Lowering interest rate cap to 35% could cost jobs and hurt GDP: report

A report commissioned by the Canadian Lenders Association estimates that lowering the maximum interest rate could lead to the loss of tens of thousands of jobs and billions of dollars in GDP.

The Ernst & Young LLP report released Tuesday comes as the CLA industry group has been pushing aggressively against the federal government’s plan to lower the interest rate cap in the Criminal Code from 47.2% to 35%.

The government has said it’s moving forward with the lower cap to protect vulnerable borrowers including low-income Canadians, newcomers and seniors from predatory lenders.

The CLA has argued that industry members won’t be able to lend to some higher-risk consumers and businesses if the government goes ahead with the lower rate, because the potential profits don’t outweigh the chances of default.

The report from Ernst & Young estimates that if the lower cap is set, about two million consumers would be at risk of not qualifying and about 818,000 would actually be cut off, while close to 18,000 businesses and 32,000 employees would be displaced.

“The report demonstrates the broad-based, highly damaging impacts that this change will have on the Canadian economy,” said Gary Schwartz, head of the CLA, in a statement.

Looking at both direct and indirect losses, the report estimates that the shift could lead to some $10.7 billion in lost GDP and almost 50,000 jobs.

Borrowers could also face $4.4 billion in higher interest costs as they are pushed into payday loans or unregulated lenders like loan sharks, the report found.

But the “notable profit margins” of many of the lenders involved means they don’t need to cut off borrowers, said Katherine Cuplinskas, press secretary to Finance Minister Chrystia Freeland, in a statement.

“Suggestions that lenders might deny credit to some of the most vulnerable people in our communities is entirely irresponsible.”

Anti-poverty advocacy groups like Acorn Canada and Prosper Canada have also supported the move to lower the cap, the first update to the maximum since it was initially set in 1980.

In testifying to the Standing Committee on Finance in late February, Prosper CEO Elizabeth Mulholland said that rather than alternative lenders saving borrowers from loan sharks, there is actually very little to distinguish between the two as they both charge exorbitant interest and hound borrowers relentlessly when they fall behind.

She said the lower cap won’t affect borrowers as much as the industry argues, as people generally have other solutions and high-cost loans trap borrowers in cycles of debt.

“A high-cost loan is never the best solution for someone who is low-income, credit-impaired and/or struggling to make ends meet.”