Third Interim Report on Cost of Credit Disclosure Act 1994

TOPICS NOT DEALT WITH BY CCDA

From the beginning of this project we have made it clear that we are not attempting to deal with the whole field of consumer credit. Our intention has been to deal comprehensively with disclosure of the cost of credit in consumer credit transactions and with certain other matters that are very closely related to cost of credit disclosure. It is assumed that where a particular topic is not dealt with by CCDA, each province would be free to deal with that topic as it sees fit. Some of these topics are closely related to cost of credit disclosure and might well be suitable subjects for uniform "consumer credit" legislation, but they have been excluded from this project on the "don't bite off more than you can chew" principle. My intention here is to identify some consumer-credit related topics that are not dealt with by CCDA, and briefly indicate why not.

Agreements for Sale of Land

CCDA is not intended to cover "agreements for sale" regarding land. In other countries, ccdl does apply to the sale of land "on credit", and it would be difficult to deny that the arguments for requiring full disclosure of the cost of mortgage loans apply with equal force where consumers finance the purchase of homes by means of agreements for sale. The main, but not entirely satisfactory, reason why CCDA does not cover agreements for sale is that no Canadian ccdl that I know of currently applies to such financing arrangements. Moreover, I suspect that a very small proportion of consumer home purchases are financed by means of agreements for sale. However, I would be hard pressed to think of a good reason why, in principle, agreements for sale should not be covered by CCDA.

Reverse Mortgages

Reverse mortgages are a relatively recent innovation and are not yet common in Canada. As the following passage indicates, they are not all that common in the United States, either:

A quick way to understand the "reverse mortgage" is to take most of what you know about the traditional mortgage lending process and turn it around. When a bank makes a reverse mortgage -- more officially known as a "home equity conversion mortgage " -- it sends monthly checks to the borrower, rather than vice- versa. Credit evaluation is unnecessary, in part because the members of the target market likely don't have the income necessary to pay the loan back. And if your bank goes into this business, chances are it will have the field to itself, unlike the fiercely competitive first- and second-mortgage businesses. Reverse mortgages are aimed at senior citizens who are house-rich but cash-poor. The loans enable them to draw on the equity they've built up in their homes without having to leave it. Unlike a home equity loan or credit line, however, reverse mortgages don't have to be paid back on a current basis. The lender typically looks to the eventual sale of the home for repayment of both principal and interest . . . [4]

As this passage indicates, and its name suggests, almost everything about a reverse mortgage loan is the opposite of a traditional consumer mortgage loan. The disclosure requirements in CCDA are not designed with reverse mortgages in mind, and would not be well-suited to the circumstances of such transactions. I think the appropriate course of action would be to flag such transactions for exclusion by regulations under CCDA section 3(5)(b).

Certain Issues Relating to the Sale of Goods or Services

CCDA treats a sale of goods or services (collectively, a "product") on credit as a type of loan agreement (supplier credit) and requires disclosure of the cost of credit for such a transaction. But CCDA is not intended to deal with every issue that might arise in connection with the sale of a product on credit.

Matters that would arise in connection with cash sales

CCDA does not deal with issues that are common to both cash and credit sales. For example, one commentator wondered why CCDA does not require disclosure of express or statutorily implied warranties in a disclosure statement, noting that this is important information. This point is well taken, but it is as true of cash sales as it is of credit sales. This is more a sale of goods issue than a cost of credit issue.

Lender's liability for seller's warranties

Later in this report is a discussion of CCDA section 68(3), which makes an assignee subject to defences that a borrower would have against the original credit grantor. CCDA does not, however, deal with the more general issue of to what extent, or in what circumstances, a lender who finances the purchase of a consumer product should be liable for claims or defences that the consumer may have against the supplier. For example, suppose that D is a retailer. F, a finance company, has no formal ties with D, but has an ongoing business relationship under which it provides financing to D's customers. The relevant transactions are not set up as conditional sales contracts between D and the buyer (B), which D then assigns to F. Instead, F has provided D with forms of loan agreement between F and B. The forms provide for a loan from F to B with a direction for F to pay the loan proceeds directly to D. Thus, when B signs the form, he or she enters into a direct contractual relationship with F. Being the lender, F would be responsible for making the disclosures required by CCDA. However, there is nothing in CCDA that would make F responsible for, say, B's breach of an implied warranty of merchantability, or for a misrepresentation as to the quality of the goods by one of B's sales persons.

It is recognized that there are arguments for imposing liability on lenders in a position similar to that of F, and that consumer protection laws in some jurisdictions would actually do so. CCDA does not do so simply because it is considered to be beyond the scope of this project to consider in what circumstances a lender should incur liability for breaches of warranty or misrepresentations by a supplier with whom the lender has some sort of business relationship. Since this topic is outside CCDA's scope, it is assumed that provinces will deal with this issue as they see fit.

Disclosure to Guarantors

Additional Reference: Discussion Notes, Part A.1.b (p. 4)

CCDA does not deal with disclosure to guarantors. The reasons are set out in the Discussion Notes.

Restricting Lenders' Remedies -- Acceleration Clauses

I think that no one has expected CCDA to deal with the issue of how lender's go about enforcing loan agreements when a borrower defaults. However, there is one issue that is arguably closely enough related to cost of credit disclosure to have been dealt with. This is the issue of how to deal with "acceleration clauses", clauses that purport to make the entire balance of a loan payable when the borrower misses or is late in paying one instalment, or otherwise defaults on any of his or her obligations under the loan. Consumer protection legislation usually requires the lender to give the borrower notice of default and an opportunity to cure the default before the acceleration clause can be activated. CCDA does not purport to deal with this issue.

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