June 5, 1958

?

An hon. Member:

They do not know the difference.

Topic:   INTEREST ACT
Subtopic:   AMENDMENT TO PLACE CEILING ON INTEREST RATES
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PC

Alfred Dryden Hales

Progressive Conservative

Mr. A. D. Hales (Wellington South):

I am

very happy, Mr. Speaker, to have the opportunity to take part in this debate because I am one of those who believe in the free enterprise system of business. I am also a member of a party which I believe at all times has fought for the rights of free enterprise and for business in general. I should like to compliment my friend the hon. member for Assiniboia (Mr. Argue) on his honest endeavour in presenting his bill this afternoon. I am sorry he is not in the house this

Interest Act

evening. I can see only three members of the C.C.F. here at the present time. If they were really sincere in introducing or promoting a bill to amend this act I would have thought they would be here in full force this evening.

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CCF

Harold Edward Winch

Co-operative Commonwealth Federation (C.C.F.)

Mr. Winch:

There are more behind the

curtain.

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Subtopic:   AMENDMENT TO PLACE CEILING ON INTEREST RATES
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?

An hon. Member:

They are hiding behind the curtain.

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PC

Alfred Dryden Hales

Progressive Conservative

Mr. Hales:

I am also rather amazed at

the silence of the official opposition on this question that is before the house. We have had the privilege of hearing from only one, or two, at the most, members of the official opposition. However, I know the hon. member for Assiniboia is quite sincere in his presentation. Whether or not this legislation is passed, I think he and the members of this house will have this assurance. They will know that any of those people in the lending business who are not carrying on their business in a legitimate way will at least realize that the eyes of the government are watching their particular actions.

I could not help noting some of the comments that came from that corner over there to Mr. Speaker's left. I think our good friend the hon. member for Burnaby-Coquitlam (Mr. Regier) used some extremely exaggerated cases. I feel that the case of the party he mentioned who paid 235 per cent was possibly an exaggerated one. I know he has the facts to substantiate it and so on. However, I think that is one case in many, possibly one in a thousand. I think the party who entered into that agreement had the privilege and the opportunity to read the contract which he entered into. Had he asked the rates that would be charged if he paid his account a month before it was due I think he would likely have been told the whole circumstances. He spoke of the excellent credit facilities of the credit union in that same riding. It is a wonder to me that more people do not make use of the facilities of the credit union.

With respect to the 12 per cent that has been suggested as the ceiling, I feel that the hon. member for Burnaby-Coquitlam (Mr. Regier) refuted that figure when he said that the credit unions charged nine per cent and paid their managers salaries as high as or higher than the salaries of chartered banks and paid union wages to the members who worked in that organization. Therefore, I have not had proven to me during this debate that 12 per cent is the proper figure to be used. I think exaggerated cases were brought out this afternoon. We should not be asked to legislate for every little deal which should

be looked into. I do not think we should legislate to take care of all of us. If one is willing to borrow and one is willing to lend on terms which are agreeable and understandable to both parties why should we be asked to legislate in that regard in a free enterprise business?

If there are such profits in this lending business as our good friends in the C.C.F. have claimed there are, then it will not be very long before many more people are in the lending business than there are today. The more we have in it the more competition there will be and the lower the interest rates will become. My colleague, the hon. member for St. Lawrence-St. George (Mr. Chambers), this afternoon gave a very definite explanation of how free enterprise works in the lending business, and I think what he said will turn out to be quite true.

Money is a commodity, the same as anything else; money is bought and sold. Credit is being used today more and more. It seems that the obtaining of credit has become a way of life with us and 1 do not suppose it will be changed very greatly. I do not need to list the many ways in which credit is used today. It is used in practically every form of business, even in the fields of luxury where people are using credit today for trips to the old land, and so on. Nevertheless, there has been a demand for those firms which lend money and people are taking advantage of their existence and are using the facilities they have. I suppose in the ridings of all hon. members there are a number of these lending institutions and there are many people who are using the services which they render. I think I can substantiate this by indicating the great increase in small loans since 1952. In 1952 roughly $9,378,835 was lent in small loans and in 1956 that figure had practically doubled. Therefore, this small loans business is increasing. It has doubled itself in the last five years. It would not have achieved this increase in business if the companies were not giving a service to the public which makes use of it.

