Memorandum on the Disclosure of Cost of Consumer Credit 1995


A. Last Year's Conference

During the 1994 Uniform Law Conference the Uniform Law Section ("ULS") considered the following documents relating to the project on cost of credit disclosure:

1. Memorandum on Cost of Credit Disclosure ("1994 Memorandum");

2. Cost of Credit Disclosure Act, Draft 3.21, with Discussion Notes ("CCDA 3.2");

3. Proposed Interest Act, Draft 2.0 ("PIA 2.0").

CCDA 3.2 and PIA 2.0 had been circulated for comment by interested parties in the spring of 1994. Some of these comments were reflected in the 1994 Memorandum's discussion of substantive issues.

In addition to issues regarding the content of uniform ccdl, the 1994 Memorandum raised the issue of how the ULCC could best coordinate its process with the process for harmonizing ccdl envisioned by the Agreement on Internal Trade ("AIT"). The 1994 Memorandum mentioned that harmonization of ccdl was dealt with in the part of the AIT dealing with the consumer related measures sector ("CRMS"), and that the task of implementing the AIT's commitment to harmonization would fall to the CRMS negotiators for each jurisdiction. The 1994 Memorandum discussed two approaches that the ULCC might take to the coordination problem. The recommended approach was as follows:

At this August's meeting the Uniform Law Section [should] take the following steps.

(a) Consider the issues raised by this report and make decisions that reflect the Uniform Law Section's current view as to the best approach to those issues.

(b) Appoint a drafting/liaison committee to represent the ULCC in continuing consultations with CRMS negotiators.

If the CRMS negotiators reach agreement on all outstanding issues relating to ccdl by the spring of 1995, the drafting/liaison committee [should] prepare a final draft of CCDA that reflects that agreement. This draft [should] be formally adopted at the 1995 Conference.

If the CRMS negotiators fail to reach agreement on all outstanding issues by the spring of 1995, the drafting/liaison committee [should] prepare a proposed final draft of CCDA for consideration at the 1995 Conference. The draft [should] reflect the consensus on those issues where a consensus has been achieved. On other issues, the draft [should] represent the recommended approach of the drafting/liaison committee. The draft CCDA [should] be adopted, with any changes considered desirable by the Uniform Law Section, at the 1995 Conference.

After considering the 1994 Memorandum and the two draft acts (CCDA 3.2 and PIA 2.0), the ULS adopted the following resolution:

That the principles of both Acts and the statutory language of the Uniform Cost of Credit Disclosure Act reflecting them be adopted, subject to further consideration of specified provisions and subject to minor adaptations of other parts of the draft statute to meet the needs of federal/provincial/territorial officials in the context of the internal trade agreement.

As will be explained below, coordinating the ULCC's efforts with those of the officials responsible for implementing the AIT's commitment to harmonization of ccdl has been somewhat more challenging than was envisaged during the 1994 Conference.

B. Developments Since Last Year's Conference(1)

The CMC and ULCC: Common Goals, Different SchedulesThe 1994 Memorandum identified the CRMS negotiators as the officials responsible for implementing the AIT's commitment to harmonization of ccdl. This function (amongst others) has now been assigned to an interjurisdictional committee of officials called the Consumer Measures Committee ("CMC"). Each jurisdiction has appointed one or more officials to represent it on the CMC. Although I have said that the CMC is responsible for implementing the AIT's commitment to harmonization of ccdl, it should be emphasized that the CMC's members are officials, not politicians. One assumes that any agreement on the details of harmonized ccdl reached at the level of the CMC will ultimately have to be approved by each jurisdiction at the political level.

The CMC held a conference call in late September of 1994 to discuss a number of issues relating to the implementation of the AIT, including the process for harmonizing ccdl. Before the conference call I provided members of the CMC with a 10-page memo that discussed a number of process and substantive issues. The memo suggested a timetable that would have a working group reach a consensus on all outstanding issues in time to draft a final version of the CCDA for this year's ULCC Conference. The memo also briefly discussed what I saw as being the major outstanding unresolved issues.

By the end of the September conference call it was apparent that the CMC's ideas about the process for achieving harmonized uccdl were not exactly congruent with the ULCC's view. The following are major points upon which the two bodies' views are not fully congruent with each other.

*Having undertaken the project in 1990, the ULCC viewed the project as being in its final stages. Having only recently focused their attention on the subject, the CMC regarded the project as having just got underway.

