Developed by the Risk Roundtable of the Canadian Lenders Association‍

‍INTRODUCTION

The Canadian Lenders Association has conducted research that provides a better understanding of the unintended consequences of a potential reduction in the maximum rate of interest to the Canadian consumer and SMB borrowers should the Federal Government seek to alter the maximum rate allowable under law.

The Canadian Lenders Association’s Risk Roundtable, which represents risk officers from across the lending spectrum, has utilized a quantitative methodology to estimate the number of Canadians who would be negatively impacted by a reduction in the maximum allowable rate.

BACKGROUND

The Criminal Code’s effective annual interest rate of 60% is the maximum allowable rate in Canada, which is equivalent to a nominal annual percentage rate (“APR”) of ~47%, a measure that is more familiar to consumers when referring to the borrowing cost for nearly all credit products requiring regular repayments. 

As of December 31, 2021, there were a total of 26,665,749 Canadians with credit reports according to TransUnion of Canada. Utilizing TransUnion’s Credit Vision score, 8,237,031 Canadians or 27.8% of the population are considered Non-Prime while 21,127,327 or 71.2% are considered Prime. A total of 301,481 Canadians or 1.02% of the population are considered Unscorable. Collectively, Non-Prime consumers held $186.6 billion in consumer credit balances consisting of credit cards, lines of credit, auto loans and installment loans while Prime consumers held $661.5 billion and those without a credit score held $2.8 billion.

While most lenders regularly report credit data to the credit reporting agencies, this has not included the APRs of the debts held by consumers. 

To help its members better understand the negative impact of a potential reduction in the maximum allowable rate, a team of Risk Officers belonging to the CLA’s Risk Roundtable developed a model to quantify the number of Canadians whose access to credit would be affected using information provided by TransUnion and a series of underlying assumptions.

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METHODOLOGY

The first step of the analysis was to broadly assign a range of interest rates based on the credit segmentation of the Canadian population. Based on the pricing practices of its members, who would also have knowledge of the range of APRs used by a larger group of financial institutions (as many of these APRs are available in the public domain), the Risk Roundtable assumed that Non-Prime/Unscorable consumers would qualify for APRs between 20% and 47.2% and prime consumers would qualify for APRs less than 20%. Furthermore, in the absence of knowing the specifics of dynamic risk-based pricing strategies of each lender, it was assumed that an equal distribution of the population of Non-Prime/Unscorable and Prime consumers would qualify for these APR ranges.

Utilizing this approach, the Risk Roundtable calculated that for every 1% drop in APR between 20% and 47.2%, approximately 3.7% of the Non-Prime/Unscorable consumer population or 313,916 Canadians would be negatively impacted as lenders opted to either reduce or deny consumers access to credit as a result of being unable to price for higher levels of risk due to a reduction in the maximum allowable rate. 

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From this, the Risk Roundtable was then able to calculate the number of Canadians that would be negatively impacted for every 1% drop in the qualifying APR. This estimation focused solely on the impact to the Non-Prime/Unscorable population based on the assumption that any reduction in the maximum allowable rate would not fall to APRs below 25% at which point the borrowing activity of Prime consumers would be negatively impacted.

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CONCLUSION AND IMPLICATIONS

The Federal Government’s consultation to determine whether a change is required to the maximum allowable rate could have negative impacts on a significant portion of the Canadian population, specifically the Non-Prime/Unscorable Canadian borrowers in the form of reduced or terminated access to credit. A potential reduction in the maximum allowable rate from approximately 47% APR to 35% or 30% would negatively impact between 4.8 and 6.7 million Canadians, or up to 80% of the entire Non-Prime/Unscorable segment, which accounts for almost a quarter of the Canadian population.

A change of this magnitude could have unintended consequences by limiting or eliminating the borrowing activity of millions of consumers, many of whom rely upon credit for essential expenses. With over $186 billion in consumer credit balances, the Non-Prime consumer segment is a significant contributor to the lifeblood of the Canadian economy; they also represent the segment of the population that is most at risk given their inability to qualify for credit at major financial institutions who focus largely on servicing the Prime consumer.  

Therefore, any steps to constrain or eliminate their access to various forms of borrowing should be carefully considered given the large number of consumers who would be negatively impacted by a change of this nature.

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