[co-author: Okey Ejibe – Student at Law]
On March 22, 2022, Bill S-239, An Act to amend the Criminal Code (criminal interest rate) passed second reading in the Senate. The bill proposes amendments to subsection 347(2) of the criminal code which would reduce the current criminal interest rate.
The Existing Criminal Interest Framework — Section 347
Section 347(1) of the Code provides that anyone who enters into an agreement or arrangement to receive interest at a criminal rate, or receives a payment or partial payment of interest at a criminal rate, is guilty of offense. The current criminal interest rate is an effective annual rate above 60%.
It is important to note that “interest”, in the context of the Code, includes all fees, fines, penalties, commissions or other similar charges or expenses paid in connection with the advancement of credit, regardless of who pays or to whom these fees and expenses are to be paid. Therefore, an interest rate for Code purposes often exceeds the rate specified on the face of a particular agreement or arrangement.
Section 347.1 of the Code currently provides an exception to the criminal offense relating to interest rate for payday loans (as defined) if: (a) the loan is $1,500 or less, for a maximum term 62 days or less; (b) the lender is a provincially licensed payday lender; and (c) the federal government has designated the province as having legislative measures to protect recipients of payday loans that limit the total cost of borrowing.
Proposed changes to section 347
There have been several unsuccessful attempts to amend section 347 of the Code. Several bills were introduced in the Senate and the House of Commons, often with the primary goal of reducing the criminal interest rate, but the bills never reached the point of becoming law. In an effort to reduce the threshold from the current 60%, different rates, ranging from 20% to 45%, have been recommended and considered over the years by both Houses of Parliament. Since 2013, there have been three previous Senate bills (S-233 (43rd Parliament), S-237 (42n/a Parliament) and S-210 (41st Parliament)) which failed on the Order Paper. Bill C-274, the previous bill on this subject, which received first reading in the House of Commons on May 11, 2021, sought among other things to reduce the criminal rate to 30% plus the rate of financing to one day from the Bank of Canada on the day the agreement is entered into or renewed. It also sought to repeal section 347.1 of the Code, which would have had the effect of subjecting payday lenders to the same criminal interest provisions as other lenders. However, the bill never reached second reading.
Bill S-239, currently before the Senate, proposes to reduce the criminal rate to 20% plus the Bank of Canada overnight rate on the day the agreement is entered into or renewed. The Bank of Canada’s overnight rate is currently 1% and criminal interest, if calculated as of the date of this article, would exceed 21% anyway.
Impact on lenders
The changes proposed in Bill S-239 will affect a wide range of commercial lenders and consumers, whose interest rates may exceed the revised criminal rate, including commercial lending entities, card issuers credit cards, in-store cards and layaway programs. Borrowers may seek to use the criminal interest provisions as a shield to try to invalidate the interest provisions when lenders attempt to enforce their rights to be paid. Unlike the amendments proposed in former Bill C-274, this amendment, as currently drafted, will have no impact on payday lenders who would remain exempt under section 347.1 of the Code.
On its face, any lender who is found guilty of charging or receiving interest in excess of the criminal rate could be guilty of either (a) an indictable offense and liable to imprisonment for up to five years, or (b) d an offense punishable on summary conviction and punishable by a fine not exceeding $25,000 or imprisonment for a term not exceeding two years less a day, or both. However, in practice, the most likely impact is that borrowers will seek to use the provision as a means to nullify or write down interest provisions in their loan agreements.
Current Bill S-239 has been introduced in the Senate and, if passed by the Senate, will need to be approved by the House of Commons before it becomes law. On December 16, 2021, the Prime Minister sent a mandate letter to the Minister of Finance outlining his expectations for the Ministry of Finance going forward. One of the priorities listed was to “crack down on predatory lenders by lowering the criminal interest rate”. Time will tell if 2022 is the year of the criminal interest rate change. We will continue to monitor Bill S-239 and any other proposed changes to the criminal interest rate.