*At the time of the 1994 Conference, the ULCC was under the impression that there was a broad measure of agreement on the appropriate approach to most substantive issues addressed by the draft acts. The ULCC believed that there were only a few major outstanding issues upon which a consensus needed to be reached. The CMC thought that every substantive issue connected with ccdl should be open for discussion.

*The ULCC had done extensive consultation regarding its evolving proposals from 1991 through 1994 and did not consider that it was necessary or desirable to undertake yet anotherround of consultation on every issue addressed by uniform ccdl. At most, further consultation on a number of especially contentious issues might be desirable. The CMC considered that it was necessary to consult broadly on all issues that would be addressed by harmonized ccdl. The CMC considered that is was important for governments, as opposed to the ULCC, to be seen to be consulting on all issues relating to harmonization of ccdl.

*The ULCC thought that it was feasible and desirable to do any necessary consultation and reach final agreement (at least at the bureaucratic level) on all outstanding issues by the spring of 1995. This would give the ULCC time to do a final redraft of the CCDA in time for this year's Conference. Since the AIT calls for the parties to agree on the contents of harmonized ccdl by January 1, 1996 (with implementation by January 1, 1997), the CMC did not think it was necessary to reach final agreement on the contents of harmonized ccdl much before December 31, 1995.

After the September CMC conference call, Peter Lown, John Gregory and I attempted to persuade the CMC to streamline its process somewhat. However, as time went by, it became apparent that the CMC would not conclude its deliberations in time to incorporate the CMC's final position in a definitive CCDA that could be adopted at this year's Conference. I have had to scramble to complete an interim redraft of the CCDA reflecting (on most issues, at least) the tentative views of the CMC working group. The working group's views are expressed in the soon-to-be finalized Consultation Paper.

The Annual Percentage Rate ControversyAt this point I am going to discuss a point that might seem to belong not here but in the part of this memorandum dealing with substantive issues. To be sure, the "APR controversy" is a crucial substantive issue, but the stage at which the controversy arose has also created an interesting issue of process.

You will recall from previous materials and Conferences that the centre-piece - or sacred cow, as I would put it - of existing ccdl in Canada (and most other countries) is a requirement that lenders calculate and disclosure the annual percentage rate ("APR"), for fixed loans.(2) The functional difference between the APR and the annual interest rate ("AIR") for a loan is that, unlike the AIR, the APR accounts for the effect of non-interest charges on the overall cost of borrowing for a loan.(3) The 1991 Issues Paper tentatively proposed to retain APR disclosure in uniform ccdl or, more accurately, assumed that uniform ccdl would continue to require APR disclosure. However, the 1992 Principles Paper essentially proposed to abandon the calculated APR(4). The Principles Paper proposed that lenders be required to disclose the AIR and the dollaramount of non-interest charges. In addition, and crucially, it was proposed to put certain express restrictions on the type of non-interest charges that lenders could impose in connection with consumer loans. These restrictions were designed to ensure that non-interest charges imposed in connection with loans would not be so high as to distort the value of the AIR as a relative measure of the cost of different credit arrangements.

The general approach proposed in the 1992 Principles Paper, which for convenience I will refer to throughout this memorandum as the "AIR approach", was refined in CCDA 2 (1993) and CCDA 3.2 (1994). Our consultation from 1992 through the first half of 1994 did not suggest that there was a lot of opposition to the general AIR approach, although there was considerable debate about its details. In particular, the CCDA's the concept of a "flat charge" proved to be particularly controversial. Essentially, a flat charge is a non-interest charge that is the same for all loans within a certain lender-defined category, regardless of the amount of a particular loan within that category.

Through the first half of 1994, commentators expressed the following sorts of concerns regarding the CCDA's method of dealing with flat charges.

*A few commentators, particularly government commentators, argued that lenders should not be entitled to impose a flat charge in connection with fixed credit. Any expenses that would otherwise be covered by a flat charge should instead be covered by an appropriate adjustment to the interest rate.

*Some commentators thought that there should be a legislated cap on the amount of flat charges, while other commentators thought we should rely on market forces to keep flat charges at competitive levels.

*There was some debate as to what constraints, if any, the CCDA should place on the criteria lenders could use to categorize loans for the purpose of setting flat charges. The main issue here was whether lenders should be able to use the amount advanced to the borrower as a criterion for categorizing loans.

