Criminal Interest Rate Regulations: SOR/2024-114

Canada Gazette, Part II, Volume 158, Number 13

Registration
SOR/2024-114 May 31, 2024

CRIMINAL CODE

P.C. 2024-625 May 31, 2024

Whereas the Minister of Justice has, in accordance with subsections 347.01(2)^{footnote a} and 347.1(2.1)^{footnote b} of the Criminal Code ^{footnote c}, consulted with the Minister of Finance with respect to the annexed Regulations;

Therefore, Her Excellency the Governor General in Council, on the recommendation of the Minister of Justice, makes the annexed Criminal Interest Rate Regulations under subsections 347.01(2)^{footnote a} and 347.1(2.1)^{footnote b} of the Criminal Code ^{footnote c}.

Criminal Interest Rate Regulations

Non-application — Business or Commercial Purposes

Criteria

1 For the purposes of subsection 347.01(1) of the Criminal Code, section 347 of that Act does not apply in respect of an agreement or arrangement if

• (a) the borrower is not a natural person;
• (b) the borrowing is for a business or commercial purpose; and
• (c) either
  • (i) the amount of the credit advanced is more than $10,000 but less than or equal to $500,000 and the annual percentage rate of interest — calculated in accordance with generally accepted actuarial practices and principles — does not exceed 48% on the credit advanced, or
  • (ii) the amount of the credit advanced is more than $500,000.

Non-Application — Pawnbroking Loans

Criteria

2 For the purposes of subsection 347.01(1) of the Criminal Code, section 347 of that Act does not apply in respect of an agreement or arrangement if

• (a) the person who receives interest carries on a business related to pawnbroking;
• (b) the credit is advanced in exchange for the pawning of tangible personal property or corporeal movable property, other than a vehicle;
• (c) in the event of the borrower’s default, the only recourse of the person referred to in paragraph (a) is the seizure of the pawned property; and
• (d) the amount of the credit advanced is less than $1,000 and the annual percentage rate of interest — calculated in accordance with generally accepted actuarial practices and principles — does not exceed 48% on the credit advanced.

Limit — Payday Loans

Limit on total cost of borrowing

3 (1) For the purposes of paragraph 347.1(2)(a.1) of the Criminal Code, the limit on the total cost of borrowing under a payday loan agreement is 14% of the amount of money advanced to the borrower under the agreement.

Clarification

(2) In determining whether a payday loan agreement complies with the limit fixed under subsection (1), the total cost of borrowing does not include a fee, fine, penalty or other charge that is specifically authorized under the applicable provincial law and imposed on the borrower

• (a) for defaulting in any payment; or
• (b) for providing a dishonoured cheque or other dishonoured instrument, if the amount of the fee, fine, penalty or other charge is $20 or less.

Definition of applicable provincial law

(3) In subsection (2), applicable provincial law means the legislative measures referred to in subsection 347.1(3) of the Criminal Code that apply in the province in which the payday loan agreement is entered into.

Coming into Force

S.C. 2023, c. 26

4 These Regulations come into force on the first day on which sections 610 to 612 of the Budget Implementation Act, 2023, No. 1 are all in force, but if these Regulations are registered after that day, they come into force on the day on which they are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Executive summary

Issues

Predatory lenders take advantage of some of the most vulnerable people in our communities, including low-income Canadians, newcomers to Canada, and those with limited credit history—often by extending very high interest rate loans. The current criminal interest rate under the Criminal Code of 60% effective annual rate (EAR) — equivalent to approximately 48% on an annual percentage rate (APR) basis — can trap people in a cycle of debt that they cannot afford nor escape.

The Budget Implementation Act, 2023, No. 1, amended section 347 of the Criminal Code to lower the criminal interest rate (also referred to as “the criminal rate”) to 35% APR. These amendments will come into force on a day or days to be fixed by order of the Governor in Council.

Setting a lower criminal rate under the Criminal Code may affect lending practices such as certain commercial loans as well as small-value collateralized loans, also known as pawn loans, both of which do not frequently trap Canadians in a cycle of debt. Commercial loans do not trap Canadians in a cycle of debt as they are extended to commercial entities, not individual Canadians. As pawn loans are collateralized, if consumers do not repay, their debt is extinguished when their collateral is retained by the lender, and therefore the borrower cannot become trapped in a cycle of debt (although in some cases, borrowers may re-borrow to prevent loss of the item).

The criminal interest rate applies to all lending arrangements in Canada, except for certain payday loans (provided certain conditions set out in the Criminal Code are met) and tax rebate advances.

Payday loans are defined in subsection 347.1(1) of the Criminal Code as an advancement of money in exchange for a post-dated cheque, a pre-authorized debit or a future payment of a similar nature. Subsection 347.1(2) specifies that exempt loans must be less than $1,500, for a period of 62 days or less. Overdraft protection, margin loans, pawnbroking loans, lines of credit and credit cards are explicitly excluded from the definition of payday loans. Additionally, the loans may only be made by provincially licensed lenders and the provinces licensing the lender must receive a designation by the Governor in Council. In order to receive such a designation, a province must have enacted a payday lending regime, in accordance with subsection 347.1(3) of the Criminal Code. Designated provinces currently set various limits on the cost of borrowing for payday loans, meaning that consumers face varying cost of borrowing charges for payday loans depending on the province in which the loan is issued. These varying limits on the cost of borrowing can therefore disproportionately affect certain consumers depending upon the province in which they live.

The Criminal Interest Rate Regulations (the Regulations) are needed to exempt lending practices from the criminal interest rate, that fall outside of the Government’s policy intent to crack down on predatory lending. Additionally, the Regulations are needed to impose a federal limit on the cost of borrowing for payday loans, harmonizing the cost of payday loans across provinces that have been designated because they have enacted a payday loan regime.

