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High-Cost Credit: Ideas for Change

Drive down one of Calgary’s main thoroughfares—such as International Avenue or Macleod Trail—and you’ll likely observe, among the many storefronts and restaurants, a handful of businesses advertising high-cost credit products. Most Canadians are familiar with one type of high-cost credit—payday lending—and understand that such loans can easily trap a vulnerable borrower in a cycle of debt. Other forms of high-cost credit, however, are less well-known to the average person, even though they present similar risks to the financial health of borrowers. These are products and services like rent-to-own financing, title loans, pawn loans, and instalment loans.
Early in 2017, we set out to uncover all we could about the high-cost credit industry, with the goal of developing a set of recommendations for government that would build upon the successful payday lending reforms of 2016. Over the past year, we’ve spoken with over 50 borrowers of high-cost credit products, surveyed the academic and policy literature, consulted experts, researchers, and policymakers, and worked with an actuary to determine the real cost of several high-cost options. Using this newly-gathered knowledge, and drawing on ongoing regulatory initiatives across the country for inspiration, we’ve carefully crafted a set of policy recommendations for all three levels of government. We believe that, if implemented, these reforms can contribute to better consumer protection for all Canadians. Here are some of our ideas:
Require lenders to display a Financial Facts Label on all contracts and advertisements
The borrowers we surveyed over the course of our research told us repeatedly that high-cost lenders do not do a good enough job of disclosing the cost, terms, or conditions of the loans they advertise. To improve disclosure, we are asking governments to require lenders to display a Financial Facts Label on all contracts and advertisements. A Financial Facts Label is similar to the nutritional label that you see on all food packaging, and displays financial information about a credit product, such as loan amount, annual interest rate, fees, and payment amounts.
License all high-cost lenders
Too little is known about the high-cost credit industry, and this is due, at least partially, to the fact that many lenders are not licensed. We recommend that the Government of Alberta license rent-to-own stores, instalment lenders, title lenders, pawnbrokers and cheque cashers specifically, and create a licensing scheme broad enough to apply to future forms of high-cost credit. Licencing all high-cost lenders would allow the province to investigate lenders proactively through audits, and would also provide the Government of Alberta with better data, and thus a deeper understanding of the high-cost credit industry.
Develop a pan-Canadian Consumer Protection Strategy
In Canada, all three levels of government oversee consumer protection laws and regulate aspects of the high-cost credit industry. A pan-Canadian Consumer Protection Strategy would improve the effectiveness of these legislative and regulatory frameworks, as well as any policy initiatives that governments undertake related to consumer protection. The creation of a strategy would also allow governments to collaborate to review and strengthen federal usury laws; clarify how the Criminal Code usury rate is calculated and enforced; and ensure law enforcement is equipped with the knowledge, tools and resources to enforce rules effectively.
For more information about Momentum’s work on high-cost credit, and to read the full policy options report, we invite you to explore the following links:
Radio Interview on CBC’s The Homestretch
Podcast Interview: Moolala – Money Made Simple with Bruce Sellery
High-Cost Altnerative Financial Services: Policy Options
High-Cost Alternative Financial Services: Issues and Impact
High-Cost Alternative Financial Services: The Customer Experience
High-Cost Alternative Financial Services: Summary Brief

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