Both shortly before and shortly after last year's Conference, the ALRI received comments from a couple of credit grantors' organizations that made a different sort of argument. They argued that uniform ccdl should not restrict non-interest charges at all. Rather, ccdl should simply ensure that any charges that are imposed are properly disclosed to consumers. My response to these arguments is that CCDA's restrictions on the types of non-interest charges that lenders may impose are intended to do transparently and directly what existing ccdl does opaquely andindirectly. Certain restrictions on non-interest charges (whether direct or indirect) are inherent in the longstanding Canadian policy that allows consumers to prepay non-mortgage loans without penalty. Moreover, the proposed restrictions on non-interest charges were designed to facilitate meaningful disclosure of the cost of credit, and would not impair lenders' ability to structure the pricing for their loans in a manner that reflects the costs of setting up, funding and administering different loans.

During the September 1994 CMC conference call several CMC members suggested that perhaps mandatory APR disclosure should be retained in harmonized ccdl after all. By the time the call ended it was apparent to me that this horse, which I had assumed was dead, was very much alive. In fact the CMC working group ("CMC working group"), whose activities I will describe more fully in a moment, has decided to propose in its Consultation Document that mandatory APR disclosure continue to be required in uniform ccdl. This is a fundamental change from the approach of that the ULCC has been proposing since 1992. I will come back to the implications of this change later in this memorandum.

The Federal-Provincial Working GroupYou may recall that early in 1994, after learning that harmonization of ccdl had been put on the agenda for the internal trade negotiations, John Gregory invited the CRMS negotiator from each jurisdiction to nominate a representative to serve on a cost of credit working group. It was contemplated that the working group would try to resolve outstanding issues in time for the ULCC to approve a uniform act at the 1994 Conference. Most jurisdictions took up the invitation, and the working group met for two days in Toronto in early March of last year. Although the group did not reach a consensus on all issues, its deliberations were reflected in CCDA 3.2, which was considered at last year's Conference.

The working group referred to in the preceding paragraph was organized by the ULCC, but most of its members were nominated by the CRMS negotiators. Nevertheless, during its September 1994 conference call the CMC decided to set up its own working group, which is the one I have been referring to as the CMC working group(5). Although John Gregory and I have participated actively in the CMC working group's deliberations, it is the CMC's working group, and its proposals are those of the CMC. The proposals in the CMC Consultation Paper will be advanced as proposals of the CMC, rather than as joint proposals of the CMC and the ULCC.

The CMC working group had its first meeting in late November 1994, but the purpose of that meeting was to deal with process issues, rather than substantive issues. During that meeting it was decided that the group would develop a policy paper that would set out detailed proposals (in non-statutory language) for harmonized ccdl that would be circulated for comment to "stakeholders" in the spring of 1995. The first substantive meeting was scheduled for early February.

Before the CMC working group's first substantive meeting I provided its members with two documents:

*a 60-page paper entitled Disclosure and Restriction of Non-Interest Charges in Existing and Proposed Cost of Credit Disclosure Legislation ("APR Paper").

This paper dealt with the advantages and disadvantages of mandatory APR disclosure, and argued that the approach suggested by the ULCC would be less complicated and would provide consumer borrowers with effective disclosure of the cost of credit.

*an 80-page memorandum entitled Policy Memorandum on Harmonized Cost of Credit Disclosure Legislation.

This memorandum described a series of issues that have to be addressed by uniform ccdl. Each issue was followed by one or more propositions as to how it should be addressed in uniform ccdl. For the most part, the propositions were formulated so as to reflect (in non-statutory language) the text of CCDA 3.2, modified as necessary to reflect comments that we have received on CCDA 3.2.

During the course of the CMC working group's deliberations I have supplied its members with a few additional documents:

*a 22-page memorandum entitled Supplementary Policy Issues.

This memo dealt with some issues that I had not had time to deal with in the main policy memorandum. It followed the same format: a description of issues and propositions about each issue.

*a 22-page memorandum entitled APR Calculation and Disclosure Issues.

When it became obvious that many members of the CMC working group were not going to be easily convinced to abandon APR disclosure, I prepared this memorandum to raise a number of issues that would have to be addressed if the APR approach was going to be continued in uniform ccdl. One purpose of this memorandum was to impress upon working group members the complexity of the issues raised by mandatory APR disclosure. Unfortunately, I am not sure that it made much of an impression in this regard.

*an 8-page memorandum entitled Balance Calculations.

