said that you guys — both of you, but particularly the banks — could put all this payday stuff out of business in a nanosecond if you just stepped in, understood that you were going to lose money on this because they’re high-risk borrowers and that the amounts would be small. He says for the whole industry the money is quite negligible in the first place, if you add up all of the money involved in the payday industry. So you kind of have to take this on as a social good, as a service, and just bite it. They’re going to default on their loans. You’re going to keep giving it to them, but you’ll put the other sector out of business.
On the other hand, as you’ve noted, you have a fiduciary responsibility for your bottom line to your shareholders and to the public. So where do you walk down that road?
Mr. Docherty: It’s a very good point you’ve made, for sure. One thing I’d like to point out is that banks aren’t in the business of lending to people who can’t pay their loans back.
Senator Wallin: You should tell the professor that.
Mr. Docherty: It’s really not going to address the problem here at all. There are a lot of other things that could be done, such as financial literacy or not-for-profit credit counselling. These are more effective tools at the end of the day than giving money to someone who is not in a position to pay it back.
Senator Wallin: Just FYI, he said financial literacy and advice on that front is a crock. I can’t remember what his actual word was, but that’s what he implied, because you really need to get down to the nitty-gritty and say, “You can’t have that money.” That’s not what financial literacy is about, but just to pre-empt my next question.
Mr. Pigeon: I’ll kick some comments off and throw it over to my colleague Kate.
I’d agree with the comment we’re not in the business of lending to people who can’t pay it back. In fact, historically the model was built on that basic idea that the community knew who was a good credit risk and who could pay the loan back over time.
That said, we are not motivated in quite the same way as our friends at the banks. We’re not profit-driven quarterly, profit-expectation-driven. We can take a little more of a hit there because we don’t have to return this all to our shareholders every quarter. We can play a little more in that space and we do, and that’s an important consideration.
But we are also conscious of the fact that our members put faith in our institution and they want us around for the next generation. We’re not huge organizations; we can’t take on the business at a small credit union or even a medium-sized or large credit union. It’s just not sustainable, so we have to be mindful of that balance again, notwithstanding our desire to do right by our members.
Ms. Martin: Just to pick up on the comments around financial literacy and in relation to this particular bill, we see all of these elements as tools to help address the high-cost credit cycle we’re seeing develop. While one tool is not going to solve all of these challenges, together we think there are good opportunities to solve some of the challenges that we face with the high-cost credit cycle.
By virtue of having alternatives to payday loans and coupling those with financial literacy and perhaps also coupling those with interventions that will be effective, that kind of nudging approach, if you will, can go a long way to helping our credit union members achieve their financial well-being.
Senator Wallin: So your response to Professor Robinson, then, is that his plan is not going to work? Thank you.
Senator Dagenais: My thanks to our guests. I would say that part of the problem is access to credit. It is very easy to have credit cards, everyone offers them; every retailer has its own credit cards. When you are at the airport, people run after you to offer you a credit card. Access to credit may be too easy. People often have multiple credit cards and request a cash advance on one credit card to pay another.
You talked about cooperatives. I sat on the board of a credit union for three years. We had problem cases. We studied them, we tried to help people, but people would often go and get credit elsewhere. Will decreasing the criminal rate of interest from 60 to 40 per cent not make credit even more accessible to those going deeper into debt?
Should financial institutions not assume some responsibility for educating their customers by denying them credit? Not a week goes by without a credit card offer being mailed to my home: “We will lend you money immediately.” Many people receive them too. Many people get offers from financial institutions, and they cannot afford them. Often, the financial institution takes the risk, because it is strong enough. Should an awareness campaign be launched? Once again, will lowering the criminal rate of interest help people out, or are they more likely to go deeper into debt? Mr. Pigeon and Mr. Docherty, what do you have to say about that?
Mr. Pigeon: That’s one of our concerns. If the interest rate is too low, it could encourage people to look for loans elsewhere where the rates are really high. In our conversations with our members, it’s always regulated. We may say that we cannot offer them the loan now, but if they follow a plan, over time, the loan can be granted. That’s part of our management philosophy, the way we behave in general. This has consequences everywhere, whether it’s a mortgage or a short-term loan. It’s always the same. We try to have this kind of conversation at the beginning of the process to encourage our members not to go into too much debt. This is the original philosophy behind credit unions, precisely because people were getting into too much debt from unregulated lenders in the past.
It is a big concern.
Mr. Docherty: I would echo the comments of my colleague from the credit union. I’d say the majority of Canadians are responsible borrowers. It’s unfortunate that there are some Canadians out there who get into financial difficulty. I completely agree with your comment that the focus really has to be on financial literacy so that people understand that they shouldn’t obtain credit at high interest rates if they can’t afford it. That’s what the focus needs to be on.
Senator Wetston: So, look, financial literacy has been the subject matter of considerable discussion in financial markets as long as I have been on this planet. I won’t tell you how long that’s been. Thank you so much.
I really want to ask you this: What research or information do you have that in any way suggests that engaging in some form of education or financial literacy will help to address this issue with respect to borrowers? That’s part one of that question.
For the second part, it’s not that I’m opposed to it, but I’d like to know what you know about it, as opposed to what you think about it.
I think if you look at the recent reports of the Bank of Canada you will see that there is a great deal of concern about the debt crisis in the country with respect to consumers and borrowers, and not just associated with real estate. So if we think about the debt that’s been accumulated by consumers in this country and we look at this issue that’s before this committee and presented by this bill, I would like to have your views, if I may, as to what your recommendations might be to address this serious issue that we believe the country is facing as well.
Mr. Docherty: I’ll start with part two of the question, if I could.
The question of household debt is certainly on everyone’s mind. I can tell you that the statistics the Canadian Bankers Association gathers indicate that people are paying their loans off when they’re required to make those payments. Mortgage delinquencies are not going up in any discernible manner, and credit card delinquencies have been steady for a very long time, so the issue of household debt, while it is something that needs to be watched, may not be a major concern in Canada.
Part one of your question had to do with data related to financial literacy and whether that improves people’s lives. I actually don’t have access to any of that data on hand, but I’d be happy to follow up.
I do think it’s an incredibly important thing, and it might be one of those situations where it’s easier to tell what the impact would be if we didn’t have it, and none of us wants to see that. That would be my only comment with respect to that.
Mr. Pigeon: Thank you very much for your question. It just so happens that in a previous life I was the research lead for the Financial Literacy Task Force, so I have a bit of knowledge that admittedly has atrophied since then.
We did a study by a behavioural economist named Rob Oxoby at the University of Calgary; he showed how a simple prompting, like a survey type of instrument or questionnaire, could actually shape behaviour. We had some quantitative evidence to support that proposition. The other big learning is that the behavioural interventions can be quite effective.
