John R. Rodriguez
New Democratic Party
Mr. John Rodriguez (Nickel Belt):
Mr. Speaker, having listened to the previous speaker dealing with the free market and the provision of credit to low income borrowers I think he advanced light years for both himself and his party in saying that he recognized that the free enterprise system is not necessarily the best way of ensuring credit to low income earners.
I would be less than honest if I did not say that the minister knows that there was a great deal of trepidation when it was announced that he was going to be the new Minister of Consumer and Corporate Affairs since many people in this country saw him as the representative of corporate interests. I think he had to deal with that in the early weeks of his appointment, and I sympathize with him in his dilemma. I think this is why this particular bill has been brought forward. The Minister of Consumer and Corporate Affairs (Mr. Abbott) is being resurrected as the defender of the consumers of Canada. At least that is what appears on the surface. But when you examine the bill very closely, Mr. Speaker, you will see that this is the biggest con job ever perpetrated on the consumers of Canada.
As for the few positive aspects of the bill, finally the government has realized that in a progressive society legislation respecting consumer credit protection and a declaration of interest rates ought to have been in the federal statute books a long time ago. Indeed many of the proposed changes in this bill have already been accepted by the provinces, many have legislated many of the items being regurgitated in this bill. Indeed all the industrialized countries of the western world have much more progressive credit legislation for consumers and consumer protection as they grovel and jostle for credit in the market.
The prime purpose of the bill appears to be an attempt to meet the credit needs of low income borrowers. As I have just said, it is meeting a need for law that has not been previously enacted by federal legislation. For example, I might point out how dated some of these provisions are. The Interest Act has not been amended since 1917. In effect the minister is finally coming into the twentieth century with some kind of legislative progressivity.
There is no doubt that some of the provisions in the bill will go some way toward providing protection for consumers. Our concern is that we feel there are fundamental changes outlined
in this bill which, contrary to what the minister said in his back-up paper, and in the House when he spoke earlier today, in some instances will do a disservice rather than a service to the low income borrower.
One of the greatest problems has to be, as pointed out by the Consumers Association of Canada, the lack of research concerning the credit needs of low income people. I tried to obtain some of that information from the minister's department. I told them they must have some research in respect of incomes of low income earners from which they could furnish me some of the background papers and research done in respect of this bill. There certainly is a lack of any kind of research concerning the credit needs of low income people.
Fortunately I happen to know a consumer researcher who has done some research in this field, Michael Decter, presently of Manitoba. He points out the following in his paper:
.. . generally speaking, those who borrow from finance companies are in financial difficulties of some sort, and have been enable to obtain credit elsewhere .. . statistics show that finance company clients are lower middle income wage earners who work at skilled or semi-skilled or clerical jobs. Middle income and lower middle income people, who are primarily wage earners, form the bulk of the finance companies' clientele, while the poor are ill-served by the industry. About half of all applicants for credit are turned away by the finance companies.. .
These I suspect are in the wage bracket of less than $5,000 a year.
Those who are not turned away are using the money primarily for necessities. The major purpose of loans is to consolidate debts, usually as a sign of financial difficulty.
These loans by low or middle income people are being made at rates of 24 per cent to 33 per cent. The industry blames the high cost of loans on the risk it faces. I shall quote the industry. It is stated that loss ratios for consumer loan companies range from \'A per cent to l3A per cent of outstanding receivables, and for sales finance companies about half of one per cent of receivables. These losses are higher than those of the banks but certainly are not unmanageable. The concept of risk is very important because in Clause 8 of the bill one of the factors to be determined in calculating the cost of the loan is the degree of risk assumed by the lender on the lending transaction. There is also the matter of collateral, the age, the capacity, the financial position, and the mental and physical health of the borrower to be considered.
