Should regulators focus more on unsecured debt?

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New data on consumer debt has dredged up an old broker gripe: Regulators need to rein in the availability of unsecured debt and leave mortgage spending alone.

“Consumer debt has gotten out of control; we’ve seen a lot in northern Alberta and B.C.,” Ray Macklem of Dominion Lending Centres The Mortgage Hub told “It’s very easy to obtain an unsecured credit card, lines of credit, things like that, and they seem to be the kinds of things that get people into trouble.”

Macklem is a B.C.-based mortgage broker and recent stats don’t bode well for his fellow British Columbians. According to data from TransUnion, his province has the highest non-mortgage debt average above all other provinces, at $38,682 compared to the Canadian average of $27,368.

And while brokers are frustrated by a government that seems to focus more on controlling “good” mortgage debt as opposed to out-of-control consumer spending, the truth is there is very little the regulators can do, according to one industry player.

“People on this forum and others have been calling for Flaherty to regulate the interest rates on credit cards for some time now, and I think that there is a misunderstanding of what can and cannot be done,” Paul Therien of Centum commented on in late November. “The government can regulate mortgages because they always have had their finger in that pie.

“Housing is also a much more significant contributor to our economy, and given that housing is typically the largest expense for an individual, it merits greater scrutiny by both government and media.”

Still, there are potential measures that can be taken to help control this type of debt. Education is the key, according to one broker.

“I think Canadians could benefit from better financial education to help them understand the impact of carrying large amounts of consumer debt,” Jason Henneberry of Verico MortgagePal said. “For example, a $15,000 balance on a credit card or unsecured line of credit reduces a person's mortgage borrowing power by approximately $100,000.”

In many cases that debt is accrued by purchasing items that depreciate, such as furniture, according to Henneberry. And they have no idea how detrimental an effect carrying credit card debt can have on applying for a mortgage.

“That person often doesn't understand why they don't qualify for the amount of mortgage they are seeking; a more-informed borrower might think twice about that vehicle loan if they understood how it affects their purchasing power when it comes to buying their next home,” Henneberry said. “They could be so much better off financially by allocating their resources to creating wealth through savings or improving their equity by paying off mortgage debt.”
  • steve on 2014-01-21 11:12:34 AM

    So much BS in only focussing on CMHC and mortgage rules. I emailed Flaherty and he said it was none of his business as finance minister. I complained about 0 payments loans, 0% financing, 30% interest loans with closing costs and he said "none of his business". Yet, a 3.5% mortgage loan is his business. I argue that both have potential to ruin the economy, but he would not hear it.

  • Craig on 2014-01-21 12:49:36 PM

    Credit cards make the world go around. Reduce the credit and reduce the spending. I don't agree with it but it is a fact. Without extra credit to spend each month people would resort to saving for items making them an emotional purchase just like purchasing a home. Before retail credit in the 70's, you saved for a car. Now it is an impulse purchase for most and often with no money down or worse, added to the loan your old loan not yet paid. Controling the mortgage purchase has far less pressure on government than controlling the unsecurred credit.

  • Mary on 2014-01-21 7:11:35 PM

    I agree that the government should start making changes to unsecured debt policies or create some because it doesn't appear that there are any. Unsecured credit is out of control and it needs to be reigned in because clearly consumers are unable to do it for themselves. I also believe that a high school education should include mandatory household financing and budget development or money management courses. The kids won't be learning it at home since most of their parents don't know the first thing about it.

  • Jason on 2014-01-23 10:50:19 AM

    Ummm... the government does not regulate unsecured lending, they never have... They can regulate mortgage lending because of the National Housing Act and the fact that they back mortgage insurance through government guarantees (for ALL insurers).

    There is ZERO risk to the government and all the risk to the lenders for unsecured credit.

    People always like to blame the banks for stuff on here. Since when did a bank hold a gun to your head and FORCE you to use your credit card? When did people in this country no longer have accountability for the decisions that they make?

    I am so sick and tired of listening to brokers complain about unsecured debt being the “real culprit” when the truth is that consumers have choice. They choose to spend like mad to keep up with the Joneses by choice and to believe otherwise is saying that Canadians in generally are all stupid and need the government to control their every action.

    If you want to look at culprits who are contributing to this whole issue… what about the brokers who get their customers to refinance at every available opportunity? Think they are doing that because it is in the best interest of the customer, or are they really doing it because business is slow and they need to make some money? OH I know lots of brokers will protest that comment until they are blue in the face, but I have yet to meet one single broker that does not solicit their clients for refinances. Sure the customer might save money, but you know what… if they refinance for a lower rate with their existing lender and pay the penalty – in fact some lenders even give them a break on the penalty! They would save more money than they do when you brokers convince them to switch lenders and take out some money so that you can get paid the full commission on a deal instead of just setting it up as an early renewal.

  • Ron Butler on 2014-01-23 11:05:22 AM

    I cannot say that Jason is wrong in any of this. Banks provide a credit card product and encourage people to use it. That's commerce, is it right for the bank to tell you to use the card to go on vacation; not in a perfect world, but it is commerce.

    Brokers do solicit refinance business, most point out to the clients that they need to stop using high cost credit once the refinance is complete but most of us don't all cut up the credit cards either.

    Is better financial education the answer? Maybe, but I am not certain education is the pure answer to change human behavior.

    So should the government control credit card rates, no, it should not. Should the government act to discourage relentless advertising of credit cards? Maybe, but then I believe lottery and casino advertising should be outlawed as well. That's just me.

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