Background

The Criminal Code makes it an offence to (1) enter into an agreement or arrangement to receive interest at a rate exceeding 60% EAR; and (2) receive interest at a rate exceeding 60% EAR. The criminal interest rate was first introduced in section 347 of the Criminal Code in 1980. The amendments introduced as part of the Budget Implementation Act, 2023, No. 1 were a significant update to the criminal interest rate regime. The criminal rate is applicable to virtually all credit agreements and arrangements in Canada, including instalment loans, lines of credit, auto loans, auto title loans, credit cards, and more. The criminal interest rate provisions do not apply to transactions under the Tax Rebate Discount Act, and certain payday loan agreements. This latter exception was enacted through amendments included in former Bill  C-26, An Act to amend the Criminal Code (S.C. 2007, c. 9) in 2007.

When prosecuting the offence, the Crown must elect, based on the circumstances, either to proceed by indictment (which is reserved for more serious cases) or by way of summary conviction (for less serious cases). The penalties for section 347 are imprisonment for a term not exceeding 5 years, on indictment, or, in the case of summary conviction proceedings, a fine of not more than $25,000, or to imprisonment for a term of not more than 2 years less a day, or both.

Payday loan exemption

In 2007, section 347 of the Criminal Code was amended to provide an exemption from the application of the criminal rate provisions for payday loans provided certain conditions are met [i.e. the loan is $1,500 or less for a term of 62 days or less, issued by a licensed lender or someone who is specifically authorized by the laws of a province, and the province is designated by the Governor in Council in accordance with subsection 347.1(3)]. In order to receive this designation, a province must have in place legislative measures that protect payday loan users and must provide for limits on the total cost of borrowing for payday loan agreements. Currently, nine provinces have an approved payday loan regime. The territories and Quebec have not sought designation under these provisions, and as such any payday loan offerings in the territories and Quebec would be subject to the criminal rate.

Each province’s payday loan regime is different, although most provincial regimes include common consumer protection measures such as disclosure requirements, cancellation rights, and restrictions on wage assignments or loan rollovers. Currently, provincial authorities set a limit on the cost of borrowing for a payday loan, which can range between $14 per $100 borrowed (Newfoundland and Labrador) and $17 per $100 borrowed (Manitoba, and Saskatchewan).

Currently, provincial payday loan regimes also allow for a one-time dishonoured cheque fee of $20 in British Columbia, Manitoba, New Brunswick, and Newfoundland and Labrador, $25 in Alberta, Ontario, and Saskatchewan and $40 in Nova Scotia, while PEI does not impose a numerical limit on the dishonoured cheque fee that may be charged. A dishonoured cheque fee is imposed by a payday lender on a borrower when there are insufficient funds in a borrower’s bank account to cover repayment of the payday loan.

Government initiatives to crack down on predatory lending

In 2021, the Minister of Finance’s mandate letter included a commitment to crack down on predatory lenders by lowering the criminal interest rate in the Criminal Code. Additionally, this commitment was highlighted in Budget 2021. For the purposes of this analysis, predatory loans are considered to be credit products with high interest rates and/or fees. These products are generally provided by alternative lenders (e.g. lenders other than banks or credit unions).

Budget 2023 announced the Government’s intention to lower the criminal interest rate to 35% APR (roughly 41.2% EAR when compounded monthly), from 60% EAR (roughly 48% APR, compounded monthly) and set the maximum cost of borrowing for payday loans at $14 per $100 borrowed. Consequently, the Budget Implementation Act, 2023, No. 1 introduced legislative amendments to lower the criminal interest rate to 35% APR. The amendments also included two regulation-making authorities to (1) provide exemptions for certain types of loans from the criminal rate; and (2) fix a limit on the total cost of borrowing for a payday loan agreement. These provisions received Royal Assent with the passage of the Budget Implementation Act, 2023, No. 1, but are not yet in force.

Budget 2024 announced that the government would propose legislative amendments to the Criminal Code to prohibit the offering of credit at the criminal rate of interest, as well as to remove the requirement to obtain Attorney General consent to prosecute offences under section 347.

Objective

The objectives of the Criminal Interest Rate Regulations are to

• exempt certain types of loans from the criminal interest rate where the loan types will not lead to predatory lending practices; and
• limit the cost of borrowing of a payday loan at $14 per $100 borrowed and limit the amount that can be charged by payday lenders for a dishonoured cheque fee.

Description

Exemptions to the criminal interest rate

The Regulations exempt commercial loans (i.e. loans for a commercial, or business purpose when the borrower is not a natural person) valued above $10,000 and up to $500,000 from the criminal interest rate (which under the amendments in the Budget Implementation Act 2023, No. 1, will decrease to 35% APR), so long as the APR on these loans does not exceed 48%. Commercial loans above $500,000 will not be subject to the criminal interest rate, or any other any rate cap under the Regulations. Commercial loans $10,000 and below will be subject to the criminal interest rate, which under the amendments in the Budget Implementation Act, 2023, No. 1 will decrease to 35% APR.

The Regulations exempt small dollar, non-recourse collateralized loans, commonly referred to as pawn loans from the criminal interest rate, so long as the APR on these loans does not exceed 48% and the loan is valued at less than $1,000. Pawn loans valued at $1,000 and above will remain subject to the criminal interest rate, which under the amendments in the Budget Implementation Act, 2023, No. 1 will decrease to 35% APR.

Limit on the cost of borrowing for a payday loan

The Regulations impose a new federal limit on the cost of borrowing for payday loans of $14 per $100 borrowed in all provinces that have an approved payday loan regime. Lenders in provinces that currently have higher limits on the cost of borrowing will need to lend at the $14 per $100 rate to comply with the Criminal Code. In cases in which the payday loan is paid back in two weeks, this would result in an APR of over 350%.

