Interest Act - 2008 Report

Section 4 – Disclosure of Per Annum Rate

[33] Section 4 is a generally-applicable provision mandating disclosure of an annual interest rate in contracts, other than mortgages, containing an obligation to pay interest at a rate that is referable to a period of less than a year. Specifically, if the contract does not also contain disclosure of the yearly rate that is equivalent to the stated interest obligation, the maximum rate of interest that may be charged is 5%. The provision reads as follows:

4. Except as to mortgages on real property of hypothecs on immovables, whenever any interest is, by the terms of any written or printed contract, whenever under seal or not, made payable at a rate or percentage per day, week, month or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.[19]

Perceived Deficiencies

[34] The main deficiency of the provision is that it provides no specification as to how the interest amount should be calculated (i.e., the frequency of calculation and payment, whether in advance and whether to be compounded).

[35] A second deficiency is that the section provides no guidance as to whether the disclosure required is simply of the nominal rate of interest (i.e., the actual stated rate) or an effective rate (i.e., an annual rate that reflects the actual anticipated interest to be paid on the principal from time to time over the period of a year, including periodic payments of interest and principal and compounding of interest). Consider the following example – a student pays $10,000 in tuition on January 1 using a credit card with an advertised nominal interest rate of 20% per annum. If the credit card company in fact charges interest at the nominal rate, then the student will pay $2,000 per annum in interest (assuming no payments are made during that period). However, if interest is compounded monthly, then the student will pay $2,190 since the effective rate will be 21.9% despite an advertised nominal rate of 20%. For those on a tight budget, this difference could be significant. Based on the case law, it appears that the courts interpret the disclosure requirement in section 4 to be solely that of the nominal rate.[20]

Scope of Section 4

[36] Another issue that the courts have addressed is whether the legislation only applies to consumer transactions or to all transactions. The Supreme Court of Canada has stated that the legislation is “consumer protection law,” suggesting that it does not apply to sophisticated borrowers.[21] However, this statement did not go so far as to clearly say the legislation only applies to consumer transactions and recent decisions have reached opposite conclusions. On its face, the provision is not restricted to consumer transactions.

[37] It may be noted also that the provision is not restricted to lending transactions, but applies to any contract in which interest is stipulated. Therefore, courts have applied the provision to interest on overdue utility bills.

[38] Notwithstanding the noted deficiencies, section 4 does represent a generally-applicable obligation for lenders and others to state an annual rate of interest in their contract documents. In the context of determining whether the provision should be amended or eliminated, the question may be posed whether there are other laws that perform this function equally well or better.

[39] We note that there are a variety of public sector laws that require disclosure of a rate of interest and in certain instances (such as under the Income Tax Act),[22] specification of that rate. In many cases there is no requirement to stipulate a precise form of interest disclosure (e.g., annual rate) or on what basis it will be charged. However, it is reasonable to assume that, if not so specified, in most if not all cases the rate is intended to mean an annual rate.

Overlap with and Differences from other Federal and Provincial Legislation on Disclosure

[40] Legislation stipulating interest rate disclosure for private sector transactions is almost exclusively limited to the cost of credit disclosure requirements under provincial consumer protection laws[23] and certain federal statutes such as the Bank Act,[24] the Cooperative Credit Associations Act[25] and the Insurance Companies Act.[26] The provincial consumer protection rules generally apply to “consumers” (i.e., individuals who are not carrying on business);[27] the federal rules, which are very similar, apply to loans made to “natural persons” for other than business purposes.[28]

[41] The thrust of the cost of credit disclosure legislation is to provide disclosure to borrowers, including credit card users, of the full cost of borrowing. The primary means of accomplishing this objective is the determination and disclosure of an “annual percentage rate” or (“APR”) which factors in not only periodic interest calculations and principal payments, but also interest-free periods, certain fixed non-interest costs (including for example bonuses and any lump sum payments), and the cost of any other requirements that a borrower must meet (such as motor vehicle searches). In some instances, but not always, the APR is equal to the interest rate disclosed by a loan. Therefore, while the APR constitutes a sophisticated and comprehensive disclosure of an effective interest rate, it may differ significantly from the nominal annual rate of interest.

[42] However, the cost of credit disclosure legislation also stipulates that disclosure of the nominal rate of interest be made to borrowers. In most instances this requirement is described as the “annual interest rate”. In certain instances the required disclosure is stated as the “interest rate”. In all instances, however, we believe that the requirement should be read as referring to an annual rate and where this is not clearly stated, clarification by amending regulation could be accomplished.

[43] In addition to general cost of credit disclosure legislation, certain provinces have enacted “Payday Loans” laws that apply in addition to the general cost of credit disclosure rules. Some but not all of these laws require disclosure of a rate of interest, but in no case is this expressly stipulated to be an annual rate. Ontario’s payday loan rules, which are found in the Consumer Protection Act, do not require disclosure of a rate of interest but do require disclosure of the APR, which as noted above, may be the same as the interest rate.[29]

[44] It should be noted that the consumer protection/cost of credit/payday loans rules only apply to loan transactions. Other contracts stipulating for interest, such as overdue payment of utility bills, or contracts imposing a “service charge” stated as a percentage rate, would not be subject to these rules. Section 4 of the Interest Act has been held to apply to such contracts.[30]

[45] The most significant difference in application between section 4 and cost of credit/payday loans legislation, however, is that the latter only applies to consumers (or in the case of the federal rules, natural persons not borrowing for business purposes) whereas the former is not clearly so restricted. The question is posed therefore, whether section 4 has potentially beneficial application to non-consumer transactions. It may be recalled that at the time of enacting the new cost of credit rules, certain provinces considered, but ultimately decided against, extending their application to small businesses. An argument can be made that many of such businesses are not very sophisticated in their financial dealings and would benefit from a protective disclosure regime as may be provided by section 4.

Continued Utility of Section 4

[46] Consideration should be given to whether the nature of the information provided by section 4 disclosure is useful to borrowers. It appears that all that is required is disclosure of the nominal annual rate of interest which, in differing circumstances, may be higher or lower than the effective rate. However, we note that disclosure of the nominal annual rate of interest in any transaction is a useful item of information to the borrower, whether or not other legislation requires a more sophisticated form of disclosure. The requirement for this disclosure, which may be duplicated in certain other statutes also applicable to a transaction, does not conflict with other material disclosure requirements, nor does it hamper or restrict transactions to which it applies.

[47] We also note that section 4 provides a residual rule for financing and other transactions which stipulate a cost of using money by way of an interest rate. It is residual in that it will apply to transactions not covered by the consumer protection legislation including loans to small businesses where the borrowers may be unsophisticated and to transactions involving an element of financing that do not fall within that legislation, such as overdue utility bills.

[48] While the nature of the disclosure (nominal interest rate) may not in all cases reflect the effective rate, it does require disclosure of a rate that in many instances will be a close approximation of the effective rate and therefore may be viewed as a beneficial “user-friendly” protective requirement. However, consideration also should be given to whether an amendment requiring disclosure of an effective rate of interest, instead of the nominal rate, should be made. The difficulty here would be to define what is meant by the effective rate, which will vary depending on the circumstances. Any such definition would need to be general in terms but encompass sufficient specificity to ensure applications to all materially relevant circumstances.

[49] In summary, in that section 4 does not clash with provincial and territorial legislation and covers transactions not captured by that legislation, it is not obsolete. The provision might have more utility if it required disclosure of an effective rate of interest rather than the nominal rate. This topic would form part of any consultation carried out by the working group going forward.

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