Older Uniform Acts

Commentary on Cost of Credit Disclosure Act 1998



PART 1 - DEFINITIONS AND INTERPRETATION

1 Definitions

(1) Subsection (1) defines more than 30 terms used in the Act. This commentary briefly indicates the contexts in which the defined terms are used and elaborates key elements of certain definitions. Where appropriate, there are cross-references to relevant proposals of the DHA; however, most cross-references are deferred until the comments on the substantive provisions of the Act.

"advance"

Several provisions of the Act require disclosure of the amount and timing of advances, and it is necessary to identify and quantify advances to calculate the total cost of credit and APR for a credit agreement. This is the first of several definitions that serve primarily as "pointers" to another provision, in this case section 2(3), where a more elaborate definition of the relevant concept is found. But the definition does emphasize that the term "advance" is a shorthand reference to value received by a borrower in connection with a credit agreement. Thus, "advance" includes but is not restricted to money lent to a borrower. For example, the cash value of goods purchased under a credit sale constitutes an advance.

See commentary on section 2(3).

"APR"

See commentary on section 2(1).

"associate"

This term appears in the definitions of "cash price" and "credit sale." It also appears in section 15(1), which deals with cancellation of optional services, and in section 17(2), which limits default charges.

See commentary on section 1(2).

"borrower"

This is the general term used throughout the Act to denote someone who receives credit, whether through a loan of money, the purchase of a product on credit terms, or any other credit arrangement. Guarantors are excluded from the definition of "borrower" because the Act is not intended to govern disclosure to guarantors.See footnote 2 2

"broker"

Certain credit agreements that would not otherwise be covered by the Act are covered if arranged by a broker: see section 3(2)(b). Sections 12 and 13 impose disclosure requirements on brokers.

The last paragraph of Proposal 7 contemplates that jurisdictions may impose additional requirements on brokers beyond those addressed by the DHA. Jurisdictions that integrate such additional requirements with the requirements of this Act might find it desirable to adopt a different definition of "broker."

"business day"

This term is used in section 8(2), which provides that disclosure statements for mortgage loans must be given to the borrower two days before the borrower incurs any obligations in connection with the loan. The definition acknowledges that, nowadays, whether a particular day is a business day is really a question of fact.

"brokerage fee"

Sections 12 and 13 require disclosure of brokerage fees. It will be noticed that the definition does not include a commission or other remuneration paid on its own account by the credit grantor to the broker. On the other hand, if the credit grantor pays a commission to a broker and then attempts to recover the amount of the commission by imposing a corresponding charge on the borrower, the latter charge would fall within the definition of "non-interest finance charge," and would have to be disclosed as such.

"cash customer"

The Act is not concerned with cash customers as such. It is concerned with cash customers only insofar as the amount they would pay for a product determines its cash price for a credit transaction or its cash value for the purposes of a lease. Thus, this term appears only in the definitions of "cash price" and "non-interest finance charge" in this subsection, in the definition of "cash value" in section 37(1) and in section 4(3)(b) of the Schedule.

"cash price"

Several provisions require credit grantors to disclose the cash price of a product. The cash price of a product also determines the amount considered to be advanced to a consumer who buys a product under a credit sale: see section 2(3)(b). This means that the cash price of a product is a key variable in determining the total (dollar) cost of credit and APR for a credit sale.

(a) Paragraph (a) will apply in the common situation where a merchant who sells a product on credit terms also sells the product for cash. Here the price cash customers would pay for the product determines its cash price for the purpose of a credit sale unless the parties to the credit sale actually agree on a lower price.

The reference to "an amount that fairly represents" the selling price to cash customers is intended to accommodate situations where different cash customers typically pay different prices because the actual selling price is negotiated by the buyer and seller. Linking the cash price to a representative price paid by cash customers is intended to provide reasonable flexibility while ensuring that the stated cash price bears a reasonable relationship to the price actually paid by typical cash customers. This is important if the APR and total (dollar) cost of credit are to serve as useful measures of the cost of credit.

