Federal budget 2023: Impact on consumer lending

The 2023 Canadian federal budget (Budget 2023) highlighted the government’s intention to introduce numerous consumer protection measures surrounding what it refers to as “predatory lending,” high interest rates and increasing fees paid by consumers. 

Its proposed actions include modifying certain provisions of the Criminal Code (the Code) to both reduce the criminal rate of interest and limit payday loan interest rates, as well as introducing additional protections for mortgage payments and bank fees. Upon implementation, these changes would impact not only Canadian consumers, but also businesses and lenders operating across Canada. 

Consumer lending highlights from Budget 2023

Adjustments to the Criminal Rate of Interest 

One significant consumer protection proposal is to lower the criminal rate of interest under Section 347 to a 35% annual interest rate (APR), which aligns with the maximum interest rates for consumers currently in place in Quebec.

This announcement follows the consultation paper published in the fall of 2022 where the government sought feedback on proposals to cap the criminal rate of interest. In the context of the criminal rate, “interest” is broadly defined, and includes all fines, fees, commissions, expenses and penalties charged or paid in connection with an underlying loan. Currently, criminal rate of interest is measured by its effective annual rate (EAR), while also considering the actual timing of payments and is capped at 60% (equivalent to 47% APR). Budget 2023 also suggests a move away from using EAR to using APR to measure the criminal interest rate. The government also intends to launch additional consultations on whether the criminal rate of interest should be reduced even further. 

Adjustments to the Payday Lending Exemption

Payday loans, a form of short-term borrowing where lenders can extend high-interest credit for a short loan term (typically payday loans are for 62 days or less), are exempt from the Code’s criminal interest rate cap and are instead regulated by provincial consumer protection regulation. The government intends to adjust this exemption and limit the amount payday lenders can charge in interest to no more than $14 per $100 borrowed. This cap is in line with the lowest cap that currently exists under consumer protection legislation under Newfoundland and Labrador’s Consumer Protection and Business Practices Act. Ontario, British Columbia and Alberta’s caps are presently set at $15 per $100 borrowed. As with the criminal rate of interest, the government will also be launching continued consultations for further revisions to this exemption.

Code of Conduct for Existing Mortgages

Another consumer protection-related proposal in Budget 2023 is the draft guideline issued by the federal government, through the Financial Consumer Agency of Canada, that sets out expectations for federally regulated financial institutions to support consumers who are vulnerable to mortgage delinquency as a result of exceptional circumstances, such as the current combined effect of high household indebtedness, the rapid increases in interest rates, the increased cost of living, and the COVID-19 pandemic. 

Federally regulated financial institutions are expected to create policies and procedures to monitor and identify early signs that consumers may be experiencing mortgage hardships and establish criteria for offering relief measures that adhere to key principles of fairness, appropriateness and accessibility. Proposed relief measures include extending amortizations temporarily past 25 years, adjusting payment schedules and authorizing lump-sum payments. The consultation period for the draft guideline is open and all submissions must be received by May 5, 2023.

Additional Consumer Protection Measures

In addition to the above initiatives, Budget 2023 highlights the government’s aim to work with regulatory agencies, provinces, and territories to reduce “junk fees,” such as high event or concert fees, excessive baggage fees and unjustified shipping charges, amongst others, and ensure businesses are transparent with prices. More details on how this goal will be achieved, including which businesses will be eligible, will be released in the coming weeks.

While we must wait for the additional details on these proposals, they will have important implications for Canadian businesses and federally and provincially regulated lenders. We will continue to monitor these issues for further updates.