In all businesses, whether they be large or small, whether they be lending businesses or whatever they may be, there are three basic elements or principles on which they must all function. First of all, there must be capital invested which can be usefully employed to earn a profit. There must be a fair wage for dollars employed. Second, there must be a product or service involved which can be marketed on which profit is created through its turnover. Third, there must be a business skill based on education, knowledge and talent for which a charge

can be fairly made. Therefore, the lending business is no different from any other business in that respect.

This question of what amount should be charged, whether it should be eight per cent, nine per cent, 10 per cent or 12 per cent is indeed a very large one. This whole act requires considerable study and attention by this house and I for one feel that it should go to a committee of the house for further thought and consideration. It seems to me that if we choose this 12 per cent figure we may find ourselves in the position, by putting a ceiling of 12 per cent on the loan, that that would be the figure that would be charged in all cases, even though the loan could be made at a lower rate. We can recall what happened in the days of ceilings under the wartime prices and trade board. Very seldom could you buy an article that was sold under the ceiling price. Therefore, if 12 per cent was set I think we would find that that would be the rate that would be charged on all occasions and not a lower one.

The answer to this is to allow this very highly competitive business to function within the framework of free enterprise. I think that if it is designed not only for the borrower but also for the lender it will take care of itself and operate on a sound basis. We must admit that Canadian lending companies must compete against highly efficient United States businesses. United States lenders borrow much of the necessary funds in the United States at lower rates than those in Canada, and so Canadian companies are kept in a very competitive position in that way.

This bill has been discussed on other occasions and I fully believe the problem is not quite as serious as it has been presented to us this afternoon. I was interested in reading that the personal instalment loan field in Canada enjoyed one of the lowest rates in the world. The common rate in the United States is three per cent monthly on outstanding balances up to $150. Then it is usually two and one-half per cent per month. In England the rate of four per cent per month is recognized as fair. United States experience has shown that if rates are set too low, legitimate lenders are forced out of the business. The net result is that borrowers are forced to deal with unlawful lenders who charge exorbitant rates.

In conclusion, I say this business is not unlike others, and if it is left to operate in the field of free enterprise and a little public relations and education work are undertaken these problems will right themselves in due time. I am afraid I will not be able to support the motion at this time under the existing conditions, especially in view

Interest Act

of the fact that it has not been proven to me which is the right amount of interest to charge. I would much prefer to see the bill go before a parliamentary committee for further and more serious and lengthy study than we have been able to give it today.

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L L

William Moore Benidickson

Liberal Labour

Mr. W. M. Benidickson (Kenora-Rainy River):

Mr. Speaker, this is a subject that has been discussed in the house in most of the sessions of recent years. I have been impressed by hearing from all sides of the house in the afternoon and in the evening debate that there would be a desirability of having this particular bill referred to a committee of the house. I think that has merit. I think that action has to be taken with respect to that desire. I think it is very desirable because in the past-

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PC

Jay Waldo Monteith (Minister of National Health and Welfare)

Progressive Conservative

Mr. Monleith (Perth):

Did the hon. member always think that way?

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L L

William Moore Benidickson

Liberal Labour

Mr. Benidickson:

Yes. The Minister of National Health and Welfare (Mr. Monteith) will remember that I had a considerable part to play in having the small loans bill amendments referred to a committee of the house and as a result very substantial improvements in that act resulted. I also wish to draw to the attention of my interrogator the fact that the banking and commerce committee of 1936 and 1938 did very worth-while work in this field and I am going to suggest to the house that they could do so again.

The decisions that have to be taken in amending a statute of this kind cannot properly be taken without an opportunity such as is afforded by committee discussion which provides an opportunity for all interested people in the country to present their views and have members of all parties present and all points of view presented. I just wish to refer to the worth-while report that resulted from a previous parliamentary discussion of this subject. I refer to page 424 of the report of the standing committee on banking and commerce which in 1938 was studying this question of interest rates. They had this to say, which I think is something which should be kept very much in mind at the moment:

Throughout its inquiry your committee's objective has been to secure the best procurable rate for the borrower.

They went on to say:

Obviously the state can intervene advantageously over interest rates only within a limited field: for naturally a legislative rate at which money is not obtainable is of doubtful benefit to necessitous people.