The reference to sales by an associate of the credit grantor ties in with the last part of the definition of "credit sale": see the commentary on the definition of "credit sale."

(b) This paragraph will apply to certain credit card transactions. Since disclosure of the APR and total cost of credit is not required for credit card transactions, the main reason for identifying an objective cash price does not apply to such transactions.

The usual situation where this paragraph will apply is where a consumer charges a purchase to a credit card that is not issued by the seller or an associate of the seller: e.g., to a VISA, MasterCard or American Express account. Paragraph (a) will not apply because the sale is not by the "credit grantor" (the card issuer) or an associate of the credit grantor. Where paragraph (b) applies, the cash price is simply the price agreed to by the merchant and the consumer. This agreed price is the amount that the card issuer is considered to have advanced to the card holder in respect of the transaction: see section 2(3)(d).

Paragraph (b) could also apply where a credit card issuer offers certain services, such as optional insurance or a card registry service, exclusively to card holders. Here the credit grantor is the seller of the relevant product, but paragraph (a) still does not apply because the card issuer does not sell the product to cash customers. Since the card issuer does not sell the product to cash customers, the price paid by cash customers is not available to serve as the benchmark for the cash price. In such cases the parties' agreement determines the cash price.

"Court"

The term "Court" appears only in Part 6 "Compliance."

"credit agreement"

This is the umbrella term for all agreements that extend credit, whether as a loan of money, the sale of a product on credit terms, as a facility for obtaining credit in the future, or in any other form. The term "credit" is left undefined because its broad ordinary meaning is suitable for the purposes of the Act.

"credit card"

The definition includes what are sometimes called "charge cards": cards issued in connection with credit agreements under which the card holder is not permitted to carry balances from one month to the next. The definition makes no distinction between "two- party" and "three-party" credit cards.

"credit grantor"

This term is used throughout the CCDA to denote the party who extends credit under a credit agreement.

(a) This paragraph focuses on the parties to the contract rather than the ultimate source of the credit extended to the borrower. For example, a merchant who sells goods under contracts in which payment of part of the purchase price is deferred is the original credit grantor under such contracts, even if the merchant's rights under the contracts are immediately and invariably assigned to a financial institution. The financial institution is not a credit grantor under this paragraph, but may be under paragraph (b).

(b) The effect of this paragraph is that an assignee becomes subject to the requirements imposed on credit grantors once notice of the assignment is given to the borrower. The DHA does not address this issue.

"credit sale"

The key requirement of this definition is that a product's seller or manufacturer, or an associate of either, finances its purchase. If one of these parties finances the purchase, the transaction is a credit sale regardless of its form. If the seller finances the purchase, the transaction is likely to take the form of a sale in which payment of the full purchase price is deferred. If the manufacturer or an associate finances the sale, the transaction might take the form of a cash loan, but it would still be regarded as a credit sale for the purposes of the Act.

The DHA uses the term "supplier credit," but it is thought that the term "credit sale" will be clearer to most users of the Act.

"default charge"

Section 17 limits default charges that can be provided for by a credit agreement and other provisions require disclosure of default charges. It should be emphasized that interest on overdue payments is not regarded as a default charge, so section 17's restrictions on default charges do not apply to interest on overdue payments.

"fixed credit"

Part 3 of the Act applies to fixed credit. The form of this definition, in which fixed credit is defined as credit other than open credit, ensures that all credit agreements will fall into one category or the other. The archetype of fixed credit is a credit sale or loan of money in which the borrower receives a single advance and agrees to pay the amount owing in a series of payments of predetermined amounts at predetermined intervals.

See commentary on the definition of "open credit."

"floating rate"

Several provisions of the Act refer to floating rates, but the context in which this concept is most important is in relation to credit cards: see sections 35(2) and 35(4)(d).

An example of where paragraph (b) would apply is an interest rate that is determined for a whole month based on the value of the index rate at the beginning of the month.