The big takeaway for me was always a question of timing — just-in-time, relevant information when the decision is being made. That’s precisely what we’re doing.
The other thing I’d say is we approach this issue very holistically. I mentioned this point about the living wage piece. I think the issue with household debt in general is, frankly, a societal issue of distribution, not just financial products. I don’t think this is going to fix the problem all by itself. I think if you’re really serious about this, there has to be a suite of policies. We’re not the government. We can’t change policy. We’re doing what we can by paying fair wages to our employees, demanding that of our suppliers and contributing to our communities. That’s our mission.
I can’t say much more than that, but that’s how we approach this issue. I think I’ve emphasized that we have that historical and still relevant concern about debt issues. I hesitate to bring this up, because I might get a kick when I get back to the office, but there’s the idea of a B-20 change and everyone will go to the credit unions. But no: Our members consistently say to us that just because you walk in the door doesn’t mean you’re going to get a loan. We’re not going to put you at risk because you need money right now. We’re thinking of your well-being beyond right now. That’s how we operate. I can’t tell you how many times I’ve had that conversation with our members. That’s how we approach it in our system.
Senator Tkachuk: Who charges 60 per cent interest? Anyone? Does anyone charge 60 per cent interest in the financial industry right now?
Mr. Docherty: I would say there are payday loan companies that are charging more than 60 per cent.
Mr. Pigeon: With the formula and with the fees.
Senator Tkachuk: But if you didn’t count the fees; straight interest rates. Everyone has a fee. If someone comes in for a $100 loan, there’s a lot of work to do for that, so it might as well be a $1,000 loan if you want to make money. So if you’re only going to borrow $200, you could extrapolate that interest rate because there may be a $10 charge and it may be for two weeks. You could say that’s like 60 per cent, but it’s not, really. If you didn’t have that, he wouldn’t get the $100 or $200, so the person wouldn’t get the money at all.
But who charges 60 per cent? Does anyone charge a 60 per cent interest rate? Does anyone charge 50 per cent? I’m just asking. I don’t know.
Mr. Pigeon: I don’t know what to say beyond what my counterpart said. The way the formula is structured, effectively you end up with the legislation and math telling you that it’s more than 60 per cent because of the fee structure and whatnot for instalment loans and pawn loans.
Senator Tkachuk: In the payday loan industry.
Mr. Pigeon: I’ll let Kate speak to this.
Ms. Martin: There’s good research, and I think you heard from our colleagues at Momentum last week.
Senator Tkachuk: I wasn’t here last week.
Ms. Martin: Apologies. What some of their research indicates, certainly in the Calgary area, is that they’re seeing instalment loans and pawn loans at or around 60 per cent. Those are products that fall under the criminal rate of interest, but because of some of the regulations around payday lending provincially, these are other types of products that are coming through the cracks and charging quite high interest rates.
Senator Tkachuk: Senator Wetston, we talked about household debt, and you were talking about the question of financial literacy. I’ve been hearing about household debt and too much mortgage forever, and I’m older than you. People have too much debt.
But you’re right; when you go to the stats, people do pay back their credit cards and their mortgages or they lose their house. So there’s a lot of incentive to make all this happen.
If the legislation passes as it is at 20 per cent, who does that affect? It doesn’t affect the payday loan guy. He’s under provincial jurisdiction and he will be out there doing what he’s going to do, and so will the pawnshop do what they’re going to do. But I know American Express charges 28 per cent, but the reason they do that is because it’s a deterrent. If you end up paying their interest rates, they take away your credit card. They don’t want you to pay that 28 per cent; they want to you pay it on time, so it’s a deterrent for them. And that’s the only way they get to do it.
I don’t really see why this is such a big deal amongst banks and the credit cards, you can get credit cards at 5 per cent, 8 per cent and 10 per cent unless you want points. If you want points, you’re going to pay for them, so you’ll pay 18 per cent. But if you pay it every month, it’s not an issue.
I’m not sure what this legislation would affect, really, and what the numbers should be, for example, 30 per cent, 40 per cent. That’s why I am asking the question. Is it 40 per cent? Who charges 40 per cent?
Mr. Docherty: Again, the issue arises when the fees are included, and that’s the way the section works. The fees are included in the definition of interest. So you can’t distinguish between the fee and the interest rate based on the way this provision is written today. That’s when you run into the issues where the interest rate, once you include the fee, is artificially increased and annualized. Unfortunately, at 20 per cent especially, it’s going to capture a fairly broad spectrum of products and limit the availability of credit and push people away from traditional lenders to non-traditional lenders and those that are exempted from the provision.
Senator Ringuette: I’m going to ask a reverse question of our gentleman banker here. You’re talking about fees and about the 6 per cent loan, but the fees around that loan would bring it over 20 per cent. What kind of fees are you charging to enable a loan to go from 6 per cent to 21 per cent?
Mr. Docherty: The fees are reasonable fees. There’s due diligence, there’s a whole bunch of obligations in the case of a bank that have to be met. You’ve got to make sure it’s prudential lending so that you’re meeting the requirements of the legislation and guidelines from OSFI. You’ve got to conduct any money laundering checks and know your customer. It’s not just a matter of handing over money.
Senator Ringuette: You charge all that background work to the customers in fees on a 6 per cent loan?
Mr. Docherty: There is a fee that is applied, in most cases, for the loan. The fee is reasonable. Again, the problem with the section is the way that the section works. Say it’s a $2,500 for a 10-day loan for a consumer bridge loan. Someone is going to get a new home, they haven’t sold their old home yet and the bank is there for that person to extend this credit so that the person can get their new home.
Once you’ve charged that fee, then it’s included in the calculation of interest and it’s annualized. You’re essentially paying that fee every 10 days for 365 days. And that’s why it looks enormous. It’s not enormous in reality, but that’s why it could potentially run afoul of the section.
Senator Ringuette: Could. Okay, thank you.
Senator Tannas: For the credit union folks, you’re provincially regulated. Maybe you know the answer to this. If you got into the payday loan product, so the 62 days or less, $1,500, would you be exempt from the criminal interest rate for that particular product, or is there anything in the legislation as it sits right now that would drag you out of the provincial exemption that exists?
Mr. Pigeon: That’s a really good question. Frankly, I’m not sure. I don’t think we would be exempted from the criminal interest rate. That’s been our assumption to date, but we could check and think a little bit on that, but I don’t think so. Unless Kate knows something I don’t know.
Ms. Martin: I’m of the same mind as Marc-André. We can check on that, but credit unions across the country and in each province have cost-of-borrowing regulations they have to comply with, so those cost-of-borrowing regulations —
Senator Tannas: So it would be a provincial regulation that would hit you before, possibly; is that right?
Ms. Martin: We will figure that out.
Senator Tannas: Could you send us an answer?
Ms. Martin: Certainly.
