The Maximum Allowable Rate Cap: A Risky Move Toward Increased Illegal Lending

The Maximum Allowable Rate Cap:
A Risky Move Toward Increased Illegal Lending

By: Gary Schwartz, Canadian Lenders Association

Gary is a six-time recipient of the Deloitte Fast 50 Award and was recognized as the 2013 "Mobile Commerce Evangelist of the Year" and 2014 "US Retail Innovator of the Year." He is the recipient of the Macromedia People Choice Award, Retail Touchpoints Customer Engagement Award, as well as the Dodge Foundation Award for Innovation. Gary is a Simon & Schuster NYC award-winning author with titles that include "The Impulse Economy" and "Fast Shopper, Slow Store." Gary founded Impact Mobile which was acquired by Cisco (Webex) in 2018. He plays an active role as board member and executive advisor in a number of portfolio companies and is presently President of the Canadian Lenders Association. Gary is alumnus of Columbia University in New York and the Stanford University Center in Yokohama, where he was the recipient of the Asia and Japan Foundation Fellowships.

On January 1, 2025, the federal government implemented a reduction in the maximum allowable rate from 47% annual percentage rate (APR) to 35%. The Canadian Lenders Association (CLA) has been working with the Ontario Association of Chiefs of Police (OACP) to raise the alarm about the unintended consequences of such a shift—particularly the heightened risk of illegal lending activity.

While access to credit may not initially appear to be a policing issue, its downstream effects can foster financial vulnerabilities that illegal markets are quick to exploit. Without further study and consultation, the noted policy shift risks driving a surge in illegal lending, exposing Canadians to the various harms often associated with the illegal lending market – financial exploitation, intimidation, and violence.

The Rise of Illegal Lending

When credit from reputable lenders becomes inaccessible, individuals with limited financial options often have nowhere to turn but illegal lenders. These illegal lenders are unregulated and prey upon individuals who have been denied credit from reputable regulated lenders. Illegal lending is often tied to organized crime, with proceeds funding broader illicit activities. These unregulated lenders charge exorbitant rates and use coercive tactics, leaving victims trapped in cycles of exploitation.

The CLA and OACP has previously sounded the alarm in their report “A Rise in Illegal Lending and Criminal Activity: Implications of the new 35% Maximum Allowable Interest Rate in Canada” warning that lowering the maximum allowable rate cap will likely lead to a surge in illegal lending. Evidence from other jurisdictions, such as the United Kingdom, illustrates the consequences of restrictive caps. When access to credit from regulated lenders was curtailed in the UK, reports of illegal moneylending spiked. Loan sharks exploited vulnerable individuals, using threats and violence to enforce repayment.

By limiting access to regulated credit, the proposed cap creates an opening for illegal lenders to exploit those with no other options. History and international examples demonstrate that such policies often have the unintended harm of pushing consumers into the hands of illegal lenders.

The Strain on Law Enforcement

From a policing perspective, the potential rise in illegal lending poses substantial challenges. These operations are often deeply embedded within organized crime networks, making them difficult to detect and dismantle. Victims of illegal lenders are frequently reluctant to come forward due to fear of reprisal, complicating investigations.

Also, much like illegal gambling prior to the legalization of sports betting, many lenders will charge over 1000% APR interest rates and operate in other jurisdictions. The internet knows no boundaries and operators in other jurisdictions have no risk in not following Canadian laws. The before mentioned report noted that we saw this trend prevalent in the Quebec market with a large spike in online lending after a rate cap was put in place.

A surge in illegal lending would also place additional strain on police resources. Tackling these cases requires significant time and specialized expertise, diverting attention from other pressing public safety priorities.

Canadians most at risk for unintended impact

Canadians who do not have access to prime credit are most at risk from the unintended consequences of the policy shift. These are individuals with non-prime credit scores are already underserved by traditional financial institutions. If they are cut off from regulated lenders due to the reduced interest rate cap, they may have no choice but to seek credit from predatory and illegal sources. Such a situation has the potential to expose these impacted Canadians to financial exploitation and heighten the risk of criminal victimization.

CLA has Called for a Measured Approach

The CLA recommends that the federal government reconsider and delay the recent implementation of the 35% APR cap to allow for a comprehensive assessment of its potential consequences. Specifically, we urge policymakers to:

1. Conduct a Detailed Impact Study: A thorough evaluation of how the new cap will affect access to credit and the prevalence of illegal lending is essential.

2. Engage with Law Enforcement: Policing organizations, like the OACP, must be consulted to provide insight into the risks associated with these changes and their impact on public safety.

3. Develop Safeguards Against Illegal Lending: Implement measures to protect Canadians from exploitation by illegal lenders, such as public awareness campaigns and enhanced enforcement tools.

Conclusion

The CLA remains committed to working with the federal government, law enforcement, and stakeholders to design a framework that balances consumer protection with credit access. Let’s ensure we do not inadvertently harm the very people we aim to protect. Policies that limit access to regulated credit must be implemented with caution to avoid creating vulnerabilities.

The CLA urges the federal government to pause and reflect on the broader implications of the recently implemented reduction in the maximum allowable rate. By delaying the implementation date, policymakers can work with law enforcement and other stakeholders to ensure that unintended consequences—such as the rise of illegal lending—are adequately addressed.

Protecting Canadians requires a balanced approach. Let’s work together to ensure this policy achieves its intended goals without putting our citizens at risk.

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