The Regulations also exclude dishonoured cheque fees of $20 or less from the calculation of the $14 rate limit. This will effectively set a cap of $20 on the one-time dishonoured cheque fee that a payday lender could charge, in line with the lowest provincial allowable fee. Lenders that charge the $14 per $100 rate limit in provinces that currently allow for higher dishonoured cheque fees will need to lower their dishonoured cheque fees to $20 to comply with the Criminal Code.

The Regulations do not include interest on outstanding loan amounts in the $14 limit, as almost all provincial regimes allow for interest on outstanding loan amounts of up to 2.5% per month.

The Regulations will apply to all loans, including payday loans, entered into on or after the date in which the regulations come into force.

Regulatory development

Consultation

Previous consultations

In fall 2022, the Department of Finance (the Department) conducted a 60-day public consultation on lowering the criminal interest rate to curb predatory lending. The Department received more than 100 submissions through this consultation from industry associations, consumer groups, academics, and individual Canadians.

Following the Budget 2023 announcement to lower the criminal interest rate and introduce a cap on the cost of borrowing for payday lending, the Department held targeted consultations with select stakeholders to inform regulatory drafting on the exemptions to the criminal interest rate and the payday lending cap. The Department received over 50 submissions and initiated follow-up meetings with stakeholders to further discuss their submissions.

Feedback received during these consultations is summarized in the Regulatory Impact Analysis Statement (RIAS)published in the Canada Gazette, Part I, along with the proposed Regulations.

Regulatory consultation

The proposed Criminal Interest Rate Regulations (the proposed Regulations) and RIAS were prepublished in the Canada Gazette, Part I, for public comment on December 23, 2023, for a 30-day comment period ending on January 22, 2024. Overall, the Government received over 80 submissions from industry (including alternative lenders and pawn lenders), consumer advocates, provinces and territories, and individuals. The Government also had several meetings with alternative lenders prior to the close of the regulatory consultation period, to provide an avenue for these stakeholders to share their views.

Commercial exemption — Issues

On the commercial exemptions, the majority of the feedback received was around adjustments to the proposed Regulations. Some consumer advocates warned that the proposed Regulations would not be sufficient to protect small business borrowers who may require a loan for a variety of reasons. In order to ensure more protections for these borrowers, some suggested raising the minimum threshold from of the commercial exemption from $10,000 to $50,000.

However, lenders argued that the proposed Regulations would not go far enough in allowing for the extension of credit in the commercial lending space. Some requested lowering the exemption threshold to $2,500. Many also requested updates to the section of these regulations that highlights who will qualify for the exemption, stating that “natural persons” might exclude sole proprietors. Some recommended instead requiring lenders to have borrowers sign a confirmation that the loan will be used for commercial purposes.

Commercial exemption — Response

No adjustments were made to the thresholds to qualify for the commercial exemption, as the exemption maintains a balance in avoiding unintended consequences in the commercial credit market while reducing the risk of regulatory arbitrage or the creation of loopholes.

In terms of the natural person requirement, the Government notes that many sole proprietors exhibit similar borrowing patterns and amounts to consumer borrowing, leading to the potential creation of a regulatory loophole.

Pawn loan exemption — Issues

On the pawn loan exemption, pawn lenders requested updates to the wording, to account for storage and handling fees. Many pawn loan borrowers also wrote in support of pawn lending services. However, some stakeholders, primarily consumer advocacy groups, wrote in that this exemption would hurt vulnerable borrowers and were not in favour of this exemption.

Pawn loan exemption — Response

No adjustments were made to the pawn loan exemption. The exemption effectively allows pawn lending to operate as it has since the introduction of the criminal rate of interest, and exempting storage and handling costs would require legislative amendments to the definition of interest, which are outside the scope of these regulations.

Other exemptions — Issues

Lenders also requested other types of exemptions for consideration. These include a small dollar exemption for unsecured loans of $5,000 or less, an exemption for debt consolidation loans, and an exemption for voluntary acts of the borrower (i.e. the borrower repays the loan early).

Other exemptions — Response

No other exemptions were provided. An exemption for unsecured loans of $5,000 or less, while mitigating concerns around potential losses of access to credit, would be misaligned with the policy intent of helping consumers avoid a cycle of debt that they cannot afford nor escape. Further, stakeholders representing consumers have not raised concerns around accessibility to high-cost credit. Finally, this type of exemption could potentially be susceptible to abuse by borrowers and/or lenders (e.g. stacking of multiple loans). In terms of an exemption for debt consolidation loans, these types of exemptions are similarly misaligned with the policy intent of helping consumers avoid a cycle of debt, as they can be very high interest, and are potentially susceptible to abuse by lenders. The Regulations do not include an exemption for voluntary acts of the borrower, as the legislative authority for the Regulations would not allow for such an exemption. Such an exemption would fall outside the scope of these Regulations.

Payday lending — Issues

On the payday lending cap, many stakeholders (e.g. consumer advocates and academics) noted that this is a step in the right direction. However, many of them called for further action to repeal the exemption altogether. Payday lenders were not in favour of the cap, arguing that this cap will lead to lenders exiting the market. These lenders were also against the dishonoured cheque fee cap, stating that the fee represents the costs a lender incurs as a result of a default.

Payday lending — Response

No adjustments to the maximum cost of borrowing on payday loans or to the maximum allowable dishonoured cheque fee were made. The cap and maximum allowable dishonoured cheque fee are harmonizing the most stringent requirements already in force among provinces.