This is the thing which we shall have to consider with respect to this bill which has received a great deal of endorsation in principle in the debate here today. On that

Interest Act

basis and in order that it should receive the kind of consideration that would justify a proper amendment, I would like to move, seconded by the hon. member for Hull (Mr. Caron):

That the bill be not now read a second time but that the subject matter thereof be referred to the standing committee on banking and commerce.

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PC

Ernest James Broome

Progressive Conservative

Mr. E. J. Broome (Vancouver South):

Mr. Speaker, speaking directly to the amendment I should like to make a few general remarks first. All hon. members of this parliament, as in previous parliaments, have the interests of the borrower close to their hearts. The hon. member for Kenora-Rainy River (Mr. Benidickson) read an excerpt from the report of the parliamentary committee of 1938 in which it was stated that throughout the inquiry the committee's objective had been to secure the best procurable rate for the borrower.

Actually this whole matter goes back as far as 1777 when the first act limiting interest rates to six per cent was placed on the statute books at the time of George III. Various modifications have been made through the years, such as that brought about in 1897 by Sir Oliver Mowat limiting interest rates to eight per cent. But all of these amendments had to do with interest rates applicable in the case of borrowers with collateral security. At no time did the ordinary needs of the person who wanted to borrow without collateral engage the interest of parliament. It was only in 1906 that that need was met by the MoneyLenders Act wherein the rate was set at 20 per cent per annum. The really major job on interest rates was done, of course, by the banking and commerce committee of 1956 to which my hon. friend referred. In 1956, just about two years ago, over 679 pages of testimony were taken by the committee. The committee brought in amendments to the Small Loans Act. As I have said, the problem had been debated year after year by previous committees trying to achieve a suitable solution.

It is not an easy problem. There are people who have to have credit but cannot go to the banks. They have not the collateral. They are not the type of risk in which the bank is really interested. They may have private reasons why they do not want to go to a bank, but in any event where this need occurs this means was found to satisfy it. Of course, the history is that usury took place and fantastic rates were charged. Loan sharks were rampant in the field and the borrower was penalized to the point where

it was necessary for the government to step in and protect his interests.

But it was also necessary that this be done in such a way as not to dry up the sources of capital necessary to make loans available to the persons who wanted them. I should like to draw the attention of the hon. member for Assiniboia (Mr. Argue) to this booklet which I am sure he received in the last few weeks. It is the report of the superintendent of insurance on the operation of small loans companies and money lenders. In his report the superintendent of insurance has this to say on page 6 about the trend of business:

In my reports for 1954 and 1955, I referred to the cessation of expansion of business in recent years in the field of loans regulated by the act, being loans made in amounts not exceeding $500 (herein referred to as "small loans") and to the rapid expansion of business in the more profitable unregulated field of loans over $500 (herein referred to as "large loans").

Then he proceeds to set out the effect of this in a table. My hon. friend knows that prior to the changes made in 1956 the rate of interest was pretty well two per cent per month and that loans in excess of $500 were not regulated. As a result of the studies of the banking and commerce committee in 1956 an amendment was made to the Small Loans Act raising the ceiling from $500 to $1,500 and a progressive set of interest rates was established under which the borrower paid two per cent on the first $300, one per cent on the next $700 and half of one per cent on the last $500.

The effects of these changes in interest rates have not yet been reflected in the report of the superintendent of insurance because his report deals only with business done up to the end of 1956. Therefore there are no facts or statistics on the basis of which the hon. member for Assiniboia or any other member of the house can intelligently set a rate at which interest should be paid. We do not know. We have nothing to go on. It seems to me the height of folly not to take the time required, in view of the fact that the act was only changed in 1956, to see what the result has been so that an intelligent assessment can be made as to the level to which interest rates can be driven down and still provide a reasonable profit for the companies involved in the business because if we take away the profit motive there is no capital left. Certainly I do not think the hon. member for Assiniboia wants to legislate loans out of existence so that only the person whose credit is good at a bank can borrow money. This is what the superintendent of

insurance has to say about the changes that were made, as found on page 7 of his report:

As mentioned in my report last year, amendments to the Small Loans Act in 1956 extended the scope of the act so that it would apply to loans up to and including $1,500 and prescribed a new scale of maximum permissible charges, but these amendments applied only to loans made after December 31, 1956. Consequently, the data included in this report continue to reflect the results of operations on the same bases as in previous years.