"grace period"

The CCDA distinguishes between grace periods and interest-free periods. Interest that accrues during a grace period will be forgiven if the borrower meets certain conditions. In contrast, interest does not accrue at all during an interest-free period; the credit is unconditionally interest-free during that period.

"index rate"

This term appears only in the definition of "floating rate."

"initial disclosure statement"

This definition is a pointer to provisions that describe the contents of initial disclosure statements in various contexts.

"interest"

The main reason for defining "interest" is to help clarify the definition of "non-interest finance charge," which refers to charges other than interest. A lump-sum charge imposed at the beginning of (or at some point during) a loan would be a non-interest finance charge, rather than interest, because the charge does not accrue over time. Similarly, if a charge accrues over time, but is not based on an amount outstanding from time to time under the credit agreement, it would be regarded as a non-interest finance charge rather than interest.

"interest-free period"

See commentary on the definition of "grace period."

"lease"

The general requirements in Division 1 of Part 2 apply to leases as well as to conventional credit arrangements, while Part 5 deals exclusively with leases.

This definition would cover anything from a one-hour rental arrangement to a long-term hiring that is functionally equivalent to a credit sale. However, the Act does not apply to all such leases; it applies only to leases that meet the criteria set out in sections 3 and 38.

The qualification at the end of the definition regarding residential tenancy agreements is intended to avoid any implication that a person who rents a furnished apartment is thereby considered to be leasing the furnishings for the purposes of the Act.

"mortgage loan"

This term appears in sections 2(b), 8, 16(1), 23(1), 26 and 27 and section 1 of the Schedule.

This definition focuses on whether the loan is secured by an interest in real property, rather than on the purpose for which the loan is obtained. The qualification at the beginning of the definition allows for regulations that would exclude "collateral mortgages" from the definition of "mortgage loan" for certain purposes, such as the prepayment right provided by section 16. Such regulations would accommodate the statement at the bottom of page 3 of the DHA that "[c]ollateral mortgage loans will be subject to the same prepayment rights as regular loans."

"non-interest finance charge"

A number of provisions require disclosure of non-interest finance charges and section 3(3), which excludes certain credit agreements from the application of the Act, applies only to credit agreements that do not provide for any non-interest finance charges. Perhaps the most important reference to non-interest finance charges is in section 16(3), which provides for the refund of non-interest finance charges upon prepayment of non- mortgage credit.

The definition refers to charges that the borrower is required to pay "in connection with" the credit agreement. This is broader than if the reference had been to charges "under" the credit agreement. For example, an application fee might have to be paid in connection with a credit agreement although there is no mention of the fee in the credit agreement. Application fees, administration fees, service changes all constitute non- interest finance charges.

"open credit"

Part 4 of the Act is concerned exclusively with open credit. Since the Act defines "fixed credit" as credit other than open credit, the definition of "open credit" effectively defines both open credit and fixed credit. The two main categories of open credit are credit cards and lines of credit.

It should be emphasized that the two paragraphs of the definition are conjunctive. A construction loan of $100,000 that is to be advanced in stages upon the completion of various phases of the project is not open credit, because the total amount to be advanced to the borrower is limited to $100,000. This contrasts with a line of credit or credit card

agreement, where the total amount that may be advanced over the life of the agreement is unlimited. If a credit card agreement has a credit limit of $1000, the card holder might obtain advances totalling many times that amount over the life of the agreement.

"optional service"

A number of provisions require disclosure of optional services and section 17 gives borrowers a right to cancel optional services in certain circumstances. Optional insurance and extended warranty coverage are examples of optional services.

"outstanding balance"

This term is simply a shorthand reference to the total amount that is owing under a credit agreement at a particular time. It includes but is not limited to amounts that have not been paid when due.

"payment"

This term is used frequently in the Act. Payments are the counterparts of advances. Advances are value flowing to the borrower and payments are value flowing from the borrower (generally, but not necessarily, to the credit grantor).