The working group decided that not only should non-interest charges be included in a calculated APR, but some of these charges should be partially refunded when a loan is prepaid. This made it necessary to determine how the rebateable portion of these refundable charges should be calculated. The Balance Calculations memorandum discussed this issue.

N.B.The documents mentioned above are not included in the package of materials for the Conference, but are available on request from the ALRI.

The first substantive CMC working group conference call took place on February 27, 1995. As of June 8 the group has held a total of 11 conference calls (each of about 2 hours duration) as well as a 3 day face-to-face meeting in Toronto.(6) I have participated in all the calls and meetings and John Gregory has participated in most of them.

The CMC's Ongoing ProcessThe working group has reviewed several drafts of the CMC Consultation Paper, and the paper is almost ready to be circulated. However, even as late as the conference call of June 8, the working group's proposals on several important issues (such as how to calculate the APR) had still not been finalized. As already discussed, the Consultation Paper will propose that harmonized ccdl continue to required APR disclosure for fixed credit. In most other respects, the working group's proposals are consistent with the general thrust, if not all the details, of CCDA 3.2.

Once the working group is satisfied with the Consultation Paper it will be submitted for approval by the CMC itself. It will then be circulated to stakeholders, who will be asked to provide written comments by the middle of August. After evaluating the written comments, the CMC working group will attempt to reach a consensus on all outstanding issues by early in the fall. It is envisaged that some outstanding issues might have to be resolved by higher officials or at the political level. The CMC's ultimate objective is to reach agreement at the political level on the content of harmonized ccdl by the January 1 deadline set out in the AIT.

CCDA 4.1 and the CMC's Consultation PaperDrafting CCDA 4.1 has been an interesting process, to say the least. By March it was apparent that the CMC working group was not going to be persuaded to propose the AIR approach in the Consultation Paper, and was likely to propose the APR approach.(7) Nevertheless, the ULCC steering committee decided that the draft of the CCDA to be presented at this year's Conference should be based on the approach that the ULCC has been proposing and developing since 1992. That is, the draft would continue the approach of requiring disclosure of the AIR and the dollar amount of non-interest charges, as well as placing certain qualitative restrictions on non-interest charges. The decision to continue drafting to the AIR approach was made on the basis that the CMC's consultation process may lead it to reconsider its rejection of the AIR approach.

Of course, consideration should be given to what uniform ccdl would look like if the APR approach recommended in the CMC Consultation Document is ultimately adopted by those who have the final say in such matters. In fact, I originally intended to include "alternative provisions" in CCDA 4.1 that would actually implement the APR approach. However, I abandoned that idea when it became apparent that the CMC working group would not have reached a consensus on the details of the APR approach in time to put those details in statutory language. However,Appendix 1 of this memo indicates which provisions of CCDA 4.1 would have to be modified (or deleted entirely) to accommodate the APR approach, as proposed by the CMC working group.

Apart from the fact that it does not implement the APR approach, and with a couple of other exceptions I will mention later, I believe that CCDA 4.1 is a fair reflection of most of the proposals in the Consultation Paper. I say this with some trepidation, because the working group's exact position on a number of issues had not been crystallized at the time I was drafting CCDA 4.1. I had a pretty good idea what the Consultation Paper's position on most issues was likely to be, but its exact position on certain issues was not absolutely clear. Indeed, even when the Consultation Paper is circulated, I suspect that the details of the CMC working group's position on certain issues will be somewhat ambiguous.

Before leaving CCDA 4.1 (for the time being), it is worth emphasizing that on most major issues, the working group's proposals follow the general course charted by CCDA 3.2. Implementing the working group's proposals regarding open credit, leasing and compliance has required relatively minor changes from CCDA 3.2 to CCDA 4.1. Even in the context of fixed credit, apart from the APR issue, implementation of the working group's proposals did not require major changes to the provisions of CCDA 3.2.

The Interest ActYou may have noticed that I have hardly mentioned the PIA. At last year's Conference the consensus seemed to be that the ULS should not adopt a text of a proposed replacement for the Interest Act. This was probably just as well, because it appears that the federal government is not convinced that it is necessary to replace or make wholesale changes to the Interest Act in order to fulfil its commitments under the AIT.(8) For the time being, all the government intends to do is to amend sections 4 and 6 of the Interest Act to allow the Governor in Council to prescribe the method of calculating the annual interest rate to be disclosed under those two sections.