Timing— Issues

Lenders were against the proposed implementation timeline of 3 months following final publication, requesting more time to adjust. Many noted that the actuarial definition of APR, for the purposes of calculating the criminal interest rate in the Criminal Code, will not be finalized until May, and they would need more time to update their systems accordingly (as they are currently subject to an EAR cap). Suggested implementation dates range from 6 months to 2 years. Provinces also requested more time to align their legislation, so as to ensure compliance from licensees in the market, and to educate borrowers of the new maximum rate cap. Suggested timelines ranged from 6 months to one year following final publication.

Timing — Response

The Government has carefully considered this feedback in the proposed timing and the coming into force has been adjusted to allow more time for implementation. The adjusted coming into force represents the lower end of the range of implementation dates suggested by some stakeholders and provinces.

Other — Issues and responses

Several lenders expressed disappointment that a formal cost benefit analysis was not conducted for the criminal interest rate change, from the equivalent of 48% APR, to 35% APR. The Government notes that, as this is a legislative change rather than regulatory change, a formal analysis will not be published and is outside the scope of this RIAS.

Other minor technical adjustments were made to the regulations to refer to loan agreements neutrally, instead of in the past tense.

Related consultations

In October 2023, the Government launched consultations to explore further lowering the criminal interest rate, increasing access to low-cost, small-value credit in Canada, and on additional revisions to the payday lending exemption. The consultations also solicited feedback from stakeholders on strengthening enforcement.

In response to feedback from this consultation, Budget 2024 announced that the government intends to amend the Criminal Code to enhance enforcement of the criminal rate of interest by prohibiting offers of credit at a criminal rate of interest and allowing for prosecutions of illegal lenders without the approval of the Attorney General. Under the current law, a crime has not been committed until a borrower enters into an agreement or arrangement to pay interest at a criminal rate, regardless of the intent of the lender. Some borrowers receiving loans at illegal rates of interest may be reluctant to come forward to law enforcement for a variety of reasons. The proposal to prohibit offers of loans at a criminal rate would enable law enforcement to directly target illegal lenders. Furthermore, the proposal to eliminate the Attorney General consent requirement would address a barrier identified by stakeholders, to enforcement of the criminal rate.

Modern treaty obligations and Indigenous engagement and consultation

Indigenous peoples may be positively impacted by the Regulations. Data from the 2019 Canadian Financial Capabilities Survey indicates that respondents who self-identify as Indigenous were generally more likely to have borrowed using a payday loan over the past 12 months of the survey period, particularly for the low-income households. For that year, the group which self-identified as Indigenous accessed payday loans at a higher rate than the average, with 5% of Indigenous respondents accessing payday loans compared to 1.3% of non-Indigenous respondents. As such, given Indigenous peoples are more likely to access payday loans, they will benefit from a lower cost of borrowing of $14 per $100 fixed by the Regulations.

The Regulations are not expected to impact potential or established Aboriginal or treaty rights, which are recognized and affirmed under section 35 of the Constitution Act, 1982.

Instrument choice

The criminal interest rate is set out in the Criminal Code. Once the changes enacted in the Budget Implementation Act, 2023, No. 1 are in force, the Criminal Code will also authorize the Governor in Council to make regulations providing for exemptions to the application of this rate. Regulations are the only viable instrument to provide for such exemptions, as such, no other instrument was considered.

Regulatory analysis

Benefits and costs

The complete cost-benefit analysis developed to support these regulations is available upon request.

Several changes have been made to the analysis since the prepublication in the Canada Gazette, Part I. The revised payday lending analysis uses updated data, as several provinces have published new data on the payday lending market since prepublication and one province (Nova Scotia) has lowered its payday lending rate cap. As indicated below, these changes are anticipated to come into force January 1, 2025. As such, the first year of the analysis is 2024 and only captures the one-time costs to lenders (to update marketing, disclosures, etc.) as this would need to be done in advance of the coming into force date. All other impacts start in 2025.

Furthermore, there is a more in-depth assessment of consumer outcomes for borrowers that may be excluded from the payday lending market as a result of these changes. The analysis is summarized below.

Exemptions to the criminal interest rate

Commercial lending does not require the same degree of regulatory oversight as personal loans. Often, commercial loans require high rates of return to attract capital investments and are usually undertaken by parties that understand risk versus return trade-offs occurring as a part of diversified portfolios designed to hedge risks. Overly restrictive rules on these types of loans could have a cooling effect on transactions that, all factors considered, would be beneficial to both parties and the economy.

Moreover, commercial loans do not trap individuals in Canada in a cycle of debt. In addition to capturing certain commercial lending practices that are outside the policy intent, further lowering the criminal rate could restrict the ability of sophisticated commercial entities to engage in borrowing transactions. This is why the Regulations will exempt commercial loans from the new lower criminal rate.

Specifically, the Regulations will exempt commercial loans valued between $10,000 and $500,000 from the amended criminal interest rate of 35% APR, but will maintain the 48% APR limit. This will continue to apply in cases in which the borrower is not a natural person, and the loan is used for business and commercial purposes. This effectively ensures that some business borrowers, particularly small business borrowers, continue to benefit from a certain level of protection, while being able to access credit that would not be provided at an interest rate of less than 35% APR.

Commercial loans valued below $10,000 will not be exempted from the new criminal rate of 35% APR under the Regulations. Very few commercial loans are issued for values below $10,000 and such loans are less likely to be a part of a larger diversified investment portfolio. Commercial loans below $10,000 will be subject to the new criminal interest rate to disincentivize lenders from manipulating regulatory exemptions and circumventing the criminal rate by issuing consumer loans as commercial loans. Because few commercial loans are valued below $10,000, this will have a very minimal cost impact on lenders/commercial borrowers. In general, consumer borrowers will benefit from the reduced risk of lenders attempting to circumvent the new criminal rate.