See commentary on section 2(5).

"product"

This term appears in a number of provisions of the Act, but its most important role is probably in section 2(3)(b), which states that the cash price of a product purchased under a credit agreement is value received by the borrower. The qualification that "product" does not include the extension of credit is meant to forestall any argument that the extension of credit is in itself a service that constitutes value received by the borrower under section 2(3)(b).

"scheduled-payments credit agreement"

Although most fixed credit will fall within this definition, fixed credit is not necessarily scheduled-payments credit. A loan of a specific amount of money under which the

principal is to be repaid on demand, rather than in accordance with a specified schedule, would be fixed credit but not scheduled-payments credit.

An example of a contingency that might require adjustment of a repayment schedule is the possibility of a change in the anticipated amount or timing of a future advance that is contemplated by the agreement.

"security interest"

This definition does not distinguish between real property and personal property.

"term"

A number of provisions require disclosure of the term of a credit agreement. Although the definition refers to "the first advance," most fixed credit arrangements will consist of a single advance, and the term will simply be the period between this advance and the final scheduled payment. This final payment might be a "balloon payment."

"total cost of credit"

This is a dollar measure of the cost of credit. Several provisions require disclosure of the total cost of credit and it is also used in calculating the APR.

See commentary on section 2(2).

(2) The definition of "associate" in subsection (1) points to this subsection. In focusing on "formal" linkages_partnership, kinship, formal control_this definition puts more emphasis on certainty of application than on exhaustiveness. Thus a contractual or business relationship between two entities that falls short of actual partnership will not make them associates of each other. The DHA's definition of "supplier credit" refers to an associate of a credit grantor, but does not define "associate."

2 Concepts relating to determination of cost of credit

This section gathers together several key concepts relating to the determination of the cost of credit. Subsections (1) and (2) define the concepts of the annual percentage rate and total cost of credit, respectively. Both of these concepts involve comparisons

between value received and value given by the borrower. Subsections (3) and (4) deal with the identification and quantification of value received by the borrower, and subsection (5) defines value given by the borrower. Subsection (6) deals with the special case of money paid into or out of tax accounts.

(1)    This subsection's main purpose it to explain what the annual percentage rate is and is not, rather than to set out the rules for calculating it. The calculation mechanics are dealt with in the Schedule at the end of the Act.

Paragraph (a), which is adapted from the definition of "closed-end credit" in the United States' Regulation Z,See footnote 3 3 describes the forest that can easily be lost sight of amidst the trees of the detailed APR calculation rules. The APR is a way of measuring the cost of credit that takes account of the amount and timing of value received and given by the borrower. The statement at the end of paragraph (a) that the APR is determined "disregarding the possibility of prepayment or default" recognizes that the APR is supposed to indicate what the cost of credit will be if the credit agreement is carried out in accordance with its terms.

Paragraph (c) is intended to make it clear that the APR is not simply another name for the annual interest rate. To be sure, the numeric value of the APR for a credit agreement may be the same as the contractual interest rate for that credit agreement if there are no non-interest finance charges. For such credit agreements, there is no practical difference between the contractual interest rate and the APR. However, the APR will be higher than the contractual interest rate where the borrower must pay non-interest finance charges. For such credit agreements, the APR serves a disclosure function, but is not used in calculating the balance outstanding on the credit agreement at any given time; that is the function of the contractual interest rate.

(2) The definition of "total cost of credit" in section 1(1) points to this subsection. The total cost of credit is simply the anticipated dollar cost of credit over the entire term of a credit agreement. It is simply the difference between the value to be given by the borrower and the value to be received by the borrower in connection with the credit agreement (i.e., total payments minus total advances).

(3) The definition of "advance" in section 1(1) points to this subsection. This subsection, along with subsections (4) and (5), constitute the foundation of the CCDA's approach to determining the total cost of credit and APR.