Mr. Pigeon: I might add we do have one federal credit union, with more on the way, just for context, and several on the way.
The Chair: Mr. Docherty, have you any comments in response to Senator Tannas’s question?
Mr. Docherty: No.
The Chair: Before we move on to the next panel, my question for you — and I know you have an opportunity to provide additional information to us before tomorrow — but I’m interested to know, following up on what the deputy chair asked initially, what changes, if any, would you suggest that we consider to this legislation? I’m not clear on that.
Mr. Docherty: I have not had the opportunity to discuss what changes we’d like to see with my membership. We’re just really focused at this point on the 20 per cent issue and the way the interest is calculated under the section.
The Chair: Thank you.
Mr. Pigeon: I’d say we are in a very similar position. We haven’t had the opportunity to have this conversation with the breadth of our membership, but I would also emphasize the point we raised earlier, which is that we’re encouraged that there’s a conversation happening and we’re happy to share what we are learning from our laboratories and our efforts to move into that space and provide a viable, safe alternative for our members.
The Chair: Thank you all very much. It’s been very helpful. You are very informative. If you wish to provide information to us, we look forward to that as well.
For our second panel, we welcome Gary Schwartz, President, Canadian Lenders Association, by video conference from Toronto; and Ali Pourdad, Chief Executive Officer, Progressa.
I would remind you we have five minutes for your initial presentations because we want to create an opportunity for senators to ask questions, so we’re going to be quite religious about the five minutes. Over to you. Who wants to start?
Ali Pourdad, Chief Executive Officer, Progressa: Gary, why don’t you go first? I’m going to go over five minutes. I’m going to admit that up front. So if you want to try to be under five we’ll combine for 10.
The Chair: Just so we know —
Mr. Pourdad: I’ll be about seven; I can’t get it any faster, so Gary, if possible —
The Chair: Do your best at three.
Gary Schwartz, President, Canadian Lenders Association: What I prepared here is a representation of all members in the non-prime space. It is important for me that I’m able to go through it thoroughly, because I think it would benefit the Senate to hear it in totality. Let’s see how it goes.
The Chair: I think I know how it’s going to go. We’ve reviewed your presentation. A summary would be helpful. Hit the highlights, then we can question you.
Mr. Schwartz: Okay. Fair enough.
The Chair: Do the best you can.
Mr. Schwartz: I will. Thank you.
Thank you very much for having me here as we review Bill S-237.
As introduced, I’m the President of the Canadian Lenders Association. The CLA was established to provide a platform for businesses involved, directly or indirectly, in the provision of financial services, principally the provision and supply of credit to certain segments in the marketplace that are high risk and that can be served through the use of technology and decision making.
The Canadian lending members provide credit to both the SME market and the consumer market. Their innovative model services the needs of Canadian businesses and individual borrowers nationally.
We seek a broad membership from all lenders, other than payday lenders, that carry on business in Canada and seek to support the establishment of good governance and strong internal standards to strengthen and support the development of this important activity.
Since you’ve read this, I won’t belabour you with the details on the organization; I’ll skip ahead a little. As I mentioned, the CLA does not represent the payday lending sector. The CLA non-prime lenders provide products with interest rates well below the payday lending interest rates and are an alternative option for consumers who are denied or do not have access to credit from traditional lending institutions.
Our lending members are governed, as you are aware, by section 347 of the Criminal Code, which caps the maximum amount of interest these lenders can charge or collect to 60 per cent. The aggregate interest rates — and this is important — charged by the CLA lending members are risk-adjusted and range from 19.9 per cent to 46.9 per cent per annum.
I’m sure the committee has previously heard stories of Canadians who are caught in onerous lending cycles and how lending members work to provide alternative lending options for these consumers. Based on the structure of their business models, members of the CLA are able to provide loan options to non-prime customers who are considered too high a risk for incumbent lenders to service. Many of these consumers are living paycheque to paycheque, and they have little flexibility to manage unanticipated crises, such as when work hours are unexpectedly reduced, when there’s a family medical issue, or when a furnace or car breaks down.
Our lending members provide solutions to these consumers. These lenders allow them to address their immediate financial needs with financing they can afford to pay back. Equally important, by making loans that consumers can pay back, consumers will be able to rebuild or improve their credit score so that these consumers are more likely to qualify for traditional financing in the future.
The CLA’s non-prime lenders are inextricably part of a larger lending ecosystem servicing the Canadian market.
With the understanding that the Senate Banking Committee is studying Bill S-237, the CLA has reviewed the content of the bill. In consultation with our advocacy and regulatory committee, we would like to provide some advice.
Bill S-237 proposes to change the criminal rate of interest from 60 per cent to a Bank of Canada overnight rate plus 20 per cent. This change would only be applicable to certain loans, which we understand to be personal loans, such as loans entered into primarily for family and household purposes. The current 60 per cent interest rate would continue to apply for loans entered into for business or commercial purposes. That said, we understand that the credit advanced to businesses that exceed $1 million would be exempt from the offence of charging a criminal rate of interest. We understand that the practical effect of this is that the lenders that lend to businesses would be able to charge such businesses an interest rate higher than 60 per cent for loans over the $1 million mark.
Canada’s current laws provide for a full spectrum of lending, from prime loans to non-prime loans to payday loans. My remarks today will focus predominantly on non-prime loans for consumers, as this is an area that will be most impacted by the proposed legislation.
Based on studies —
The Chair: Mr. Schwartz, we’re at five minutes. Can we move to summarize, because we do want the opportunity to question you. I know this is difficult, but we have your material in front of us.
Mr. Schwartz: I will conclude and then hopefully come back to some of these points in the discussion.
It is important for policy-makers to understand the risk that non-prime lenders bear when financing non-prime consumers. Some examples are delinquency rates, off-charges, et cetera. In order to extend this lending into the marketplace, non-prime lenders must secure financing. Non-prime lenders themselves are not able to draw from traditional financing institutions for their lending because of the real and sometimes perceived risks of lending to that segment of the Canadian population.
This committee can appreciate that the cost to supply this credit is significantly higher than what traditional lenders pay. This, in conjunction with the higher loss rate on this type of lending, is reflected in the higher level of interest rates charged to non-prime borrowers.
Canadian consumers win when availability of credit is expanded and the barriers to entry in this marketplace are lowered. Consumers lose when innovative lenders cannot compete with cost-of-capital scale and efficiency. Keeping the interest rate as currently provided in the Criminal Code allows for continued availability of credit to Canadian consumers.
It is important to note that the marketplace seeks to provide the best possible rates for Canadians. Companies that operate efficiently and provide innovative lending solutions inherently — and I think this is very important — inherently optimize their interest rates to provide consumers with the best possible options. While new market entrants may differentiate their business by competitive speed, approval rates and loan size, one of the key factors in winning the Canadian consumer is lower cost of capital.