Commercial loans valued above $500,000 will not be subject to the criminal interest rate. This is to avoid contractual frictions and ensure healthy and productive investments in areas of venture capital and private equity, which may currently be limited with a criminal rate of 48% APR. Commercial lending transactions above $500,000 represent a level of sophistication that does not require protection through the criminal interest rate provisions. Further, there are very few commercial transactions for loans above $500,000 at values approaching an interest rate of 48%, so costs to lenders/borrowers are limited. Exempting commercial loans above $500,000 from the criminal rate will present benefits to some limited forms of sophisticated transactions, such as venture capital financing and automotive floor financing. These types of transactions do not affect low income and economically vulnerable Canadians.

Small-dollar, non-recourse, collateralized loans, commonly referred to as pawn loans, are different from other types of borrowing, as obtaining such a loan does not depend on a borrowers’ income or credit. Pawn loans are secured by collateral. If the loan is repaid, the collateral is returned to the borrower. If the loan is not repaid, the lender retains the collateral, covering any outstanding obligation and protecting the borrower from a debt that they might not be able to service, which is one of the primary policy objectives of the new, lower criminal rate. As such, these loans do not cause the same level of harm as other loans in that a cycle of debt is not created or perpetuated by a default, as they do not affect borrowers’ credit scores or ability to secure other borrowings. It should be noted that in some cases, borrowers may re-borrow to prevent loss of the item. However, given the relatively lower degree of harm, the Regulations will therefore maintain access to this small-value collateralized lending product.

Pawn loans valued at or above $1,000 will continue to be subject to the criminal interest rate, which is decreasing to 35% APR, so as not to incentivize lenders to manipulate regulatory exemptions and circumvent the criminal interest rate to issue consumer loans. For example, absent this threshold, alternative lenders that offer high-cost instalment loans may be incentivized to obtain pawn licenses to offer high-value “collateralized” loans. It should be noted that very few pawn loans are issued for values at or above $1,000.

As the exemptions provided by the Regulations will remove restrictions and be permissive in nature, it is assumed that impacted individuals and businesses generally behave rationally and only undertake such exchanges in situations they deem to be in their best interest. The pawn exemption will largely maintain the status quo by subjecting the majority of pawn loans to the current criminal rate, there are no monetized cost and benefits to those elements of the regulations. Similarly, the status quo is largely maintained for commercial loans below or equal to $500,000 (in terms of the applicable maximum rate of interest). While there may be some positive monetary benefits for commercial loans above $500,000 that are no longer subject to a rate limit, due to the variability in the number and value of loans issued, those impacts are not monetized.

Limit on the cost of borrowing for payday loans

Some stakeholders have advised that lowering the criminal interest rate, with no action to reduce the cost of borrowing for payday loans, could increasingly push consumers toward payday loans. As the limit on the cost of borrowing for a payday loan varies by province, the Regulations impose a federal limit to qualify for the payday loan exemption from the criminal rate of interest under section 347.1 of the Criminal Code, and harmonizes payday lending costs across provinces that allow for payday loans, aligning it with the lowest provincial limit on the cost of borrowing for a payday loan, in Newfoundland and Labrador.

The following model quantifies the costs and benefits of the federal limit on the cost of borrowing of a payday loan. The model assesses two scenarios: In the baseline, over an 11-year period, maximum rate caps (including rate caps on dishonoured cheque fees) are determined by the provinces and are assumed to be maintained at current levels. In the regulatory scenario, over the same 11-year period, a federal maximum limit on the cost of borrowing for a payday loan of $14 per every $100 applies in relevant jurisdictions, as well as a maximum dishonoured cheque fee of $20. The incremental impacts of the Regulations are measured as the difference between these two scenarios.

Provincial payday loan data from Alberta, British Columbia, and Nova Scotia are available over various years. Data from 2022, the most recent year for which data are available for all three provinces, are used for estimating costs and benefits. All dollar values presented in this analysis are expressed in 2022 dollars. As of the latest available data, there is variability in provincial limits on the cost of borrowing, expressed as the maximum cost of borrowing for a $100 payday loan:

• $17 in Manitoba and Saskatchewan,
• $15 in Ontario, Prince Edward Island, New Brunswick, Nova Scotia, Alberta, and British Columbia, and
• $14 in Newfoundland and Labrador.

To simplify the analysis, the population weighted average of the allowable maximum charge per $100 is used. This works out to roughly $15.17 per $100 in the baseline and $14 per $100 under the Regulations.

Furthermore, there is currently variability in the provincial limits for the maximum allowable dishonoured cheque fee charged by payday loan providers. They are as follows:

• $40 in Nova Scotia;
• $25 in Alberta, Ontario, and Saskatchewan;
• $20 in British Columbia, Manitoba, New Brunswick, and Newfoundland and Labrador; and
• Unspecified in Prince Edward Island.

As with loan costs, the population weighted average of the allowable dishonoured cheque fee is used to simplify the potential impact. It is assumed that the average maximum in Prince Edward Island is $25 (discussed below). As such, the national population weighted average allowable charge would go from $24.24 in the baseline to $20 under the Regulations.

The additional following assumptions are made:

