The Next City
June 21, 1999
The reign of Shylocks ends
PARLIAMENT REPEALS THE SMALL LOANS ACT. PRIOR TO 1980, money lenders anyone other than a chartered bank who lends money could legally charge no more than 2 per cent per month for a loan of $300 or less, 1 per cent per month for loans between $300 and $1,000, and just 0.5 per cent or 6 per cent per year for loans greater than $1,000. The government’s tight control on interest rates discouraged competition and drove needy borrowers to illegal lenders who charged inflated rates. Some threatened violence in case of default not unlike a certain Venetian money lender’s demand for a pound of flesh.
A 1967 revision to the Bank Act had already freed banks to charge market-dictated interest rates, rather than the maximum 6 per cent per annum.
Anti-usury laws still shackle financial transactions
CONSUMERS NOW HAVE A MUCH WIDER, AND SAFER, RANGE OF borrowing options. Borrowers with good credit ratings can get a comparatively low interest rate while those with a less established credit history have access to lending institutions offering loans at a range of interest rates, reflecting the associated risks.
Yet the federal government still maintains a usury law. When it repealed the Small Loans Act, Parliament made it a criminal offence for anyone, including banks, to charge more than 60 per cent in interest, fees, or fines. This high maximum ?chosen because it seemed high enough to penalize loan sharks without disrupting normal contractual agreements ?nevertheless can affect everyday financial transactions. In 1983, the Department of Justice wrote to the Canadian Bankers Association to alert its members of the new law’s potential application to credit card fees. Regardless of consumers’ willingness to pay fees, a credit card company charging, say, an annual fee of $30 to someone who doesn’t use his card much could run afoul of the law.
Since the law was passed, courts have heard a number of cases evoking the criminal interest rate. In Pacific National Developments Ltd. v. Standard Trust Co. (1991) for example, the Supreme Court voided a bonus provision on a corporate loan, finding that it exceeded the criminal rate but declaring the rest of the contract enforceable.