The Chair: Thank you very much, Mr. Schwartz.
Mr. Pourdad, please.
Mr. Pourdad: Thank you, honourable senators, for inviting me here to speak about Bill S-237, in particular the provisions governing the criminal interest rate.
I co-founded Progressa back in 2013. We’re a company of about 110 employees in Toronto and Vancouver. We all want to make a very positive difference in the lives of Canadians.
The Chair: I apologize for interrupting. I understand you’re under time pressures, and I apologize for that, but the interpreters are just not keeping up with you. Can you slow down and still respect the timeline?
Mr. Pourdad: I’ll give it a fighting shot.
Progressa’s mission is to build a socially responsible consumer finance company that encourages borrowing for the right reasons, a company that Canadians can be proud of. We pride ourselves in offering a solution to the nearly 50 per cent of Canadians who live paycheque to paycheque, several million of whom have challenged credit and therefore no conventional financing options to repay their long-outstanding debts.
We also believe that the traditional credit reporting system fails Canadians who have had prior collections history damage their credit score, leaving them to cope as non-prime borrowers.
We are particularly focused on those Canadians who became non-bankable through no fault of their own. We are part of a new wave of Canadian alternative financial institutions that provide services to borrowers rejected by banks and otherwise forced to resort to very expensive payday loans.
According to Equifax and TransUnion, the two credit reporting agencies in Canada, it is highly recommended that one not lend to consumers with non-prime credit scores. Credit scores under 650 are considered non-prime, and that represents approximately 3 million to 4 million Canadians. For the committee’s benefit, the majority of Schedule I banking institutions will not lend to Canadians with scores under 700, which represents approximately 7 million Canadians. In a world where people’s lives were predictable and entirely in their control and no one was ever caught off guard or went through an unexpected life event, this recommendation would probably make sense. Sadly, this is not the way the world works.
Consumer protection has two sides to it. Banks are federally regulated institutions primarily because they are the home of large deposit bases, mostly from ordinary Canadians. It is appropriate that those deposits are protected not only through insurance but also through regulation, which ensures and promotes the stability of our banking system. The argument that we need to protect investors and deposits is in fact a reasonable one. In a volatile and uncertain world, the continuous tightening and monitoring of bank lending criteria is, from key perspectives, the means for strengthening and securing the health of our banking system.
What about the 7 million Canadians with credit scores under 700, the lion’s share of whom live paycheque to paycheque and experience illness, unexpected job loss, divorce, separation and other personal and family crises each year? It is these realities that cause millions of cash-strapped Canadians to struggle with their everyday bills, with some of those bills falling behind and with no easy way for that debtor to catch up until the consumer can find a way to get back on their feet. This could take years. And even when they do get back on their feet, how does someone living paycheque to paycheque come up with $2,000 or $3,000 to pay off their line of credit or outstanding credit card or cellphone bill?
Consumers applying for a loan with Progressa are going through this reality every day as their bills get sent to collections, where they are regularly phoned from a collection agency and where can you fully expect that that consumer’s credit score is getting hammered from the 700s down to the 400s or 500s in a very short period of time.
Once bankable Canadians who find themselves in this unfortunate position have very few options for escape. In an age where financial security is governed by credit scores, solutions that enable debtor rehabilitation are essential.
Believe it or not, Equifax and TransUnion also recommend that one not lend to a consumer with one or more prior delinquencies. That seems intuitive. If someone did not pay their bills in the past, why provide them credit again? This is where Progressa differs from other lenders in Canada. We look past the applicant’s messy credit history and instead evaluate their character and capacity using modern technology methods based not on the history of the individual but where they are today and where they are going.
In fact, in Progressa’s case, over 90 per cent of new customers that apply for a credit product with us never see a dollar from us. We pay their past-due bills directly to their creditors and alleviate an immense stress in their lives. Imagine applying for a loan with a company, providing them your personal information, going through an interview process — already you’re stressed out — all not to see a dollar from us. Our borrowers do not come to us to increase their debt burden through additional purchase or consumption but to fix a problem that is impairing their credit and their bankability.
Progressa’s tagline is “borrow for the right reasons.” This tagline is part of our mission and one we stand behind. It’s what has led to us help over 15,000 customers, in just five years, to consolidate their bills and begin the path to rebuild their credit profile.
The Chair: Move to your conclusion, please.
Mr. Pourdad: We absolutely can. I have a lot of statistics that I would like to share with the committee in Q&A.
The Chair: It will likely come out in questions; that would be a better way to go.
Senator Dagenais: Thank you for your presentation, Mr. Pourdad. I have two questions.
First, I understand that you do not lend money to your clients, but rather, you pay their bills. If you pay my $1,000 bill, how much interest will you charge me after one year? What will my $1,000 end up being?
Second, you will surely charge me a fee; will those fees be higher than the interest you are going to impose on me?
Mr. Pourdad: I’m going to answer in English; my apologies.
Thank you for your questions. As Gary alluded to, we’re a member of a wide number of companies in Canada that charge interest rates north of 19 per cent. Our rates start at 29 per cent. They go as high as the 46 per cent rate that Gary mentioned. Many of the other members do as well.
On a $1,000 loan over 12 months, the consumer will pay anywhere between about $150 or $240 and that range of interest over 12 months. That’s basically 29 to 46 per cent APR.
There are no fees for our product. We do have optional products if the consumer wants to take them, but we don’t have any mandatory fees associated with our loan.
Senator Tannas: Could you tell me what percentage of your loans would be at the 46 per cent level?
Mr. Pourdad: About 53 per cent of our consumers have subprime credit scores. That’s sub-550 credit scores. Most of those customers will have a starting interest rate in excess of 40 per cent to start their loan — 46 would be probably rare; around 40 or 39 per cent would be more typical.
Senator Tannas: If we set the rate — and forget 20 per cent — at prime, plus 45 per cent, we’d fit everybody in?
Mr. Pourdad: My whole speech goes into this. I really don’t think it’s fair to be talking about rates. I actually think the focus is on the wrong thing. At the end of the day, we’re not making money as it is right now. We’re a start-up that borrows at rates that are comparable to the rates you’re proposing in this legislation. We have costs associated with running the business on top of that. So we already are not a profitable business today. Our investors choose to take the risk on these consumers and choose to help them try to get from point A to point B in a quest that we hopefully can build a business over time of scale and brand that we can start to make money over time.
Right now, if you reduced the interest rate to 45 per cent, we’re out of business.
Senator Tannas: I thought you were charging 45 per cent?
Mr. Pourdad: Right. If you have a cost of borrowing of 45 per cent and you’re charging 45 per cent —
Senator Tannas: No. You’re saying your cost of borrowing is 45 per cent?