• There are no payday loans offered in provinces and territories if they have not received a payday loan exemption designation from the Governor in Council. As such, Quebec and the territories are thus excluded from the analysis.
• Payday loan usage is proportional to the population of the province. Due to the lack of data on payday loans in certain provinces, provincial population data is assumed to be the most accurate method for estimating the value of payday loans and the number of payday loan customers in a particular province.
• As of January 1, 2024, the maximum cost of borrowing in Nova Scotia fell from $17 per every $100, to $15 per every $100. Given that the most recently available data does not capture the current rate and that there has not been sufficient time to observe the changes associated with the new rate, it is assumed that the data points (i.e. number of payday loan customers, total number of payday loans, etc.) from the year ending June 30, 2023, would remain unchanged. As such, this model uses data from Nova Scotia from the year ending June 30, 2023.
• The volume (in dollars) of loans is a function of the price elasticity of supply. This assumes that if the maximum rate that can be charged for a payday loan declines, the supply of payday loans will decline as a result. This assumption is in line with economic theory of price elasticity of supply. This elasticity is estimated using a decrease in the number of storefronts in Ontario, following several rate changes in the province (from $21 to $15 per $100 loan).
• Volume of loans is assumed to grow at a real (over and above inflation) rate of 2% under both the baseline and regulatory scenarios.
• Supply and demand of payday loans will not be impacted by the lowering of allowable charges for insufficient funds. This assumption is based on the belief that charges for insufficient funds on cheques to cover payday loan liabilities are used as a tool by lenders to encourage borrowers to ensure sufficient balances are available in their accounts. The $20 limit is deemed adequate to achieve this objective and thus no change in borrower behaviour is modelled and rates of default loans will not increase. In addition, lenders are not assumed to view these charges as a reliable source of revenue within their business model and thus will be unlikely to restrict supply of loans in response.
• All loans in default are due to dishonoured cheques or a dishonoured debit. The payday loan regulations cap the amount a payday lender may charge a borrower for a dishonoured instrument to $20. This limits the charges that are permitted in provinces such as Alberta, Ontario, and Saskatchewan. In order to estimate the impacts of this change, this assumption is required.
• The average dishonoured cheque fee in Prince Edward Island is $25. While it could potentially be higher, the payday lending market in the province is very small relative to the rest of the country, and as such, any dishonoured cheque fee amount will result in very little incremental impacts and little impact on the results of the nationwide analysis.
• There is a 5% increase in the average number of loans taken on by a borrower. This assumption is based on academic reports that estimate that the number of payday loans per borrower increases when the maximum interest rate on payday loans is decreased. This is likely a result of payday lenders issuing loans to existing borrowers they have a positive repayment history and an established relationship with the lender.
• Payday loan users are charged the maximum allowable interest in their province. This assumption is based on feedback from a number of consumer groups and industry members.
• The number of consumers seeking a payday loan will not diminish in the regulatory scenario. However, some of these borrowers will no longer qualify to borrow from regulated payday lenders. This assumption is supported by an industry member’s response to the consultation period.
• All operating expenses incurred by the lender remains the same in both scenarios. Bad debt expenses remain at the same proportion of revenue in both scenarios. This assumes that lenders have some control over bad debt and other expenses in the short run, while operating expenses are fixed.
• Industry will incur a one-time cost with these regulatory changes, for the purposes of updating their operations (e.g. updating IT systems, marketing materials, etc.). The estimate of these costs is provided by industry and are assumed to be accurate. These costs will occur before any official rate change (in 2024).

The variables investigated for the purposes of this cost-benefit analysis include changes in profits for firms, and estimated savings to borrowers. All dollar values are expressed in 2022 dollars.

To calculate the costs of the Regulations, the loss in producers’ surplus is estimated, using a cost breakdown supplied by industry. The cost of the Regulations is estimated as the difference between the estimated industry profit in the baseline scenario, as a function of total loans issued, and the estimated industry profit in the regulatory scenario.

To estimate the benefits to payday loan borrowers, the differential in the cost of borrowing is applied to the total value of loans that continue to be issued in the regulatory scenario. On average, consumers will save $1.25 for every $100 on payday loans. Since the estimated value of interest paid declines in the regulatory scenario, it can be concluded that the Regulations will provide cost savings to consumers that are able to borrow money in both the baseline and regulatory scenario (remaining customers).

As described in the tables below, Canadian borrowers are collectively saving approximately $29.7 million in interest on payday loans, as well as on dishonoured cheque fees, in the first year and $225.9 million over 11 years. This results in cost savings of about $50.56 per customer for all remaining customers, in the first year. Savings to borrowers are expected to come at a cost to industry profits, which are expected to decline by $30.7 million in the first year and $207.6 million over 11 years. This results in a net present value benefit to society of $18.2 million ($225.9 million minus $207.6 million).

Cost-benefit statement

• Number of years: 11 years (2024–2034)
• Base year for costing: 2022
• Present value base year: 2024
• Discount rate: 7%

Monetized costs (in $M)

Impacted stakeholder	Description of cost	First year and base year (2024 and 2025)	2028	2034	Total (present value)	Annualized value
Industry	Ongoing loss in profits	$26.8	$28.4	$32.0	$203.7	$27.2
	One time cost (e.g. updating IT systems, marketing materials, etc.)	$3.9	$0	$0	$3.9	$0.5
All stakeholders	Total costs	$30.7	$28.4	$32.0	$207.6	$27.7

Monetized benefits (in $M)

Impacted stakeholder	Description of benefit	First year and base year (2024 and 2025)	2028	2034	Total (present value)	Annualized value
Consumers	Savings on loan fees	$27.8	$29.5	$33.2	$211.6	$28.2
	Savings on dishonoured cheque charges	$1.9	$2.0	$2.2	$14.3	$1.9
All stakeholders	Total benefits	$29.7	$31.5	$35.5	$225.9	$30.1

Summary of monetized costs and benefits (in $M)

Impacts	First year and base year (2024 and 2025)	2028	2034	Total (present value)	Annualized value
Total costs	$30.7	$28.4	$32.0	$207.6	$27.7
Total benefits	$29.7	$31.5	$35.5	$225.9	$30.1
NET IMPACT	($1.0)	$3.1	$3.5	$18.2	$2.4

Quantified (non-$) and qualitative impacts

Positive impacts

• Modelled results indicate that the number of payday loan borrowers will decrease by close to 45 000 Canadians. For some borrowers this will lower the risk of them falling into a cycle of debt. Canadians that are likely to benefit from this change will either seek out other sources of lower-cost debt or delay discretionary spending until they are able to pay for the product or service using savings. While it could be argued that individuals would only borrow money if they determine it to be in their best interest, associated late charges and interest means that many customers underestimate the overall cost of the loan.