This subsection defines what constitutes value received by the borrower and describes how this value is quantified. It can be thought of as a positive definition of the components of "principal," as used by Proposal 1.2.See footnote 44

Paragraphs (a) through (d) might be thought of as identifying "real value" received by a borrower, while (e) and (f) identify "deemed value." In theory, the charges mentioned in paragraphs (e) and (f) should be treated as part of the cost of credit, not as value received by the borrower. However, the expenses mentioned in paragraphs (e) and (f) correspond to items to be excluded from the cost of borrowing by Proposal 1.5. Treating a charge mentioned in paragraph (e) or (f) as value received by the borrower (an advance) excludes the charge from the cost of credit because the deemed advance "cancels out" the payment in respect of that charge when calculating the APR and total (dollar) cost of credit.See footnote 5 5

(4) This subsection, which relates to Proposals 1.4 and 1.5, is intended to forestall arguments that certain expenses incurred or things done by a credit grantor in connection with a credit agreement constitute value received by the borrower. For example, in the absence of this provision, a credit grantor might argue that money paid by the credit grantor for a credit report on the borrower is money paid "to the order of" the borrower, and thus constitutes value received by the borrower.

If the credit grantor imposes a charge on the borrower for something that is not considered to be value received by the borrower, the charge will be reflected in the APR and total cost of credit because there is no advance to offset the payment in respect of the charge.

Paragraph (4)(a) is based on items (i), (ii) and (viii) of Proposal 1.5 (which all refer to insurance), read with Proposal 1.4's statement that "all charges" not excluded by Proposal 1.5 are part of the cost of borrowing. The Committee's intention appears to be that a premium for any compulsory insurance, other than insurance mentioned in Proposal 1.5, will be treated as part of the cost of credit. The Act achieves this result through the combination of paragraph (4)(a) and subparagraphs (3)(e)(iii) and (iv).

Paragraph (4)(b) is an interpretation of the reference to "all charges" in Proposal 1.4. Although Proposal 1.4 says that "all charges" are included in the cost of borrowing except for those excluded by Proposal 1.5, it seems obvious that "all charges" is not intended to be read literally. If Proposal 1.4, especially the reference to all charges, were read literally, the cash price of goods purchased under a credit agreement (being a "charge") would constitute part of the cost of credit, which would be absurd. It is assumed that Proposal 1.4 really means something like "all charges that might reasonably be regarded as part of the cost of credit" are treated as part of the cost of borrowing unless they are specifically excluded by Proposal 1.5. The charges referred to in paragraph (4) are the sorts of cost that could reasonably be regarded as part of the cost of getting credit.

(5) The definition of "payment" in section 1(1) points to this subsection. Anything that constitutes value given by the borrower must be accounted for when calculating the total cost of credit or APR. The value must be given "in connection with," but not necessarily "under," the credit agreement. Thus, payment of an application fee would constitute value given by the borrower when calculating the cost of credit, even though it was paid before the borrower entered into the credit agreement.

Paragraph (a) refers to money or property transferred by the borrower. Where a consumer trades in an old car when purchasing a new car under a credit sale, the agreed value of the old car would constitute value given _ a payment _ by the borrower.

Paragraph (b) deals with payments that the borrower is required to make to a person other than the credit grantor. In theory, if the object of disclosure is to disclose the cost of credit to the borrower, then the destination of a payment should be irrelevant. The question should be whether the payment increases the borrower's cost of credit, not whether the payment goes into the credit grantor's pocket. The introductory part of paragraph (b) and subparagraph (b)(i) are consistent with the theory. Subparagraphs (b)(ii) and (iii) depart from the theory, in that transfers of money that would be treated as value given by the borrower if the money was transferred to the credit grantor are not so treated if the money is transferred to a third party selected by the borrower.

The DHA does not attempt to provide an overall definition of what constitutes a payment. However, subsection (5) is intended to reflect the general thrust of Proposals 1.4 and 1.5. The exceptions in subparagraphs (b)(ii) and (iii) reflect item (vi) of Proposal 1.5.

