- Third Interim Report on Cost of Credit Disclosure Act 1994
- PROCESS ISSUES
- TOPICS NOT DEALT WITH BY CCDA
- FUNDAMENTAL ISSUES
- ISSUES REGARDING SPECIFIC SECTIONS Part 1 - Definitions and Application
- Part 2 -- Charges and Calculations
- Part 3 -- Fixed Credit
- Part 4 -- Open Credit
- Part 5 - Leases of Goods & Part 6 - Compliance
- Part 7 - General
- Appendix A
- Appendix B
- All Pages
Detailed Disclosure Requirements Versus General Principles
One commentator raised the issue of what I have called the "detailed requirements" approach versus the "full and fair disclosure" approach. The commentator first observed that "the proposed ccdl 3.2 is a model of clarity in comparison to any ccdl legislation which has previously existed in Canada", but then argued that the act still was not "accessible, even to lawyers." The argument (which is developed in some detail) ends with the conclusion that, since implementation of the detailed requirements approach is bound to produce legislation that is too difficult for non-specialists to understand and apply, the full and fair disclosure approach should be adopted instead.
I remain convinced that the detailed requirements approach is the better approach. There is a good reason why not only every Canadian jurisdiction, but also the United States, the United Kingdom (and the rest of the European Union), and Australia have adopted the detailed requirements approach. Whatever its drawbacks, it is the only approach that has any prospect of ensuring that consumers receive the same cost of credit information in the same format from different credit grantors. And only where this happens will consumers have a reasonable opportunity to compare the cost of credit from different sources.
Having said that, I take the commentator's point about accessibility. In particular, there are some changes of terminology that would, I think, address some of the specific concerns that led the commentator to conclude that CCDA is not accessible to ordinary business persons and other non-specialists. I will come back to this point when we get to the definitions in section 1.
Flat Charge for Fixed Loans
Discussion Notes, Part A.2.a (p. 5-6)
CCDA 3.2: ss. 1(1)(t), 8
CCDA 2 largely abandoned the concept of a calculated annual percentage rate ("APR") in favour of a system in which (1) lenders must disclose the annual interest rate ("AIR") and (2) there are explicit restrictions on non-interest charges. The possible non-interest charges are divided into four categories:
disbursement charges (called "loan setup charges" in CCDA 2);
prepayment charges (only permitted for mortgage loans); and
Commentators appeared to be satisfied with the basic approach of CCDA, but there were differing views on exactly what non-interest charges should be permitted. The main point of controversy was over flat charges for fixed loans. To explain the controversy, it is necessary first to set out the rationale for CCDA's approach to flat charges for fixed loans. To this end, I have reproduced an edited extract from the Commentary on CCDA 2. [All footnotes except for footnote are from the original.]
One way to define the range of permitted non-interest charges for internal administrative costs would be to say that there are none. Lenders would be required to recover all of their internal administrative costs by adjusting their interest rates to ensure that the interest charges cover the internal administrative costs associated with each loan. If required to do so, lenders could indeed recover internal administrative costs by making appropriate adjustments to their interest rate structures for fixed loans. But the resulting rate structures will not necessarily simplify things for consumers or make it easier to find the cheapest sources of credit.
Suppose that Acme Finance Corp. specializes in smaller personal loans: from $500 to $5,000. The process -- and, therefore, Acme's direct internal cost -- of setting up a loan is pretty much the same regardless of the loan amount: say, $25 per loan. Most of Acme's loans have terms from 6 to 36 months, and it will be assumed that Acme's cost of funds is the same for all its loans. Acme has found that the simplest way to price its loans to ensure that loans of different amounts and terms are profitable is to charge a flat "administration fee" of $25 and to set the interest rate at 10% per annum for all loans. The $25 fee is generally added to the amount of the loan. Acme's typical advertisement looks something like this:
Loans from $500 to $5000. Terms: 6 months to 3 years. Interest rate: 10% per year. Administration fee: $25
It is pointed out to Acme, however, that its ads violate ccdl because lenders cannot impose a non-interest charge such as the $25 fee. The interest rate must account for all internal charges, as well as the cost of funds. Acme could adjust its interest rates so that it will get exactly the same cash flow from any given loan that it would have got by charging $25 and 10%. The following chart indicates the interest rate that would have to be charged on different loans to get the same cash flow on each loan as is achieved through the combination of a $25 administrative charge and a 10% interest rate.
INTEREST RATE EQUIVALENT TO $25 ADD-ON FEE AND 10% INTEREST
|Loan Amount||6 Month Term||12 Month Term||24 Month Term||36 Month Term|
Thus, Acme could respond to the "interest only" requirement by introducing a flexible interest rate policy: 27.2% for a 6 month, $500 loan, 12.4% for a 1 year, $2000 loan, and so on. The overall effect of this policy on consumer awareness of credit cost would not necessarily be all to the good. Here are a couple of possible drawbacks.
