Third Interim Report on Cost of Credit Disclosure Act 1994


ISSUES REGARDING SPECIFIC SECTIONS

Part 1 -- Definitions and Application

Section 1 -- Definitions

Before dealing with specific defined terms, I should refer to a point raised by the commentator who preferred the "full and fair disclosure" approach to the "detailed requirements" approach of CCDA. Part of the commentator's unhappiness with CCDA 3.2 was with some of its terminology. In particular, the commentator expressed concern that some terms were more appropriate in the context of cash loans than in the context of vendor credit. For example, one would ordinary refer to the parties to a conditional sales contract as the buyer and the seller, rather than as the "lender" and the "borrower", and one would not refer to the transaction itself as a "loan agreement". A similar point had been raised by a commentator on CCDA 2, but working group members did not consider the terminology to be a problem so I had left it unchanged for CCDA 3.2. However, the point having been raised again, I have thought about it again, and I must admit that there is a lot to be said for using terminology that is as close as possible to the terms with which "users" will be familiar. Therefore, I propose to change some of the defined terms (without changing the actual definitions).

Recommendation 6:

Certain defined terms should be changed:

  • "borrower" to "customer" (or "debtor");
  • "fixed loan" to "fixed credit";
  • "lender" to "credit grantor" (or "creditor");
  • "loan agreement" to "credit agreement";
  • "supplier loan" to "supplier credit".

"cash value" (Clause (1)(j))

Additional Reference: Discussion Notes, Part A.3.a (pp. 7-8)

At least two commentators expressed similar concerns regarding subclause (iv) of the definition of "cash value". The concern, in a nutshell, is that this subclause would not allow the seller and the credit buyer to negotiate a price; the cash value would have to be based on the "lowest price for which the seller would sell the product to a cash customer". This "lowest price" could be difficult to determine in many cases. In any event, it would deprive the seller of the opportunity to negotiate a price with each customer.

The cash value of a product purchased on credit terms is intended to serve as a reasonably objective measure of the monetary value of what the consumer receives in the transaction. This is important for the reasons summarized in section A.3.a. of the Discussion Notes, especially:

1. to facilitate comparison of the cost of financing the purchase through the seller with the cost of borrowing money from an independent source to pay cash (or charging it to a credit card), and

2. to ensure that a buyer who prepays the outstanding balance does not pay unearned finance charges.

All ccdl uses the concept of a cash price or cash value of goods sold on credit, and anchors this to the amount that would be paid by a cash customer. For example, the U.S. Regulation Z's definition of "cash price" reads, in part:

the price at which a creditor, in the ordinary course of business, offers to sell for cash the property or service that is the subject of the transaction . . . [23]

In tying the cash price to the amount for which the seller ("creditor") offers to sell the goods to cash purchasers, Regulation Z's definition is similar to subclause (iii) of CCDA's definition. Where the seller offers the product in question to cash customers for a predetermined price (i.e. the situation covered by subclause (iii) of the definition), this price provides a reasonably objective measure of the current monetary value of the product. But where a product is not offered for sale to cash customers for a predetermined price, the appropriate method of determining the cash value is less obvious. For example, car dealers sometimes do not put a price sticker on the car, but instead wait for offers from prospective purchasers.

Why not simply use the sale price agreed to by the seller and the credit buyer as the cash value? The problem is that this would give a lender who is so inclined an excellent opportunity to bury the finance charge in the cash price that is stated in the sales contract. Suppose, for example, that a car dealer does not put a "sticker price" on its cars. Instead, it waits to receive offers from prospective buyers, or discloses a price only when a prospective buyer makes enquiries. Since the price is negotiable, the price for which the dealer sells any particular model (with the same options) will vary from customer to customer. Suppose that the

average price for which the dealer sells a particular model to cash customers is $16,000. On the other hand, the terms of sale to a typical credit customer are as follows:

Price: $19,000

Interest Rate: 0%

Downpayment: $2000

Term: 3 Years (36 monthly payments)

Payments: $472.22

Obviously, an implicit finance charge is built in to the price for which a car is sold to credit customers, so the statement that the interest rate is 0% is somewhat misleading. Moreover, if the cash value of the car were regarded as being $19,000 for all purposes the full finance charge would be payable even if the buyer decided to prepay (or refinance) the loan after a year.

Admittedly, determining an objective cash price in the type of situation envisaged by subclause (iv) is not a precise science, because different cash customers may pay different prices. The idea of anchoring the cash value to the "lowest price for which the seller would sell the product to a cash customer" comes from the Australian Code:

"cash price" of land, goods or services to which a credit contract relates means the lowest price . . . that a cash purchaser might reasonably be expected to pay for them (either from the supplier or, if not available for cash from the supplier, from another supplier)

However, it may be that subclause (iv) is too inflexible. A car dealer might be prepared to sell a particular car to a personal friend at its wholesale price, but it is not obvious that this should determine the cash value of the car for the purposes of CCDA. What we are really after is a value that reflects a reasonable estimate of what a typical cash purchaser could be expected to pay for the product. Accordingly, I would recommend such a revision to subclause (iv). This should give a seller a reasonable amount of leeway in disclosing the cash price while still ensuring that the disclosed cash value is a reasonable approximation of what a typical cash customer would pay for the product. A seller who finds the requirements of subclause (iv) too burdensome could relieve itself of this burden through the simple expedient of offering the goods to cash customers for a predetermined price.

Recommendation 7:

Subclause (iv) of the definition of "cash value" in CCDA should be revised to read as follows:

(iv) in any other case, its agreed cash value, not exceeding the seller's reasonable estimate of the amount that a typical cash customer would pay for the product.

Section 3 Application

There is widespread support for putting all references to monetary amounts in regulations. I agree, so long as uniformity is not affected.

Recommendation 8:

Monetary limits should be moved to the regulations.

Note

I suspect that some provincial governments will decide to extend the application of the act to certain loan agreements that would not otherwise be covered. For example one working group member agreed with the exclusion of business loans, but added their province would continue to include loans to farmers for their farming operations.

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