Negative impacts

• Under the model examined, results indicated the number of loans issued decreased by over 90 000 loans in the first year. This means that some subprime borrowers may be unable to access credit from payday lenders. The resulting reduction in loans will have a variety of outcomes. As mentioned, for some this will be beneficial. However, for others a lowered supply of loans could result in additional costs such as incurring consequences for late payments on other financial obligations such as utilities. If the late payment results in disconnection of service, reconnection charges could be significant. This could also result in additional non-sufficient funds fees from banks. In extreme cases borrowers may seek out black-market lenders (loan sharks). Loan sharks charge rates above criminal limits and may use threats and/or violence to encourage repayment.
• Lender profits decrease by close to 50%, or nearly $27 million in the first year. In addition to the lowered profits, consolidation of the industry could also be an impact of the Regulations. In the long run, there may be fewer companies offering payday loans and each company could limit the number of outlets in operation, limiting overhead costs. This may also drive an increase in payday loans offered exclusively through low-cost online providers. This restricted access could increase search costs for customers, offsetting savings from lowered interest rates.

Sensitivity analysis

To examine the impacts of different variables on the outcomes of the Regulations, a sensitivity analysis was conducted on the price elasticity of supply (scenarios 1 and 2).

Scenario 1

In scenario 1, results were estimated assuming an increased price elasticity of supply of 0.41, compared to 0.31 in the regulatory (central) analysis. This ensures that the results are robust to variations in this assumption, which is uncertain given the limited data on which it was based. Since industry members have suggested that a rate cap will result in a decrease in payday loans, an increase in elasticity was considered a possibility. With the increased elasticity in supply, there would be a greater restriction of supply resulting from the decreased loan rates and total volume of loans supplied under the Regulations would drop from $2.28 billion to $2.21 billion, in the first year. As a result of this change, consumers are expected to save an average of $50.69 with benefits totalling $29.5 million in the first year.

In the first year, lenders would also see a slight decrease in profits from $26.8 million in the central scenario to $25.1 million in scenario 1. This represents a profit loss of $28.6 million from the baseline scenario when taking into account one-time costs.

Overall, the net present value of the Regulations in scenario 1 is $18.1 million, a decrease from the estimated net present value in the central scenario of $18.2 million.

Scenario 2

In scenario 2, it is assumed that price elasticity of supply is equal to 0.21, a decrease from what is estimated in the central scenario. This will allow for the estimation of costs and benefits in the event that supply is not as responsive to a change in price. In scenario 2, the total loan volume disbursed in the first year is estimated to be $2.24 billion, a slight increase from what is estimated in the central scenario ($2.22 billion). The total number of borrowers will decrease in this scenario, by close to 41 000. In this scenario, consumers are expected to save $50.43 each, totalling $29.8 million in the first year.

Additionally, as a result of a change in total loan volumes, lender profits are estimated to decline by $24.9 million (in the first year) from the baseline scenario. This is a smaller decrease than what is estimated in the central scenario of $26.7 million.

Overall, the net present value impact of the Regulations in scenario 2 is $47.0 million, a large increase from the net present value of the central scenario ($18.2 million) and scenario 1 ($18.1 million).

The results in scenarios 1 and 2 imply that the model is very sensitive to the uncertainty inherent in the price elasticity of supply. This demonstrates that the true impacts of the Regulations are largely dependent on the market response to the Regulations.

Summary of monetized costs and benefits in base year (in $M)

Impacts	Central Scenario	Scenario 1	Scenario 2
Total costs	$30.7	$32.5	$28.9
Total benefits	$29.7	$31.5	$31.7
Net impact	($1.0)	($1.0)	$2.8
Net present value (over 10 years)	$18.2	$18.1	$47.0

Distributional analysis

In general, payday loan borrowers often have lower income and less savings. The Financial Consumer Agency of Canada’s (FCAC) 2016 study of payday loan borrowers in Canada found that 53% of payday borrowers earned less than $55,000 annually. Additionally, 62% of respondents reported that their savings would cover less than three months of expenses. Only 24% reported they would be able to pay for an unexpected purchase of $500 with their existing savings.

Based on publicly available provincial data, it is estimated that there were over 600 000 payday borrowers in Canada in 2021. The FCAC estimates that by September 2022, 4.52% of Canadians had used a payday loan in their lifetime to manage daily expenses. Indigenous peoples, recent immigrants, Canadians with low income, and women are over-represented in these results.

Payday borrowers are often working age and living in an urban area. The FCAC reports 72% of payday loan borrowers were between 25 and 54 years of age and 83% live in an urban area.

Although payday loan users borrow for a number of reasons, most borrow to cover necessary expenses. For instance, FCAC’s 2016 report found that 45% of respondents used a payday loan for a necessary and unexpected expense while 41% borrowed for a necessary but expected expense. Only 7% of respondents reported using the loan to “buy something special.” As to why borrowers use payday loans instead of cheaper credit alternatives, many reported being unable to access these alternatives.

Based on this research, the Government estimates that low-income individuals between the ages of 25 and 54 will disproportionately benefit from the Regulations as most will be able to continue borrowing but at a lower cost. Indigenous peoples, recent immigrants, individuals with low income, and women are likely to benefit from the Regulations to the extent that they use payday loans. These groups are expected to benefit the most from the Regulations.

Of the borrowers who will lose access to payday loans, it is expected some of these individuals will benefit, such as through finding a cheaper source of credit or from foregoing credit entirely, thereby saving on interest payments. Survey reports find that when denied credit from alternative lenders, some consumers turn to family, friends, or community organizations to borrow funds. These borrowing options may sometimes be less risky to consumers as they are less likely to fall into a cycle of debt.

