Older Uniform Acts

Commentary on Cost of Credit Disclosure Act 1998



PART 3 - FIXED CREDIT

DIVISION 1 - GENERAL

19 Application of this Part

[No Comment]

20 Credit Sales


This section does not relate to any specific proposal in the DAH but reflects requirements that are implicit in some existing provincial legislation. The gist of this provision is that a credit sale to which this Part applies must provide a schedule of payments; it cannot be a "demand loan." This will facilitate disclosure to the buyer, in the sense that there will be at least a presumptive schedule for repaying the outstanding balance. The schedule of payments would not have to be written in stone. In particular, it could be subject to adjustment to accommodate changes in the interest rate: see commentary on the definition of "scheduled-payments credit agreement" in section 1(1).

Since this Part applies only to fixed credit, this section would have no application to credit sales under open credit agreements.

21 General disclosure requirements in advertisements

This section attempts to implement Proposals 10.1 and 10.1.1. It is difficult to detect the

guiding principle underlying the various twists and turns of these proposals, but the section follows the twists and turns as diligently as possible.

(2) This subsection states the two disclosures _ APR and term _ required in any advertisement to which this section applies. This corresponds to items (i) and (ii) of the second paragraph of Proposal 10.1.

(3) This reflects the first part of item (iii) of the second paragraph of Proposal 10.1, as modified by the second sentence under the heading Supplier Credit in Proposal 10.1.1. When all is said and done, these portions of Proposals 10.1 and 10.1.1 seem to require disclosure of the cash price whenever the advertisement relates to a specifically identified product (such as a particular model of automobile).

(4) This reflects item (iii) of the second paragraph of Proposal 10.1, read with the fourth paragraph of Proposal 10.1, the portion of Proposal 10.1 under the heading "Broadcast Advertisements" and the first sentence under the heading "Supplier Credit" in Proposal 10.1.1. Taken together, these proposals seem to contemplate that both the cash price and total cost of borrowing must be disclosed whenever there are "fixed charges" that will be reflected in the APR, except that advertisements in certain media do not have to disclose the total cost of borrowing.

(5) This subsection acknowledges that an advertisement may relate to a range of possible credit arrangements that will not necessarily have the same APR or total cost of credit. In such cases it will be necessary to disclose the APR (and total cost of credit, where it must be disclosed) for a representative transaction.

22 Advertising interest-free periods


(1) This subsection implements Proposal 10.3.

(2) Although Proposal 10.3 does not specifically address this point, it seems reasonable to require disclosure of the conditions under which interest will be forgiven, as required by paragraph (2)(b). Similarly, although Proposal 10.3 is also silent on this point, it seems reasonable to require disclosure of the APR based on the assumption that the conditions for forgiveness of interest are not met: a "worst-case" APR.

(3) This attaches certain consequences to a failure to comply with subsections (2) and (3).

This issue is not addressed by the DHA, since it does not deal with the consequences of non-compliance.

DIVISION 2 - DISCLOSURE STATEMENTS

23 Initial disclosure statement for fixed credit

(1) This subsection implements Proposal 2.1.1, except that a couple of the items in that proposal are dealt with in other provisions of the Act. Item (xiv), brokerage fees, is dealt with in sections 12 and 13. Item (xv), choice of insurer, is dealt with in section 14.

The introductory part of this subsection requires the disclosure statement to state its effective date. For non-mortgage credit, this will usually be the date the disclosure statement is given to the borrower. But since the disclosure statement for a mortgage loan must be delivered at least 2 days before the borrower enters into the agreement, the effective date of the disclosure statement will presumably be at least two days after the disclosure statement is delivered. The logical effective date will be the date that funds are to be advanced.

The credit grantor is only required to disclose information that is "applicable" to a particular credit agreement. It should also be kept in mind that section 7 allows disclosures to be based on reasonable estimates or assumptions where the precise information is not ascertainable at the time of disclosure.

(b)(c) These paragraphs require disclosure of the amount owed by the borrower on the effective date of the disclosure statement, and how this amount is determined. The sum of the amounts in (c) should equal the amount disclosed under (b).

(c) Since the cash price of a product is treated as an advance under section 2(3)(b), the requirement in paragraph (c) to disclose the amount of each advance would entail disclosure of the cash price of a product sold through a credit sale.

(e) This requires disclosure of the amortization period only if it is longer than the term because there does not seem to be any need to disclose the amortization period separately if it is the same as the term.

(f)-(h) These paragraphs required disclosure about the interest rate. Paragraph (h)(iii), which corresponds to item (xx) of Proposal 2.1.1, is intended to alert the borrower to the possibility of "negative amortization."

(i) This paragraph contemplates the possibility that the borrower may have to pay non-interest charges that are not reflected in the initial outstanding balance, because they will be imposed at some later time. If the precise amount of the charge is not ascertainable, section 7 would allow the credit grantor to estimate the amount of the charge.

Item (x) of Proposal 1.5 contemplates disclosure of the "current [discharge] fee." Jurisdictions that allow credit grantors to impose such fees may wish to add a specific provision that requires disclosure of the current amount of any fee charged by the credit grantor to provide documents acknowledging that a loan has been discharged.

(j) This contemplates disclosure of the amount and timing of future advances. Most scheduled-payments agreements will only involve a single advance, which would be accounted for in paragraph (c). But a scheduled-payments credit agreement might contemplate multiple advances.

(l)-(m) These paragraphs are grouped together because the total cost of credit (paragraph (n)) is total payments (paragraph (m)) minus total advances (paragraph (l)). It should be noted that any non-interest finance charges included in the initial outstanding balance disclosed under paragraph (b), are not included in the total advances, because they would not constitute value received by the borrower under sections 2(3) and (4).