The bill claims to protect that one half of the people who are turned away by the finance companies because of high risk and low income. These were the people whom Captain Henri Marchessault found in a two-year study to be likely to use the services of loan sharks. He found that of 7,000 clients only 20 per cent had criminal backgrounds, which incidentally might explain their inability to get other credit, while the remainder were low income earners with nowhere else to go. From this we see that the people who take advantage of the present high rates of finance companies do so out of necessity. Those who go to loan sharks, because of their very low incomes, probably require money for their necessities as well, but they obviously cannot get it from the lending institutions.
November 1, 1976
The government appears to have looked at this situation and decided to attack loan sharking, while at the same time opening up lines of credit for those whose earnings are less than $5,000 by eliminating interest ceilings on small loans. While this may have some effect on legal loan sharking its other effect will be to make an already profitable business more profitable. Considering that most of these loans are taken out to meet necessities it will also mean that young people with low incomes will go into perpetual poverty through debt to pay for their necessities, at rates of interest as high as 60 per cent or 70 per cent. It should also be noted that these higher interest rates undoubtedly will also apply to many of those people presently receiving loans at 33 per cent.
Moreover, since the bill allows a person's age to be taken into consideration, then because of risk-and this is in Clause 8-it also means that young persons starting out in life will be starting out with very heavy burdens even to buy their furniture. This all seems very unfair, considering the low rate of non-payment of the finance companies and presumably among loan sharks as well.
The elimination of the ceiling on interest rates is one of the two fundamental changes in the bill which will hurt the position of low income borrowers. The other change is the one which forces the borrower to take legal action to have any wrongs redressed. The Consumers Association rejected this and it was pointed out that low income earners, the ones whom this bill is purportedly aimed at, are the very ones least likely to use or to know how to use the courts.
The government suggests that competition in the market place will be the device which prevents interest rates from rising unreasonably for low income earners. We can reject that argument without discussion at this point. In other words, what the bill does is send the low income earners from the loan sharks to the finance companies which have no limit on their interest rates. As my colleague points out, the lawyers also probably will be involved in this.
There are other solutions. The least radical of the solutions would be one put forward by the government in the 1974 election. At that time the government promised a loan insurance scheme for people establishing credit. This is another promise the government has not kept. This would eliminate the risk for the finance companies and, given the low rate of loan defaults among low and middle income earners, would probably necessitate only a minimal increase in interest rates. This is the one part of the bill we on this side of the House could never accept.
The government has said that the rationale, the main purpose in introducing this bill is to get people away from the loan sharks. To do this it will provide and ensure that the low income worker can obtain a loan from the lending institutions. Of course in order for it to be profitable for the private sector, the finance companies and the banks, to go into this business there has to be some assurance, a minimization of the risk, because the low income earners are poor risks. It has to be made worth their while. The interest rate will be one which, as
Protection of Borrowers and Depositors set out in Clause 3, "may provide for any rate of interest that is agreed upon." Well, that is very broad.
I say to the minister that in effect a person who would come to borrow money from a person with money to lend is prepared to accept anything close to what the minister calls the criminal rate. I say he wisely calls it that. In effect the criminal rate could be 60 per cent. Here we have a person who has no credit rating at all coming to borrow money and entering into an agreement for a rate of interest that is agreed upon. The interest rate could very well be 50 per cent. The minister might say it is better for the low income borrower to pay a rate of 50 per cent than a rate of 1,500 per cent to the loan shark. Both instances are totally unacceptable. They are totally unacceptable for the low income earner. I think the minister will agree with that.
This clause setting the interest rate agreed upon between the borrower and the lender is supposed to be in keeping with the minister's statement that this bill underlines his determination to help police forces fight the ever increasing crime of loan sharking. Where I come from in the Carribean we have a fish which is even more dangerous than the shark, and that is the barracuda. It seems to me that we will take these people away from loan sharks and leave them at the mercy of barracudas for whom it will be quite legal to charge 50 per cent interest, or as close to that rate as possible. It seems to me that this is not the solution for low income earners. The government set out the problem very well. It wants to get these people away from loan sharks and into legitimate institutions. I wonder if it is not rather like jumping from the frying pan into the fire.
Subtopic: BORROWERS AND DEPOSITORS PROTECTION ACT