Some consumers who are denied a payday loan experience harms, such as missing a bill payment or foregoing a necessary expense. If unable to find alternative forms of credit, these borrowers may face late payment fees or other negative outcomes as a result of losing access to payday loans. As suggested by industry stakeholders, some borrowers may even seek out illegal loans if they are unable to access a payday loan from a regulated lender.

Small business lens

Analysis under the small business lens concluded that the Regulations will impact small businesses.

In terms of the exemptions to the criminal interest rate for commercial loans, the Regulations do not apply the new criminal rate to loans greater than $10,000 and exempt loans greater than $500,000 from application of any maximum interest rate. These exemptions will be permissive in nature and facilitate businesses operating in a similar manner as before the decrease in the criminal rate. This will aid small businesses in their ability to attract capital investment for high-risk endeavours by offering high rates of return, allowing them to grow quicker and hedge personal risk by sharing it with potential lenders.

Most pawn lenders are small businesses. As with exempted commercial loans, exemptions will allow them to operate in a manner similar to the status quo. In this sense, the Regulations are beneficial to small businesses and will allow them to offer loans of less than $1,000 that are secured by collateral at higher rates than in the baseline.

In terms of the cost of borrowing cap on payday loans at $14 per $100 borrowed, some payday lenders may be classified as small businesses, and as such will be impacted by the Regulations. We expect that by imposing a rate cap on payday loans, the industry may shrink and may force some lenders out of business. There is evidence to suggest that decreasing the maximum rate cap can lead to decreased numbers of payday lending outlets. As such, there may be decreased competition in the payday loan market as larger companies gain market share. The new limit on the cost of borrowing for a payday loan may create compliance costs for lenders, such as adjusting IT systems, signage, and marketing to borrowers. Lenders estimate that this fixed cost will total $3.9 million nationally. Due to data limitations, it is unclear what portion of payday lenders issuing payday loans are small businesses. According to a 2016 CARDUS report, 35% of payday lenders are small businesses. From available provincial data, the Government estimates that there are over 1 000 payday lenders in Canada. Taking the lower bound of this estimate (1 000), the following impacts to small businesses are below.

Given the main objective of the Regulations of providing protection to Canadian borrowers from excessive charges for loans, flexible compliance options were not considered.

Small business lens summary

• Number of small businesses impacted: 350
• Number of years: 11 (2024–2034)
• Base year for costing: 2022
• Present value base year: 2024
• Discount rate: 7%

Total compliance and administrative costs (in $M)

Totals	Annualized value	Present value
Total cost (all impacted small businesses)	$9.5	$71.3
Cost per impacted small business	$0.03	$0.20

One-for-one rule

The one-for-one rule does not apply, as there is no incremental change in administrative burden on business and no regulatory titles are repealed. The Regulations do not impose any additional administrative burden on businesses as there is no requirement to prove an entity is eligible for exemption to the criminal interest rate. Similarly, there is no requirement for entities to prove to a federal regulator that their payday loan offerings are below the cap. Businesses, at their own discretion, may choose to maintain records as proof of innocence in the event of a case of criminal proceedings. As such, the one-for-one rule does not apply.

Regulatory cooperation and alignment

The Government has conducted, and commissioned, research into the regulatory environment of international jurisdictions. Specific international jurisdictions that have been researched include the United Kingdom, Ireland, Australia, New Zealand, and the United States in terms of maximum costs of borrowing, and exemptions thereto. The Regulations align to some extent with the exemptions to interest rate caps in those jurisdictions. For example, commercial loans are exempted from interest rate caps in many US states, United Kingdom, Ireland, Australia, and New Zealand. Pawn loans are exempted from maximum interest rate caps in Australia, as well as some US states. Further, the Government has consulted with provincial partners with existing payday lending regimes to ensure that the federal approach to cap payday lending aligns with provincial legislative regimes.

Strategic environmental assessment

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required.

Gender-based analysis plus

FCAC data demonstrates that Indigenous Peoples, recent immigrants, Canadians with low income, and women are over-represented in the percentage of Canadians that have used an online or payday lender. Users of payday loans generally have lower income and may be experiencing poverty.

These groups will benefit from this measure to the extent that they rely on payday loans. Additionally, any individual in Canada that relies on payday loans will benefit from the Regulations. However, a small proportion of potential borrowers who lose access to credit may experience some harm as a result of the Regulations. Some of these harms may include exclusion from this market and potentially turning to illegal lending.

Implementation, compliance and enforcement, and service standards

Implementation

The Regulations will come into force on the same day on which the amendments to the Criminal Code to lower the criminal rate of interest come into force January 1, 2025. The period in between final publication and coming into force will allow lenders to adjust their operations, including IT systems, signage, and marketing to align with the requirements, and allow provinces additional time to make adjustments, as requested.

Compliance and enforcement

The criminal interest rate has been and will continue to be enforced under the Criminal Code, and the exemptions to the criminal interest rate in the Regulations will also be enforced by provincial police forces. Lenders in breach of the criminal rate, and the non-payday exemptions thereof, are at risk of prosecution.

In designated provinces with a payday lending regime and existing limits on the cost of borrowing for payday loans, the new federal limit on the cost of a payday loan will continue to be enforced by the appropriate provincial regulator. Because relevant provincial regulators already enforce provincially set limits on the cost of borrowing for payday loans and other consumer protection measures related to payday loans, it is expected that they will be able to implement the new federal limit within this transition period. No new funding will be required to support provincial regulators with implementation.

Contacts

Mark Radley
Email: consultationconsumeraffairs.consultationconsommation@fin.gc.ca

Or

Department of Justice
General inquiries:
Telephone: 613‑957‑4222
Email: webadmin@justice.gc.ca