I suggest that those are the important words in the report. The report continues:

The report covering business transacted during 1957 will be the first to show the effects of the amendments. However, the full effects thereof will not be evident until all loans made on the former bases have been entirely repaid.

Therefore all of the figures we have heard, all of the references to profits and all the rest of it are all based on a set of circumstances which no longer exist. But even if we take the set of circumstances that existed in 1955 and 1956 and the same figures that the hon. member for Assiniboia has been quoting, what do we find? At the bottom of page six of the report we find that in 1954 total loans were $164 million and the total profit after income taxes was roughly $6,900,000. In 1955, loans climbed to $197 million and profits by some $70,000. In 1956, loans climbed to almost $250 million and profits climbed in the neighbourhood of $800,000 to $7,740,000.

Leaving out of the argument the effect on the economy if you withdrew $249 million of credit, in my opinion the increase in loans when compared to the increase in profits is at least in proper relationship. I do not say that these profits are not excessive. They could well be excessive, but one must recall that these figures do not reflect the changes made in the act in 1956.

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L L

William Moore Benidickson

Liberal Labour

Mr. Benidickson:

May I suggest to the hon. member that he is, of course, referring to the report of the superintendent of insurance with respect to the Small Loans Act, and that is not the statute that is under amendment tonight. It is the Interest Act that we are discussing.

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PC

Ernest James Broome

Progressive Conservative

Mr. Broome:

With due respect to the hon. member, I may say that when the hon. member for Assiniboia introduced this bill he related it very clearly and closely to the Small Loans Act. This same relationship has been continued throughout the debate tonight. It is impossible to divorce this bill from the other bill, because they both deal with the same field.

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L L

William Moore Benidickson

Liberal Labour

Mr. Benidickson:

Deal with the amendment.

Interest Act

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PC

Ernest James Broome

Progressive Conservative

Mr. Broome:

I am entirely in order in what I am doing and in what I have said. If I may continue, there is no doubt about it, if we try to establish the rate too low then we do not help the borrower. We merely bring these illegal operators into the field to whom the hon. member for Assiniboia referred earlier. He mentioned a home owner who needed $600 to complete his home, I believe that was the figure. The home owner advertised in the newspaper that he would sign a note for $800 or $900 if someone would lend him the $600. People who require capital will go to almost any length to get that capital.

I am reminded of an incident that occurred when I was electioneering. I called at a house and the lady said to me, "Mr. Broome, if there is one thing you should do it is to try to stop instalment buying; it has just about ruined my family." We discussed the problem for some time, and at the end of the discussion this woman came to the conclusion that we could not stop instalment buying, but she was not going to be the sort of person who put down a dollar, paid a dollar a week and, in the end, paid twice as much as she should have for the article.

I think our friends in the C.C.F. have the idea that you can legislate common sense into people's heads; that you can legislate people into doing things the C.C.F. believes they should do or that you can legislate capital into doing the things the C.C.F. thinks it should do. Legislation is simply not effective when you try to force people into a pattern into which they do not want to go. I say, with all due deference, that there is merit in this bill, but we do not know what the rate should be. We should wait until we have more facts and figures on which to base a decision.

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L L

William Moore Benidickson

Liberal Labour

Mr. Benidickson:

Find that out in the

committee.

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PC

Ernest James Broome

Progressive Conservative

Mr. Broome:

In the United States the Russell Sage Foundation, which is a charitable foundation, has spent literally hundreds of thousands of dollars in attempting to make the small loans field in that country a legitimate field of business enterprise. They brought out what they called a uniform law governing small loans which they wanted adopted by all the states of the union. The rate recommended in that uniform law was 24 per cent and many states have adopted it, but Wisconsin has a rate of 2J per cent on the first $100; 2 per cent on the second $100 and lj per cent on the third $100. I believe a great deal of credit is due the previous administration for having established the rate in 1956. I think perhaps our legislation is now as far-reaching and as socially conscious

Interest Act

as any in the western world. A great deal of credit is due to the previous administration.