(2) This implements item (xxi) of Proposal 2.1.1. It is intended to clarify what information must be disclosed for fixed credit arrangements that do not specify a schedule of payments. Some of the information required to be disclosed by subsection (1) is simply not applicable to credit agreements that do not specify a schedule of payments. Other information referred to in subsection (1) would in theory be "applicable" but would be impossible to determine or even estimate in advance. Subsection (2) requires disclosure of information that is both applicable and ascertainable, or at least capable of reasonable estimation, at the time a disclosure statement is to be given.

It will be noticed that the disclosure statement must disclose the APR for loans to which this subsection applies. If there are any non-interest finance charges, the precise APR will depend on the length of the term of the loan. Thus, the APR must be based on an assumption regarding the term of the loan. Section 5(3) of the Schedule provides the relevant assumption: that the loan will be repaid one year after the effective date of the disclosure statement.

24 Changes in interest rate


(1) This implements the first paragraph of Proposal 3.1, keeping in mind that the definition of "floating "rate" in section 1 incorporates the idea of a published index rate.

(2) This implements the second paragraph of Proposal 3.1.


25 Disclosure regarding amendments and negative amortization

(1), (2)  These implement the first sentence of the first paragraph of Proposal 3.2.

(3) This implements the second paragraph of Proposal 3.2. The proposal does not mention the APR. However, the second paragraph of the proposal implies that where an amendment merely changes the schedule of payments, the only incidental changes that must be disclosed are those mentioned in that paragraph. If the APR that was disclosed in the original disclosure statement included a non-interest finance charge, a change in the schedule of payments would change the APR for the credit agreement.See footnote 11 11 Since the second paragraph of Proposal 3.2 seems to assume that such incidental changes to the APR need not be disclosed, this subsection specifically states that such changes need not be disclosed.

(4) This corresponds to section 14(3) of the drafting template proposal. Missing a payment would increase principal where the interest component of the missed payment is added to principal (compounded). If the scheduled payments were barely covering the interest in the first place (as in the early stages of a loan with a long amortization period), compounding the unpaid interest could create a situation where the scheduled payments will not cover interest that accrues during subsequent payment periods. Undoubtedly, most credit grantors would hasten to bring this situation to the attention of the borrower whether they were legally required to do so or not.

26 Disclosure where mortgage loan renewed

(1) This subsection interprets the second sentence of Proposal 3.4, which reads:

If the lender intends not to renew a mortgage loan where the loan agreement provided for renewal, notice should be provided to the borrower at least 21 days before the expiry of the term of the loan.

The trouble with this wording, so far as a statute is concerned, is that the express language of a mortgage will probably not reflect the assumptions of the parties regarding renewal. If a consumer takes out a mortgage with a 25-year amortization period and one-year term, both parties probably assume that the lender will offer to renew the loan at the end of the term. However, the mortgage agreement probably will not reflect this assumption; it will simply require the borrower to pay the balance outstanding at the end of the term. Given this gap between parties' expectations and the language of many mortgage agreements, subsection (1) does not refer to agreements that "provide for renewal." Instead, it refers to a mortgage loan whose amortization period exceeds its term, which is a good indication that the parties contemplated renewal.

(2) This subsection interprets the first sentence of Proposal 3.4, which refers to "the same categories of cost information as the disclosure statement for the loan." The information items listed in this subsection are those which seem to comprise "categories of cost information."

(3) This interprets and implements the second paragraph of Proposal 3.4, which says that changes in terms that are favourable to the borrower are permitted. This provision makes allowance for changes that are favourable to the borrower or are due to actions or elections of the borrower after the original disclosure statement was delivered. For example, the borrower might be a few days late in making the payment due on the last day of the original term, but the credit grantor is prepared to renew the mortgage loan. If extra interest that accrues because of the late payment is added to the balance outstanding on the renewal date, this will affect a number of the disclosures in the original disclosure statement. Or the borrower might make a lump sum payment at the
time of renewing. Or the borrower might elect to make bi-weekly payments when the disclosure statement was based on monthly payments. In such cases, it seems appropriate to allow the credit grantor to amend the original disclosure statement within a reasonable time after the loan is renewed.

(4) This subsection interprets the portion of section 19(2) of the drafting template proposal that says that if the borrower is not given a renewal statement 21 days before the renewal date, "the borrower's rights under the original loan agreement will continue to apply until 21 days after the renewal statement is provided to the borrower." It is not readily apparent exactly what rights the Committee has in mind: most mortgage agreements do not give many "rights" to the borrower. Subsection (4) gives effect to the Committee's presumed intention by protecting the borrower from being locked into a renewal agreement or from being irrevocably committed to paying any renewal charges until the borrower has had at least 21 days to consider a disclosure statement that reflects the actual terms of the renewal agreement.

27 Renewal of non-mortgage credit

The DHA does not deal with renewal of non-mortgage credit agreements but it is an issue that needs to be considered by legislators. Disclosure prior to the renewal date is not as crucial for non-mortgage credit as it may be for mortgage loans. Unlike mortgage loans, non-mortgage credit is always prepayable. Thus, it is unnecessary to guard against the possibility that the borrower will be locked into a renewal agreement without adequate time to consider its terms. Moreover, a borrower who prepays the outstanding balance a few days after renewing a non-mortgage credit agreement would be entitled to a refund of a charge imposed in connection with the renewal since the charge would be a "non-interest finance charge" to which section 16(3) would apply.

Cost of Credit Disclosure Act

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