Mr. Pourdad: I’m saying our cost of borrowing at this point is very close to what is being proposed in this legislation.
Senator Tannas: That’s your cost of funds?
Mr. Pourdad: That’s correct.
Senator Tannas: Or is it your charge that you charge the consumer?
Mr. Pourdad: That is our cost of funds.
Senator Tannas: Before you’ve even made a loan you’re making 45 per cent payments, is that right?
Mr. Pourdad: No; 20 per cent.
Senator Tannas: I’m asking you this question. I’m saying that in order to fit every single one of your customers in, if we move this lending rate to 46 per cent as a maximum, you would fit them all in?
Mr. Pourdad: Credit losses alone in this space — I’m not trying to deflect the answer — can be anywhere between 16 cents on the dollar and 28 cents on the dollar not to come back.
If you’re charging 45 per cent, as in your example, you take off 16 to 20 points from that number and your cost is 20 points; there is nothing left over for the company. It’s simple math.
Senator Tannas: It strikes me that it is a wild coincidence that 60 per cent today is the right number, just as it was in 1980 when the risk-free cost of funds was 18 per cent and we didn’t have any technology, or efficiency, or so on. Isn’t that a huge coincidence that it should be the same?
Mr. Pourdad: It’s very easy for us to say things like that because we’re not experiencing what these consumers are experiencing. Our customers are struggling. They are going through a real tough time. No one will help them. No bank will help them, their parents won’t help them, and their friends won’t help them.
Everybody knows somebody who has come to them and asked them for money and you’re not going to lend them money. Our company has chosen to take that chance on people and help them, but when I sit in front of TD or Bank of Montreal, they think we’re crazy to lend money even at the rates we charge. They think we’re nuts. They don’t know how we get our money back. That’s where the technology comes in. We’re turning it on its head and trying to do things more efficiently and effectively for that consumer, but at the end of the day we are taking a very big credit risk.
Senator Tannas: So your position is leave it at 60 per cent? At 59 per cent you’re unhappy; at 45 per cent, you’re out of business.
Mr. Pourdad: My position is that we should leave it at 60 per cent, correct.
Senator Tannas: Okay. Thank you.
Mr. Schwartz: I just wanted to add and underscore that, in a marketplace where Ali and other lenders are trying to service the non-prime sector, given that it’s a very expensive sector to service, ultimately Ali is competing with other companies. It’s not just Ali there. We have a number of companies that are trying to service the sector, and they are competing with each other. As I indicated, one of the key factors in winning the consumer is going to be lower cost of capital. They’re going to compete. Inevitably, if they can create efficiencies with their technology as innovative lenders, they will try to drive what they can offer the customer down to compete and win their business. Artificially pulling down the rate isn’t going to change anything. All it will do is eliminate lenders that can’t afford to borrow at that rate from the marketplace, and it will reduce competition.
Senator Ringuette: I’m assuming that Progressa is a member of Marc’s association.
Mr. Pourdad: We are.
Senator Ringuette: So you all work together, 48 of you. I read your document and it spurred my curiosity with regard to the U.K. I was astonished that the U.K. has a short-term loan cap of 11.2 per cent. That was astonishing.
Notwithstanding, my very important question: You’re not a payday loan product. So you’re not regulated by the provinces. So the provinces do not provide oversight. You’re not a banking institution, so the Superintendent of Financial Institutions does not supervise what is going on. Who provides oversight for your industry?
Mr. Pourdad: I’m happy to start, and Gary will have further comments, I’m sure.
First and foremost, we do fall under the Consumer Protection Act of every province. So our lending guidelines, our disclosure requirements, the transparency of advertising all falls within each individual province’s Consumer Protection Act. We have to abide by that. So there is some regulatory oversight from that perspective.
Second, several provinces have introduced high-cost interest acts, some recently — in Manitoba, just this last year. Saskatchewan already had such oversight. New Brunswick, your province, has the Cost of Credit Disclosure Act, and other provinces as well do provide some level of regulatory oversight over companies that fit between the banks and the payday loan companies.
Senator Ringuette: I went to your website. I clicked and clicked and clicked and clicked. The headline was, “How much would you like to borrow?” From $1,000 to $15,000 and for a period of anything from 6 to 60 months. Then it says, “Apply now.” Of course, I didn’t click on that “Apply now.”
But then I tried to get some information in regard to your cost, and I went to a page from your site. It says, “Open loans with no upfront fees. Obtaining a loan should not cost you money.” What do you mean by that?
Mr. Pourdad: That’s a great question. The majority of consumers that come through Progressa use us as a bridge loan. They’re going through a tough time. They’re being phoned by collection agencies. They’re good people who once had really good credit scores, and now they’re going through a tough time and need a short-term bridge to get from point A to point B. They might only borrow from us for four, five, six months. Our average loan goes out for 30 months at origination. In fact, it’s mostly paid off by about 18 months. That’s the history of our loans; most of our loans are paid off by 18 months. People do make the extra payments. It doesn’t cost them anything. That way they can control the cost of borrowing. It’s flexible, and it allows them to pay down and continue to build their credit at the same time. These customers are building their credit. That’s the other opportunity they’re being given. When they’re down and out and call us, the first thing they say to us is, “There’s no way you can help us.” They’re getting an opportunity to also rebuild their credit and get back to the banks. That’s not an opportunity that you would get at a payday loan company. If this legislation came into effect, that avenue to rebuild their credit would be gone. There would be no avenue left.
I’ll share some statistics with you because this is real stuff from TransUnion. They independently audited our entire history of lending. Over 90 per cent of customers we’ve ever helped have successfully paid back their debts or are currently in active paying status. Of customers that we assisted to consolidate their debts with credit scores between 450 and 499 — that’s considered deep subprime lending — 27 per cent of those customers migrated their score to 500 to 550; 39 per cent migrated their score to 550 to 599; and 23 per cent migrated their score to over 600 within six months of borrowing with us. Of that entire credit score segment, 99 per cent of customers saw positive or neutral credit score migration. If you put this legislation in place, that opportunity for consumers is gone.
Mr. Schwartz: If I may, more pointedly, to continue that narrative, you have a spectrum of lending in Canada. If you artificially cut off one end of the spectrum, the need for capital for these individuals doesn’t evaporate. So if you’re artificially cutting off one end of the spectrum and companies have to exit the marketplace, then you’re just pushing those individuals into unregulated areas where they will never be repatriated.
Ali is not a unique example. Our members talk about this continually, the idea of repatriating somebody’s credit to move them from one side of the spectrum to the other. It’s a natural ecosystem that needs to be supported. By leaving things the way they are, the market takes care of itself. We, as an organization, are very proactive in self-regulating to make sure that we’re servicing the market. Everything we do is proactive.
So just to add a little bit of embellishment to Ali’s comment.