At the same time, if one reads the evidence here one finds that support for that measure came from all sides of the house. The hon. member for Assiniboia was a member of that committee, as was the hon. member for Kamloops (Mr. Fulton); the hon. member for Eglinton (Mr. Fleming) and I believe the hon. member for Kenora-Rainy River. They were all working towards the same end, something reasonable, something just, something that would work. In connection with this amendment I would suggest, therefore, that we are seeking to duplicate the work which was done in 1956 before we have had time to assess the results of that work. I suggest that it is certainly not an amendment which would serve any useful purpose at this time. As my good friend says, it is a little premature.

I should like to mention credit unions which, as has been pointed out, charge a 12 per cent rate. I am a member of a credit union, in fact I helped to found one. These credit unions do work on the basis of one per cent per month. They have no income tax to pay and they are non-profit organizations. Usually the members of a credit union have one or more specific things in common. The credit union usually has a rather detailed knowledge of the individual members of the union, so there is slight credit risk. Even at that, the rate is still one per cent per month. I do agree that there is a free insurance feature and in many cases there is a percentage rebate to the borrower on the money he has paid into the credit union. However, even under the most favourable circumstances the rate does not drop below nine per cent.

In so far as the chartered banks are concerned, they are limited to six per cent under the Bank Act. As a result of other legitimate charges, the average rate charged by the Bank of Commerce, which has gone further into the small loans field than any other bank, is 10.46 per cent. Are you going to contend that the bank is making a fantastic profit? I suggest the bank is making what it would consider to be a normal profit on that type of business. A bank is rather careful about taking risks. I believe those people in the small loans field take a greater risk and therefore have a higher cost of doing business. I suggest that from every conceivable point of view; from the history of this type of legislation, from a study of the people and institutions presently in the field, and an analysis of the report of our own civil service, there is no justification

at this time for considering the amendment because we could not give an intelligent decision.

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PC

John Andrew W. Drysdale

Progressive Conservative

Mr. John Drysdale (Burnaby-Richmond):

Mr. Speaker, I rise to speak to the amendment and to a certain extent to speak at the very kind invitation of the hon. member for Assiniboia (Mr. Argue). Earlier this afternoon when I was seeking from the hon. member some information he suggested I could perhaps speak at a later time-

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CCF

Hazen Robert Argue

Co-operative Commonwealth Federation (C.C.F.)

Mr. Argue:

But not at this time.

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PC

John Andrew W. Drysdale

Progressive Conservative

Mr. Drysdale:

-so I thought at his very kind request I should perhaps take the opportunity to enlighten him on a few points about which he had been unable to help me.

I would first of all like to say that I agree with the objective of this bill but I do feel the hon. member, in spite of his altruistic motives, would succeed in having the very thing happen which he does not wish to happen. In moving the amendment the hon. member has run in and picked out a mythical rate of 12 per cent, and I notice that although he has been advancing similar motions- according to my knowledge of the records, in March of 1957 and again in January, 1958- he has been unable during all that period to furnish a basis for the necessity of a 12 per cent rate of interest. He has apparently given no consideration to the effect of such a rate of interest on the availability of money. I would like very briefly to refer him to an article appearing in the Financial Post on August 18, 1956, but would first mention that the hon. member has suggested that a bank rate of 6 per cent would be appropriate. In this article it states that the Bank of Commerce on a loan of $100 actually gives the borrower some $94, and that although the theoretical rate of interest is 6 per cent the true rate is some 10J per cent.

I would ask what is the objective of this rate of interest and how does the bank look at it; what do they think about this rate of interest? I am informed that the Bank of Commerce looks at these as a loss leader and they take the attitude that they will put this service out to the borrower in the hope of eventually getting his business. As a matter of fact, they estimate that some 75 per cent of the people who borrow money continue to do business with that particular bank, but I would emphasize to the hon. member for Assiniboia that they still consider this a loss leader and the interest involved is some 10J per cent, which is very close to his theoretical 12 per cent.

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CCF

Hazen Robert Argue

Co-operative Commonwealth Federation (C.C.F.)

Mr. Argue:

I would like to ask a question of the hon. member. Is he suggesting that the

Bank of Commerce does not make a profit in this particular department?

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PC

John Andrew W. Drysdale

Progressive Conservative

Mr. Drysdale:

I would like to tell the hon. member that the banks look on this particular kind of loan as a nuisance and the main reason they want them is as an attraction for bank business in the long run.

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June 5, 1958