It is indeed true that, so far as the harmonization of ccdl is concerned, sections 4 and 6 are the two crucial sections of the Interest Act. By repealing those two sections and replacing them with a broad regulation-making power (and then passing the appropriate regulations), the federal government could harmonize the Interest Act with other ccdl and accomplish most of what was intended to be accomplished through the PIA.(9) Unfortunately, I believe that the federal government's proposed amendments to sections 4 and 6 do not really address those sections' fundamental problems, nor do the amended sections create a broad enough regulation-making power to permit the sort of regulations that are necessary to make the Interest Act a truly useful complement to general-purpose ccdl.

The amendments are contained in Bill C-88, the Agreement on Internal Trade Implementation Act, which received second reading on May 29. Section 17 of the Bill amendssections 4 and 6 of the Interest Act to read as follows (the amended parts are in bold print):

4(1)Except as to mortgages on real property, whenever any interest is, by the terms of any written or printed contract, whether 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 prescribed by regulation 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, calculated in accordance with the regulations.

(2)The Governor in Council may make regulations for the purposes of subsection (1).

6(1)Whenever any principal money or interest secured by mortgage on real property is, by the mortgage, made payable on a sinking fund plan, on any plan under which the payments of principal money and interest are blended or on any plan that involves an allowance of interest on stipulated repayments, or on any fund or plan described in the regulations, no interest whatsoever shall be chargeable, payable or recoverable on any part of the principal money advanced, unless the mortgage contains an express statement showing the amount of the principal money and the rate of interest chargeable on that money, calculated in accordance with the regulations.

(2)The Governor in Council may make regulations for the purposes of subsection (1).

Obviously, the amendments would preserve most of the text _ and most of the problems _ of the present sections 4 and 6.

After Bill 88 received first reading, I wrote to the Department of Finance and pointed out that the amendments to section 4 and 6 failed to address many of the problems presently associated with those sections. I argued that sections 4 and 6 could be combined in a single section that gives the Governor in Council a broad power both to define the classes of contracts to which the regulation would apply and to prescribe the method of calculating and disclosing interest for such contracts. I have not received a response to my letter.

C. Issues of Process

Suggested Process for Finalizing Uniform ActThere is no doubt that the AIT and the role of the CMC in implementing the AIT's commitment to harmonization complicates things for the ULCC. Obviously, the AIT-related process wrought havoc with the ULCC's timetable for adopting a uniform act. But timetable considerations aside, there is a question of how far, if at all, the ULCC should defer to other organizations on the resolution of contentious issues that affect the content of the CCDA (as finally adopted by the ULCC). Should the ULCC reach its own conclusions about the appropriate approach to various contentious issues and adopt a CCDA that reflects those conclusions, regardless of whether those who are ultimately responsible for implementing the AIT's commitment to harmonization are likely to reach the same conclusions? Or should the ULCC attempt to convince those who have the final say of the wisdom of the ULCC's conclusions on contentious issues, but ultimately adopt a CCDA that implements the conclusions of those who have the final say on the contents of harmonized ccdl? I believe that the latter is a more constructive approach and should be adopted by the ULCC.

Later, this memorandum briefly discusses and makes recommendations about a number of substantive issues regarding the content of harmonized ccdl. For the most part, these are issues that arise out of the CMC Consultation Paper. These are issues where I have serious concerns about the utility or practicality of the approach proposed by the Consultation Paper. It would be useful for the Uniform Law Section to discuss these issues and decide whether to recommendthat the CMC reconsider its position on them. Having made these recommendations, however, the Section would acknowledge that on certain issues, such as the APR issue, the CCDA might not reflect the approach favoured by the ULCC.

Recommendation 1

1.1The ULS should consider and reach a position on the substantive issues identified in this memorandum or raised for discussion at the Conference.

1.2The ULS's position on the substantive issues should be communicated to the CMC working group by the committee referred to in Recommendation 1.3.

1.3The ULS should delegate a committee to communicate with the CMC and to finalize the text of the Uniform Cost of Credit Disclosure Act ("UCCDA") by not later than January 15, 1996.

1.4The UCCDA should implement the final agreement of the parties to the AIT regarding the content of harmonized cost of credit disclosure legislation, even where this does not reflect the preferred approach of the ULS.

1.5The UCCDA should be circulated to all jurisdictions as soon as possible after January 15, 1996. Unless two or more objections are received by the Executive Director of the Conference by February 28, 1996, the UCCDA should be taken as adopted as a Uniform Act and recommended to the jurisdictions for enactment, and the text should appear in the 1995 Proceedings.

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