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Canadian credit unions welcome payday loan regulations while looking for alternatives to serve members.
The federal government is tightening Canada’s regulations around payday loans to restrict the amount of interest that can be charged. Credit unions have been developing responses to help members understand the impact of the changes and what lending alternatives are available.
The government’s aim is to protect financially vulnerable Canadians from predatory lending. People who need cash fast can face extremely high-interest rates for short-term, immediate loans. The government is cutting the maximum rate of interest that can be charged from 47% annual percentage rate down to 35% for most lending. For payday loans and tax-rebate advances—quick cash that is borrowed in the expectation that it can be repaid fast—the maximum is being set at $14 per $100 borrowed.
The goal is to ease that situation where lending ceases to be a business transaction and becomes more like a criminal shakedown. In the Canada Gazette, which publishes new federal regulations, the government explained that: “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.”
Trapped in a Cycle of Debt
These loans “can trap people in a cycle of debt that they cannot afford or escape,” the government said.
Credit unions support protecting consumers and point out that they understand the dilemma that vulnerable people can face when they need quick access to funds. In a submission to the federal government’s consultation on predatory lending, the Canadian Credit Union Association noted that there are often few good choices for the vulnerable.
“Across Canada, alternative lenders remain a primary, and in some cases the only, option for many borrowers who need funds to cover everyday living expenses or unanticipated emergencies,” said the CCUA, which represents 197 credit unions that control $301 billion of assets, serving more than six million Canadians.
The association recommended that the criminal rate of interest be even lower than 35%, suggesting it be reduced gradually to a range of 20 to 30%. “The calculation of interest should exclude overdraft and nonsufficient funds fees, which are typically assessed when a payment cannot be processed due to insufficient funds in [a borrower’s] chequing account,” the group said.
“The current environment of high-cost installment loans offered by alternative lenders leaves many Canadians vulnerable to debt cycles and other associated costs. For instance, money that households could have put towards savings, or to purchase goods and services in their community, is instead used to service high debt costs.”
Lack of Alternatives to Payday Lending
The CCUA says that people turn to alternative lenders that charge high interest because there’s often no alternative. In May 2023, the Canada Mortgage and Housing Corp. (CMHC) reported that Canada’s household debt is the highest among the G7 countries, exceeding the national gross domestic product.
“The burden of servicing debt does not go away when people lose their jobs; the burden continues until the debt is paid off,” CMHC said.
A survey published in June 2023 by the Financial Consumer Agency of Canada, the that enforces consumer protection legislation, found that 3.6% of respondents had used an online lender or payday loan company between August 2020 and December 2022.
“People are desperation borrowing, and this is one notch short of loan-shark stuff,” said Scott Terrio, credit counsellor and manager of consumer insolvency at Hoyes, Michalos & Associates in Toronto in an interview with CBC Radio. He said that in 2022, 53% of the insolvencies his firm filed for clients included at least one fast-cash loan, up from 21% in 2010.
Some people who need money fast go to payday lenders because they don’t have bank accounts and can’t easily find anywhere else to go for funds. “Although Canada is one of the most highly banked nations in the world, with 96% of Canadians having a formal bank account, there continues to be a large number of unbanked, mainly from low-income and Indigenous populations,” the CCUA says.
“Even those who have bank accounts sometimes avoid using them if they have bad debts and are afraid their accounts may be garnisheed. Poor customer service and cultural insensitivity are [also] common barriers facing racialized minorities in Canada, especially people of colour,” it says.
Research also shows that not all people who take out payday loans are from low-income households. In a report prepared for CCUA in October 2021, called “The Role of Credit Unions in Providing Alternatives,” Laura Lamb noted that “payday loan borrowers are not a homogeneous group.”
During the last decade, it was found that “close to 40% of payday loan borrowers have household income[s] of $55,000 or greater and 20% have incomes of $80,000 or greater,” wrote Lamb, economics professor at Thompson Rivers University in Kamloops, British Columbia.
CCUA also notes that, “Conventional financial institutions' disinterest in engaging in business where there may be no additional opportunities for growth, and consumers not meeting the account opening requirements can limit [borrowers’] options.”
Effects of New Regulations
Payday lenders say the new regulatory changes will force them out of business, since these quick loans will no longer be profitable. The dilemma is that while ultra-high-interest loans can exploit peoples’ desperation, they also fill a need—people who don’t have easy access to loans still sometimes need to come up with cash fast.
In February 2024, the Ontario Association of Chiefs of Police (OACP) and the Canadian Lenders Association released a study raising their concerns that the new federal rules “could lead to a dangerous rise in criminal activity.” The Canadian Lenders Association represents some 300 banks and non-bank lenders in Canada but does not represent the payday lending sector.
Lowering the maximum interest rate runs the risk of “endangering Canadians who are already at risk of not making ends meet,” said the report.
"The legislation has the potential to create a vacuum for criminals to fill," says Barry Horrobin, Co-Chair of the OACP's Community Safety and Crime Prevention Committee.
“This is a bad policy that is going to leave millions of Canadians without access to loans during an affordability crisis," says Gary Schwartz, president/CEO of the Canadian Lenders Association. "The government has failed to think this through."
The OACP’s and CLA’s concern is that illegal predatory lenders could take advantage of Canadians by operating online from outside Canada. “By forcing legal, responsible lenders out of the marketplace, we worry Canadians will be targeted by this type of criminal activity," Schwartz says.
The police and lenders’ report cites studies from Quebec, California and the United Kingdom that suggest lowering interest rates leads to fewer legal lending options and a rise in illegal high-interest lenders.
For example, in 2019, California capped interest rates at 36% for personal loans between $2,500 and $10,000 (US). This change “led to the state-regulated installment loan market pushing borrowers to payday loans and unlicensed markets with interest rates as high as 950%,” according to the report.