Senator Wetston: I’d like to, if I could, understand a bit more clearly the line of questioning that Senator Tannas was pursuing with you.
The spread in 1980 looks a lot different than the spread today, but I think what you’re saying is that, obviously, if you didn’t have this 60 per cent requirement or — I’m not sure what to call it.
Mr. Pourdad: It’s the usury law.
Senator Wetston: Thank you. You’ve taken the words right out of my mouth. But I just need to understand this from a commercial and an economic perspective. I think what you’re saying — and Senator Tannas was suggesting it to you both — is that in 1980, somehow or another, the government was so wise and prescient that they picked the right number, regardless of the 37 years since then and all of the development. Did I get the number right? Maybe it’s 47. And all of this has happened over this period of time. I’m not going to ask you how it is that you intend to stay in business when you’re not making any money. I’ll leave that for another, maybe a sidebar, conversation. I would be very interested to know the answer to that.
In this period then, when there have been dramatic changes in the market, including a lot of online lenders, which I think has become less rare today, we understand the issues of technology; we understand what’s gone on for low-for-long interest rates. Would it be a reasonable suggestion on my part that the reason why you say you’re comfortable with that today is because the whole industry has evolved to this level both of lending and fee inclusion and the way that they operate because this is how the market has evolved?
Let’s pick another number. Let’s say it was 40 per cent and not 60 per cent. Would you be at 40 per cent today? Would you be able to serve all those customers that you say would not be served if that was the number today? The entire market, then, would be competing and functioning at that loan level. Would you agree with that?
Mr. Pourdad: I will answer that question. It’s a longer answer, though.
The regulatory environment has changed over the last three or four decades. It’s a different world now than it was back in the 1980s. Back in the 1980s, Canadian banks did lend to non-prime Canadians. In the 1990s they did as well, up to the credit crisis. They were long out of it before the credit crisis, but they used to lend to a wider range of credit scores.
There used to be large international banks in Canada, in consumer finance, prior to 2008, as everybody is probably aware. Wells Fargo, CitiFinancial and HSBC were large banks that had significant consumer finance presence. They were significant consumer finance companies in Canada. The regulatory environment has changed. If I could borrow at the government rate from the bank, then to answer your question, yes, I would pass that savings to the consumer at 45 per cent.
Senator Wetston: You didn’t quite answer my question. Maybe, Gary, would you like to answer it?
Mr. Schwartz: I’m going to answer it in a very similar vein. Post the bank debacle of 2008, things have changed. A bank is required to take large reserves of capital against risk-related lending, and these large reserves and the reputational risk of being a lender in the space have forced, as Ali said accurately, Wells Fargo, HSBC and Citigroup out of the market. Incumbent financial institutions aren’t there for the non-prime anymore.
It’s sort of Hobson’s choice. You either allow these companies that are trying to service this non-prime marketplace to try to innovate around their business models and their efficiencies, to drive that down naturally. As I said, the rates vary from 19.9 per cent to 46.9 per cent, but that’s going to vary based on the credit score of the individual.
The bottom line is that Ali is right; these companies are taking a huge risk and trying to service this under-serviced marketplace. We want them to service them because we want to repatriate them to a good credit score, where they can walk into a bank and —
Senator Wetston: But you continue to say there aren’t many defaults. I’m not seeing all these defaults that you’re worried about. Everybody has the same statistics. The banks have them. They may be high risk, but they’re paying. They’re not paying in your space, so why are you in this business? Is this a social service, or are you in a business? You have said you’re not making any money.
Mr. Pourdad: I’m speaking for the industry. So our company, if you take the topline economics of our business, our loans do perform. Our customers do want to rebuild their credit, and we have very good credit performance with very low credit losses. We do.
The industry, some of these companies are public. Their information is publicly available. They have average credit losses. I call these the benchmarks because they’re much larger than us and have much more scale. They have credit losses starting at 15 or 16 per cent, and some of the companies also have credit losses that go up to 25 or 26 per cent. There’s publicly available information out there. I’m speaking for the industry.
I’m in business because we have a social responsibility. Our company has a social mission to try to help these consumers rebuild their credit profile when no one else will. That’s why we’re in business.
Senator Wetston: I appreciate that, and I think it’s positive what you’re doing, but I still don’t understand whatsoever how you can go from 1980 at 60 per cent and 2017 at 60 per cent and say this is the only way this industry can function, and you need to have this in order to be able to ensure that you can serve this high-risk part of the population, for which I’m still looking for information as to defaults, and then you bring in the financial crisis as a basis for suggesting that these firms — just one second, if I may — have left the market. By the way, prior to the financial crisis, they were all here and enjoying this 60 per cent criminal rate of interest, and what then?
I’m still having some trouble here. Maybe I don’t fully understand what you’re saying. I don’t understand the business aspect of this. I don’t understand the economics aspect of this. All I can say is that when I asked you this question at 40 per cent, you said that wouldn’t work in today’s market. Would it have worked in 1980?
Mr. Pourdad: The banks were lending back then, so yes, it would have, because they’re borrowing at zero per cent. When the banks are borrowing at next to nothing and making the conscious decision to lend to these consumers, then it makes sense. But banks are not doing that today. They’re not there for those consumers, and that’s why you need alternative ones.
Senator Tkachuk: I’d like to say, Mr. Chair, how impressed I am that we have a company here that has a social conscience, along with the credit union, which also has a social conscience. Doesn’t anybody want to make money anymore?
Senator Dagenais: My question is still for Mr. Pourdad. I understand that your company is doing well, but without being indiscreet, where did the money come from for your first loans?
Mr. Pourdad: That’s a great question. I raised the money from my friends and family. That’s where I actually got my money. It was me. I put in several thousand dollars — my dad, my dad’s best friend, my co-founder and his brother — and we put in $200,000 among five of us and started lending ourselves. That’s how the business began.
Senator Dagenais: Am I to understand that all those people are now shareholders of the company?
Mr. Pourdad: The original people who put money in? Yes. Today we have 100 shareholders. Shareholders are not lending money to us.
Senator Tannas: I just had a quick look at your website. We appreciate you being here, but I’m trying to make the math work so that I can unstick myself from this question of 60 per cent and why it’s still the same.
Ninety-nine per cent of your borrowers improve their credit rating. Do you ever have a borrower who improves his credit rating and doesn’t pay you back?
Mr. Pourdad: No.
Senator Tannas: That implies that 99 per cent of your people pay you back and 1 per cent don’t.
Mr. Pourdad: No. I said 99 per cent of our customers saw positive or neutral credit score migration.
Senator Tannas: How would they do that and not pay you back?
Mr. Pourdad: Very simple; paying us back does not necessarily mean that you’re going to build your credit score. You have to borrow responsibly in general. You shouldn’t be borrowing irresponsibly or out of your means in general. Otherwise, your credit score could decline, even if you’re paying us, so you need to be responsible.
