Boasting of an economic plan that will benefit the ‘middle class and those working hard to join it’, Finance Minister, Bill Morneau, laid out the Federal Government’s Fall Economic Statement last Tuesday. Increases to the child tax benefit, as well as a modest increase to the working income tax benefit, will send some much-needed cash in the direction of low and moderate-income Canadians. ACORN members see these as positive steps.
Morneau credits consumer spending for the country’s economic growth over the past year. Yet, Canadians are racking up debt-to-income at rate of 169.9 per cent, an increase of over 93 per cent since 1990, led by growth in mortgage debt (Statistics Canada, 2017). In comparison with other OECD countries, Canada ranks 8th for levels of consumer debt. The US ranks 17th (OECD, 2015).
Despite acknowledging that household debt has reached record heights (and is still rising) in the Fall update, the government has taken no steps to address predatory lending and the significant risk it poses to consumers. While consumer debt is increasing, it is becoming increasingly difficult for low and moderate-income earners to borrow from mainstream financial institutions. 3 per cent of all Canadians – close to one million - are unbanked, having no relationship at all with a mainstream financial institution. 15 per cent, almost five million Canadians – are underbanked, meaning their engagement with the mainstream financial sector remains limited. Excluded by their banks due to high NSF fees, no access to low-interest credit in emergencies and other barriers to accessing basic credit, many Canadians are forced to rely on fringe financial lenders. These lenders charge exorbitant rates and prey on low-income borrowers, with the hope of catching them in a debt trap that causes their repayments to spiral.
In their 2016 financial sector review, the government reported a growth in the subprime mortgage industry from 6.5 – 12.5 per cent between 2007 and 2015 (Department of Finance, 2016). Other types of fringe lending are also growing, and even the banks admit that, "If you tighten rules and raise the bar on getting a mortgage from financial institutions, it may prompt a number of borrowers who are being shut out to deal with lenders that are in the less regulated space" (RBC senior economist Robert Hogue, 2016).
ACORN members are concerned that the outlook is not good for these low and moderate-income families who are being pushed to the fringes. Recent changes to mortgage regulation look to make it even more difficult for low-income earners to access credit from mainstream financial institutions. The mortgage rate stress test was introduced to ensure that consumers can afford to borrow, yet by not moving forward on a regulatory framework that addresses the entire market, specifically the absence of a national anti-predatory lending strategy, Morneau missed the mark. The stress test only succeeds in raising the bar even higher for low and moderate-income earners who strive to own a home. In the midst of a housing crisis, this will push consumers further into the fringes and increase the risk that borrowers will get trapped in high-interest, high-risk mortgages. A national anti-predatory lending strategy that seeks to harmonize federal and provincial anti-predatory lending practices would help tackle inter-jurisdictional challenges and gaps in regulation on predatory lending, which will help bring spiralling debt costs for many low and moderate-income individuals under control.
Donna Borden - ACORN National Leader of Financial Justice