Taken together, subsections (3), (4) and (5) deal with all of the charges mentioned in Proposal 1.5 except for items (iii) (charges for overdrawing an account), (x) (discharge payments) and (xii) (charges for shares in a credit union). Regarding item (iii), the Committee's intention appears to be that credit extended by way of overdraft would be entirely excluded from the application of cost of credit disclosure legislation, on the theory that such credit is appropriately dealt with in legislation governing deposit accounts. Such an exclusion could be accomplished by means of a regulation under section 3(4) of the Act.

The reference in item (x) of Proposal 1.5 to discharge payments appears to contemplate fees that a credit grantor charges for providing documents necessary to discharge a security interest, especially a mortgage of real property. Some jurisdictions do not or might not in the future permit such charges to be imposed.See footnote 6 6 Jurisdictions that do allow such charges could exclude them from the cost of credit by deeming the amount of such a charge to constitute value received by the borrower in a regulation authorized by subsection (3)(g). Another approach would be to exclude "discharge payments" from the APR and total cost of credit by a provision similar to subsection (6).

Regarding shares in a credit union _ item (xii) of Proposal 1.5 _ it is worth observing that such shares presumably have a cash value (the amount for which they are sold to persons who want to join the credit union without necessarily obtaining a loan). Quite apart from any specific provision regarding such shares, if the borrower pays that cash value for their share, the borrower would be considered to have received value for that share (i.e., an advance equal to the cash value of the share). The share purchase transaction would not affect the APR because the borrower's payment for the share would be offset by the value of the share. However, to the extent that it is considered advisable to specifically provide that charges for credit union shares are not to affect the

APR, regulations under subsection (3)(g) could specify that the charge for such shares is deemed to be value received by the borrower.

(6) Mortgage lenders sometimes maintain tax accounts for the purpose of ensuring that property taxes on the mortgaged property are paid. Transfers into and out of the tax account would fall within the definition of value given and received by the borrower, but accounting for such transfers when calculating the total cost of credit and APR would complicate those calculations for no real purpose.


3  Application

(1) The effect of treating leases as credit agreements for the purposes of this section is that the Act applies only to leases that meet the criteria set out in subsection (2): leases to natural persons for consumer purposes. In addition, Part 5, which sets out disclosure requirements for leases, only applies to leases with certain characteristics. See commentary on section 38.

(2) Paragraph (a) reflects the first sentence under the unnumbered heading "Application" on page 1 of the DHA. The wording of paragraph (a) is based on the definition of "consumer" in Article 810 of the AIT.

Paragraph (b) addresses an issue that is not addressed by the DHA, which does not say anything about the characteristics of the credit grantor. A qualification such as this seems essential, however, if the legislation is not to capture private lending arrangements for which the requirements of this Act would clearly be inappropriate. The assumption underlying subparagraph (b)(ii) is that if a credit arrangement is arranged by a broker, the broker will have the expertise to provide the disclosures required by the Act even if the actual credit grantor does not.

(3) This subsection implements Proposal 9 and is intended to exclude informal credit arrangements from the application of the Act. It will be noted that the criteria in this subsection are conjunctive; all of them must be met for the exclusion to apply.

(4) This subsection does not correspond to any specific proposal in the DHA. If a borrower signs a statement indicating that the borrower is obtaining a loan for a commercial purpose, and the credit grantor believes the statement is true, the credit grantor would be entitled to assume that the Act does not apply to the transaction. Note that the statement of purpose itself must be signed by the borrower for this subsection to apply. That is, the borrower must specifically acknowledge the statement, rather than merely signing a document containing a statement that may or may not have been brought to the borrower's attention.

(5) The DHA does not consider whether certain types of consumer credit agreements should be excluded from the harmonized legislation. For instance, existing legislation frequently excludes credit extended by utility companies for utility services, student loans and so on. It seems prudent to authorize regulations that would exclude particular categories of credit agreements from some or all of the Act's provisions.

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