Senator Tannas: Your bondholders are getting paid 12 per cent, according to your website?
Mr. Pourdad: The current bonds pay 12 per cent. There are costs involved with that as well.
Senator Tannas: Understood. You probably pay a commission, use an investment adviser and so on?
Mr. Pourdad: Correct.
Senator Tannas: So your costs are probably close to 20. Is that fair?
Mr. Pourdad: Correct.
Senator Tannas: Thank you.
The Chair: Mr. Schwartz and Mr. Pourdad, thank you very much. This was a spirited conversation. It’s the kind of conversation we like. We respect very much what you’re both doing, and we are very appreciative that you shared your wisdom with us today. Thank you both very much for being here.
Committee members, you will recall that last week — I think a snowstorm or something intervened, there were bells, we were voting, and it was generally a confusing situation — we indicated to Senator Ringuette that we would give her the opportunity today to make herself available for any questions that we might have.
So here we are. If any of us have any questions of Senator Ringuette, we have that opportunity now. Or, Senator Ringuette, if you wish, you can make a brief statement just to summarize where you think we are.
Hon. Pierrette Ringuette, sponsor of the bill: First of all, thank you, chair, and colleagues, for the quality of your questions. It went really to the heart of the issue.
Additional information for you is the following: A vibrant economy like Germany, the Netherlands and Japan, their maximum, their cap interest rate nationally, for example in Germany, is at 16.4 per cent; the Netherlands is at 15 per cent; Japan is at 20 per cent. As I mentioned earlier, in the U.K., in regard to short-term loans, it’s 0.8 per cent per day, and it equals 11.2 per cent. And 17 states in the U.S. have done extensive research and have put together a maximum interest rate.
If I may, I’ll make a small statement. If you have questions or comments, I welcome them.
Honourable senators, from my conversations with a lot of you, the consensus is that 60 per cent, the criminal interest rate introduced in 1981, is too high. Then the question is, what is the appropriate rate?
As I mentioned, the U.K. not only caps interest rates for short-term loans, but they also have a system where the government supplies cash up front to community groups, volunteer groups to supply emergency loans for people within their community. Desjardins in Quebec has started a similar project in Quebec, and it seems to be very successful.
Why am I proposing 20 per cent plus the overnight rate for families and households? Because families and households are the most vulnerable in our society and because research done in the 17 U.S. states, our neighbour, shows caps for small loans — and that also includes small business loans — ranged from 5 per cent in Delaware to 24 per cent in Tennessee. So there’s a range.
It is the constitutional authority of the Government of Canada to establish interest. The concern expressed in 2006-07 by the long-standing chair, Senator Grafstein, has officially occurred. I’ve handed you a portfolio of information in regard to what is happening in your provinces with the payday loan industry, and that system was put in place in 2006. For instance, in Alberta, the annual percentage rate is 130 per cent, while in New Brunswick it’s 390 per cent, and in Saskatchewan it’s 598 per cent in regard to payday loan provincial regulation. Can you imagine?
However, my bill does not concern payday loans of not more than $1,500 for a maximum of 62 days. That’s the specific financial product that the province regulates. It concerns all other financial products.
Since 2006, even with all the negative stories, I have not been informed that the Department of Finance has reviewed the consequences of the then bill for payday loans. So, down the road, I will bring forward a request, a motion, for us to study the entire effect that the payday loan industry has had since 2006. There will be questions and there will be answers.
Some seem to think that usury rates are for people who want to buy something they cannot afford. I strongly believe this is not the case for most citizens. Some may need a loan to buy a prescription for a sick kid or a sick parent.
This bill brings our interest rate to a fair level of 20 per cent plus the Bank of Canada overnight rate, which is 1.25 right now. Tying the criminal interest rate to the Bank of Canada overnight rate brings the flexibility in the system that we’re not 37 years without reviewing what is proper and what is not, which is the case right now. So the flexibility is built into the bill.
Honourable senators, I’m available for your comments and questions.
The Chair: And we have a list. Thank you very much, Senator Ringuette.
Senator Stewart Olsen: I have just one question. I was intrigued by everyone mentioning that you have your service charges, plus. What would the service charge average be for, say, banking? Do you happen to know that?
Senator Ringuette: As my question to one of our witnesses today, their fees vary by their product, depending on what background research they say they have to do in order to move forward with the application.
Honestly, personally, I have never been asked for a fee from my bank. I have been sometimes offered insurance on a loan, which adds a percentage to the fee. But it differs. That’s what I think is happening out there.
Senator Stewart Olsen: Okay. Thank you.
Senator Tkachuk: I have a couple of questions on the differences between interest rates here and in Europe. When you did your European comparisons, did they all calculate their interest rates the same way?
Senator Ringuette: Yes.
Senator Tkachuk: So they used the service fees to come to their numbers? Did they all do that exactly the same, Japan, Germany, France and all those countries?
Senator Ringuette: Yes, they do in regard to their maximum rate. For instance, from what I have witnessed, what I’ve researched in regard to the U.K., they allow, with the 11.2 per cent interest rate for short-term loans, a fee outside of that 11.2 per cent if a person does not pay on time. There are slight variations.
Senator Tkachuk: So who lends at that rate? Banks?
Senator Ringuette: Yes, banks and financial institutions, as we have here in Canada. In the U.K. there are —
Senator Tkachuk: Payday loans wouldn’t be doing it, but maybe banks would be. The banks here are not doing it.
Senator Ringuette: No. But in the U.K. a lot of lenders are online. They’re not necessarily storefront.
Senator Tkachuk: In Europe, maybe, too. They’ll find other ways.
What I’m getting at is whether we could be putting these people out of business, and then there is nowhere for people to go. The banks have made that decision. They are not lending to those people, and it’s problematic.
When we talk about the 1980s, interest rates were at 18 to 24 per cent. Banks were charging that. We always paid fees for mortgages. We even paid fees for cars. They weren’t as big as they are now. When you buy a car now, they really hammer you with the administration fee and everything, but you always did pay some fee when you had a car loan.
If you go with a 20 per cent interest rate, these people would be out of business, and then someone will fill the void, and it’s not going to be good people. It’s going to be bad people filling the void, because they are going to get the money somewhere.
When you take away one thing, you’re going to give an opportunity for others. That’s a danger.
Senator Ringuette: I guess that’s an assumption that we cannot put aside.
However, the question that Senator Wetston posed in regard to the 60 per cent that was put in place 37 years ago when the overnight rate was 18 and more — and I have the history of the Bank of Canada rates — maybe, at the end of the day, it’s because for 37 years we have not been doing the review that we should have been doing through the Bank Act. If there hadn’t been 37 years of providing a 60 per cent cap, then the industry wouldn’t be where it is now. It would have adjusted gradually as we would have adjusted the criminal interest rate. I honestly believe that the industry will adjust, a good portion of it.