Quebec set limits on interest rates at 35%, leading to the growth of an online market for high-interest microloans, with many providers based outside Canada. The result was offshore lenders “circumventing provincial regulations and offering rates well above the legal limit,” the report says.
“It's crucial to recognize that merely lowering the criminal interest rate, while beneficial, may not provide a complete and long-term solution,” the CCUA agrees.
“Unintended consequences of only reducing the criminal interest rate could include driving some lenders out of the regulated market and into the illegal or underground market, where consumers would face higher risks and costs with limited protection and recourse.”
A broader strategy is needed, “one that involves financial institutions, credit unions, and banks actively promoting and supporting access to low-cost, small-value credit,” the CCUA says.
Some credit unions have stepped up to offer products and services to those who are “financially excluded” from more favorable loans, says Lamb in her report to the CCUA. In her survey of 17 credit unions in 2021, she found that “six credit unions are offering small short-term loans which are considered to be fair and less expensive alternatives to payday loans.”
Credit Union Alternatives to Payday Loans
British Columbia-based $35.5 billion Vancity Credit Union has been offering a product called the Fair & Fast Loan for nearly 10 years. It was designed “to allow people to make ends meet in an emergency,” says Vancity spokesperson Shannon Miller.
The Fair & Fast Loan offers loans at 19% and has a more flexible schedule than typical payday loans. Vancity CU borrowers using this product have up to two years to pay back the loan and can pay in full at any time without a penalty. Loans can be approved as quickly as 10 minutes online, she adds.
“A Vancity $500 Fair & Fast loan with a two-month term, paid monthly would cost a total of $11.91 in interest,” Miller says. “In contrast, in BC, payday lenders can currently charge $15 for every $100 borrowed. If $500 is borrowed through a payday loan, you can be charged up to $75 in interest and fees.
“The product is working and is considered a success. We have on average about 2,400 loans funded a month. About 70% of the loans are generated through online banking.”
Vancity CU launched Fair & Fast loans in 2014 because “it believes people should be able to access the credit they need without falling prey to a predatory loan agreement. We want to help people remove themselves from a debt cycle, and that requires meeting them where they are at—suddenly strapped or credit challenged and needing a fast, fair and easy loan application,” notes Miller.
Fair & Fast loans have a higher delinquency rate than the credit union’s personal lending portfolio. “However, these loans are in smaller amounts [between $100 and $2,500] and represent a small portion of our portfolio,” Miller reports.
“Our frontline staff work with members accessing the Fair & Fast loan to potentially get them into a better-suited loan. As our Fast & Fair loans are reported to the credit bureaus, members can build credit and move toward a loan product with lower interest payments,” Miller says.
$20.3 billion Servus Credit Union in Alberta, $9.5 billion Affinity Credit Union in Saskatchewan, $5 billion WFCU Credit Union in Windsor, Ontario, and $53 million LaHave River Credit Union in Nova Scotia have all offered short-term lending at rates ranging between 17.99% (Affinity) and an APR of 37% (WFCU, for a two-week loan). Uptake from members has ranged from several hundred over several years (Servus) to 5,200 over five years in Windsor, with the average WFCU loan being $350.
LaHave River CU’s program, Helping-Hand Financing, features lower interest rates, flexible repayment options, a revolving line of credit, low-cost chequing accounts, and financial literacy education.
Another program is in Ontario. The Impact Lab, run by $5.5 billion DUCA Credit Union, partners with Equifax, CacheFlo and Credit Canada to provide small loans to individuals. Loans are granted based on cash-flow rather than credit score or debt service ratio, and the interest rate is prime plus 2% with a potential 2% rebate if all conditions are met.
In its description of this program in a submission to the federal government on interest rates delivered in autumn 2023, CUCA said that DUCA’s first pilot ran in 2019, with a default rate of less than 3.5%.
Credit unions in Canada are also looking at the United States, where in Vermont, $943 million North Country Federal Credit Union offers payday loans through partnerships with employers.
Credit unions can do more, Lamb says: “Some credit unions’ products are more successful in reaching target markets than others.”
Credit unions and other financial institutions and governments need to work together to improve access to reasonable loans for lower-income people, said Bolu Omidiji, CCUA’s manager/community input and ESG, in a November 2023 response to the federal government’s request for input on predatory lending.
“Information sharing is key. … For instance, it is important to know the break-even point, the expected default rate, the criteria for assessing loan applicants and the cost of servicing a portfolio,” Omidiji said.
Governments can help by balancing consistency among the different federal and provincial regulations governing loans and lending rates, while still paying attention to varying regional and local needs, she adds.
“New forms of payday loans and discrepancies in provincial or territorial regulations need to be considered,” she says.
It’s also important to make sure that payday loans are regulated with clear disclosure requirements, caps on maximum fees and charges, and limits on the amount that can be loaned, to prevent people from getting in over their heads. Capping interest rates at 35%—or less—is just one step. Limiting the amount that can be borrowed can help people avoid the temptation of using still high-cost loans as an unsustainable lifeline, the submission says.
Governments can also help by considering a program that would protect financial institutions by either covering all or a portion of defaults, making it easier for credit unions and others to take on the risk, the report adds.
Education is important too, whether it’s financial education for credit union members or training for employees, or both, Omidiji says. One program called Each One Teach One, developed by Vancity and now adopted by the CUCA, trains employees to deliver financial literacy workshops in plain language.
The sole goal of this training is simple, the CUCA’s submission says: “Empowering Canadians to take control of their financial decisions, goals and plans.” cues icon
David Israelson is a non-practicing lawyer who writes business stories for several publications.
