The bill that could spell trouble for private lending

CMBA's Gale says Senate proposal would be "a bad idea all round"

The bill that could spell trouble for private lending

A proposal currently making its way through the Senate to reduce the criminal rate of interest could have severe repercussions for Canada’s private lending sector, according to a prominent industry figure.

Samantha Gale (pictured), CEO, Canadian Mortgage Brokers Association (CMBA) – British Columbia, told Mortgage Broker News that Sen. Pierrette Ringuette’s Bill S-237, which proposes to change the national criminal rate from 60% to the Bank of Canada’s overnight rate plus 20%, makes little sense for lenders and consumers alike.

“It’s got a long way to go, but if it were passed, it would have an absolutely profound impact on private lending,” she said, “for this reason: there are legitimate commercially appropriate interest rates that would definitely exceed this [overnight rate plus 20%] limit.

“I think that it would be very damaging to the private lending community and also to consumers, because you’d probably see lots of unregulated lending under the table contributing to loan sharking. It’s a bad idea all round.”

The bill had its first reading in the Senate on May 04, and must be approved by both houses of Parliament before being passed into law – a process that’s likely to be lengthy and fraught with complication. Gale said that CMBA would be making its concerns known to legislators during that time, including its belief that the regulation shouldn’t be part of the Criminal Code.

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“We’ve long held the view that this provision does not belong in the Criminal Code; if anything, it’s consumer protection legislation,” she said. “[The bill] represents an opportunity for us to explain to politicians and lawmakers how problematic it is to place this consumer protection provision in the Criminal Code.

“In general, there are other racketeering sections in the Criminal Code that really govern this kind of conduct in a criminal context. [The bill] belongs either in a federal statute like the Canada Interest Act, or in provincial consumer protection legislation.”

Sen. Ringuette put forward a similar measure in the Senate in March 2017, arguing for the same reduction in the criminal rate of interest as the current bill but also proposing the creation of three different classes of loans subject to separate interest rates.

That bill eventually fizzled out after its third Senate reading in June 2018. While the most recent proposal removes some of those complex references to distinct loan classes, Gale said that much ambiguity still remains – particularly with the various formulas for calculating interest differing dramatically.

“There’s a lack of understanding of the different formulas for calculating either the annual percentage rate (APR), which is the term used in consumer protection legislation, the effective annual interest rate, which is the term used in the criminal code, or other interest rate calculators,” she said.

“One of the problems with the provision is that it’s dependent on a certificate from an actuary who will do a calculation, and the calculation of the effective annual interest rate will include all of the costs that go into the mortgage like lender and broker fees. There is a lack of clarity around that.”

The proposed drop in the criminal rate is a steep one, which Gale said could affect large swathes of the private lending sector. “You’ll see with private lending that there are a lot of private loans that are in that in-between period, exceeding that 20% mark. When you take into account the term and the fees, it would impact a lot of private lending.”

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She also noted that while consumer protection legislation in the provinces governs consumer transactions, the new provision for the Criminal Code would affect all transactions in the private lending sphere – whether related to consumers or commercial development.

“It wouldn’t be uncommon for a developer to pay an amount [that exceeds the proposed rate],” Gale said. “They may need to add financing to their project, but the bill would capture that conduct as well. It’s going to catch a lot of commercially acceptable loans in the private sphere.”

It remains to be seen whether this iteration of the proposal will be successful – and if so, when it would be implemented, with no suggestion that it would take place imminently. Still, Gale said that private lenders and mortgage professionals should be aware of the discussions taking place around the industry, particularly with possible further regulation coming down the line.

“Right now, consumer protection is a very high priority, and I think what the federal government will do is re-examine some of the provisions relating to PITI [principal, interest, taxes and insurance] lending,” she said. “However, it could be broader than that.

“Consumer protection around mortgages and real estate is definitely on the radar, and I think it’s important that everybody understands what the discussions and the directions are.”