Last week we heard from a professor from York saying that the banks should all be doing that. I’m realistic and I know that won’t happen. He also said they have such a poor business plan. Maybe it will help them tighten up their business plan.
Senator Tannas: First, I want to thank you for bringing this forward because it’s opened my eyes to a world and a concern. We have an industry that is growing that at the high end takes all comers and covers their losses on the backs of poor people that are going to pay their bill but have to pay this extra interest. It’s a casino; it’s crazy. It’s all designed because we have low interest rates so their cost of borrowing is low, and we’ve got a high ceiling.
In my opinion, we have some aberrations going on here that I don’t think are serving anybody well, but we have businesses that are there, they have capital invested, they have been playing by the rules, mostly. I don’t see that we can step in and take a scythe to this without doing damage to businesses, employees, people that are out there that are on the treadmill, and if these guys go out of business now, the treadmill stops. A whole bunch of people are in the casino playing the game.
Notwithstanding, our friend who was here says he charges a maximum 45 per cent. He refused, steadfastly, to say that the rate should be 45 per cent and he could keep all his customers. I don’t know why he wouldn’t go there, but he’s inflexible.
To me, this is a problem, but I don’t think we can go there in one bite. Would you consider something where we did take some action to lower and an amendment that would put a review on it every five years, like the Bank Act?
Senator Ringuette: I definitely agree with you that it should be reviewed regularly, as the payday loan situation should be.
You haven’t mentioned any kind of rate for me to see if it would be in the realm of being reasonable.
Senator Tannas: Anything less than 60 per cent is better than what we have. It’s a step in the right direction.
Senator Ringuette: Absolutely. Senator Dagenais had good questions for our friends. Who got you? Where did you get your first money? Oh, it’s okay. So you’re paying 20 per cent right now to your dad and your uncle. I’m sorry.
The Chair: We’ll move on.
Senator Ringuette: The issue that I would like to have your comments on is that the bill that I am proposing is 20 per cent plus for families and households, but it remains at 60 per cent for loans for businesses less than a million, and then it removes the cap. I’d like to have your opinion on that. Should we have a uniform rate? Should we keep that for everyone?
My study indicated that the most vulnerable were the families and the household. The big corporations, we all know, the big boys can negotiate fairly decent —
The Chair: We’ll move on now.
Senator Wetston: Thank you, senator. I want to ask you a question about what your research has demonstrated. When you commented on the European and U.S. jurisdictions, did you have an opportunity to review the market failure that existed in those locations and whether or not their response was similar? Or were they ever at the kind of rate that we’re talking about here?
Senator Ringuette: The research that we were able to get didn’t provide that it went from 30 to 16 per cent; so I can’t tell you.
Senator Wetston: Do you have any idea, from your research, what the average cost of making a loan to a consumer might be in this environment? Do you have any idea?
Senator Ringuette: No, I don’t.
Senator Wetston: You don’t have that?
Senator Ringuette: No.
Senator Wetston: When we chatted about this, I think you indicated that a significant area of pushback might be from credit card companies, particularly with respect to 20 per cent, if that were the legislated rate. Is that the case, in your opinion, and if that is the case, why would that be the case?
Senator Ringuette: There are —
Senator Wetston: I may have misunderstood you.
Senator Ringuette: There are some credit cards in the marketplace right now that are at 29.99 per cent — not many. So it would have a little effect, and the Canadian Bankers Association gave that as an example. That would have a small effect on the credit card industry — very limited.
Senator Wetston: This is my last question, and it will be very brief.
I think you’re aware of developments in financial services around the area of fintech. Fintech covers a lot of territory. The Bank of Canada, OSFI and securities regulators have spent a lot of time in the last few years examining fintech — basically, online services — which covers not just a distribution of securities but lending as well.
You may not be able to answer this question, but it would seem to me that fintech is a significantly disintermediated service that would allow for a lower cost of lending — all online lending, as well — which would suggest that they’re going to have to get the money to lend. It seems to me there are a lot of lenders who are making a lot of money off the backs of the firms that are lending the money, which are making a lot of money, potentially — although it does seem one person is not making any money — off the backs of consumers, who are vulnerable. I can’t say that any better, I don’t think.
Is there any possibility, from your perspective, that the fintech space could potentially provide an alternative source of lending, which both Mr. Schwartz and Mr. Pourdad suggest would disappear from the market, and therefore these particular consumers would not be served? Do you have any thoughts about that?
Senator Ringuette: I honestly believe that with a reasonable criminal interest rate and a transition period before it becomes law, the industry would quickly respond to that. I believe the ones providing a good product to a slate of clients will remain in business.
I don’t want to put anyone out of business. I just want to make sure there’s fairness in the system.
Senator Dagenais: I would like to make a comment. Could we not set an interest rate by forcing lenders or banks to include the hidden fees? Because we know that there are hidden fees, sort of like airlines that always have an overall price. The ticket price includes the hidden fees. We would then be focused on the intentions of lenders and especially banks. Once again, I think lowering the interest rate means that we want to help people who have come to the end of their rope, and all we give them is more rope. So we must try to help them by explaining the situation. That’s my suggestion. In other words, there is an interest rate, but we indicate an overall price that includes administration fees.
The banks say there are no fees, but try to make changes to an investment at the caisse or the bank. You will be told that since you are paying before the maturity date, there is a 10.25 per cent fee even with cooperatives. I know, because I had the experience with a credit union. It’s just a suggestion.
Senator Ringuette: Senator Dagenais, thank you, and I will point out that the 35 per cent interest rate in Quebec includes administrative fees, and so on, just like the 60 per cent interest rate also includes administrative fees. The Supreme Court has been very clear on many occasions that the interest rate must include the fees.
The Chair: Senator Ringuette, thank you very much for your tenacity and the depth of knowledge you have on this. This has been very helpful to us.
Our intention tomorrow, committee members, is to move to clause by clause. I have been informed by the clerk that if we’re going to make amendments tomorrow, apparently the practice is that the law clerk would review those amendments to make sure they are in form. That has not happened as of yet.
If there are amendments to be made, perhaps they need to be made at third reading. That apparently is the process.
Have I misstated that?
Barbara Reynolds, Clerk of the Committee: The law clerk is not able to tell me, because if a senator went to the law clerk, that is a client privilege. This is just to point out that if there were to be new amendments tomorrow, they would not be able to do the analysis on the spot at the meeting.
The Chair: Very well. We’ll deal with that tomorrow. That may mean that if amendments are put forward, it might have to go to third reading. I just wanted to share that information.
Thank you very much again, Senator Ringuette.
(The committee adjourned.)