It will be harder to give consumers advance information about the cost of loans. Acme's advertisements might now look more like this:
Loans from $500 up to $5000. Terms: 6 months to 3 years. Interest rates vary, depending on amount and duration of loan.
Acme cannot provide any interest rate information in its advertisements that will apply across the whole range of its loans.
Converting the $25 non-interest charge into interest has its most dramatic effect on smaller, shorter-duration loans. There is perhaps something to be said for letting borrowers know that $25 and 10% on a $500 loan over six months translates into 27.2% per year. On the other hand, the smaller the amount and the shorter the duration of a loan, the less useful APR becomes as a measure of the cost of credit. For example, from the table it will be noted that the annual interest rate on a $500 loan declines quite sharply when the term goes from 6 months to a year (or longer). It drops from 27.2% for a six month loan to 19.3% for a one year loan and 14.9% for a two year loan. Borrowers might conclude from this that it must be wiser to pay back a $500 loan over one or even two years because the interest rate will be much lower. But such a decision would cost the borrower money because the dollar cost of the loan would increase as the term increases, despite the lower rates.
Thus, requiring lenders to recover all of their internal administrative costs by adjusting their interest rates would have drawbacks, even from consumers' point of view. In particular, consumers might well have to deal with a more complicated rate structure than they would have to deal with if lenders could recover certain internal costs through an administration charge.
This leads to the question of whether there is some mechanism or combination of mechanisms that will do all of the following:
preserve the value of the annual interest rate as a reliable indicator of the cost of credit from different sources.
allow lenders to recover certain internal administrative costs through non-interest charges.
be easy to apply, in the sense that there will be little or no room for argument as to whether a given non-interest charge is permitted or not.
It is suggested that the flat charge mechanism meets these criteria. The definition of "flat charge" [CCDA 3.2, s. 1(1)(t)] is based on the proposition that a lender's direct internal costs of setting up or administering a given loan should be relatively insensitive to the amount of the loan. The steps that a lender must take to administer a $5,000 loan are pretty much the same as the steps it must take to administer a $25,000 loan. Hence, the direct administrative costs for the two loans should be roughly the same, and the amount that needs to be charged to a borrower to recover this cost should also be the same.
But what is to prevent lenders from setting the amount of their flat charges much higher than the internal costs they are supposed to cover? The answer is that market forces should deter lenders from setting flat charges higher than is necessary to cover such costs. Consumers are quite sensitive to non-interest charges, especially when those charges are high in relation to the amount of the loan. A charge that a borrower might hardly notice if imposed in connection with a $10,000 loan might be much more noticeable in connection with a $1000 loan. Therefore, a lender who is required to impose the same flat charge for a $1000 loan as for a $10,000 loan will have to consider the reaction of borrowers of smaller amounts when setting the amount of the flat charge for a class of loans. Thus, the requirement to establish a single flat charge for a class of loans over a range of values should act as a brake on any temptation to inflate flat charges.
The Commentary went on to propose legislated caps on the amount of flat charges for fixed loans to ensure that lenders do not inflate their flat charges. CCDA 2 proposed caps of $25 for non-mortgage loans and $100 for mortgage loans.
The comments on CCDA 2's approach to flat charges for fixed loans focused on the proposed cap. Commentators argued that the cap was unnecessary, because market forces would keep the amount of flat charges at competitive levels. I found these arguments persuasive enough to change CCDA's approach to caps. CCDA 3.2 does not impose quantitative caps on flat charges but holds them in reserve, so to speak. Section 8(6) provides for regulated caps on flat charges or for regulatory prohibition of flat charges for any type of fixed loan.
However, at the working group meeting in March it became apparent that some members were strongly opposed to allowing flat charges for fixed loans, with or without caps on their amount. The gist of their argument is captured in the following passage from a letter sent to me by a working group member:
I disagree with the entire concept of a flat charge for fixed credit. Mostlenders would automatically charge the allowable "cap" if set at the suggested $25 or $100 whereas high pressure lenders would charge excessive amounts to unsophisticated borrowers if no "cap" or a high "cap" was set. The cost of acquisition, internal investigation, documentation preparation, etc. of a lender or credit seller is as much a part of their business overhead as rent, telephone costs, salaries, etc. and should be included in their product prices or interest rates as a cost of doing business. An exception should be made for "open credit", not because of the above costs but because of the cost of monthly statements and frequent transactions. Annual card fees or item transaction costs would be acceptable with competition providing controls.
This issue was discussed at length during the working group meeting but was not resolved.
The Discussion Notes for CCDA 3.2 invited comments on the issue of flat charges for fixed loans, and several commentators took up the invitation. Not surprisingly, commentators expressed different views on the subject. On the one hand, some commentators argued that prohibiting flat charges for fixed loans would have unwelcome consequences:
It would force lenders to recover internal costs that would otherwise have been recovered through a flat charge by means of across-the-board interest rate increases. This would result in cross subsidization of people who borrow small amounts by people who borrow large amounts.
If interest rates are customized to take account of the size and duration of loans, the rates on smaller, shorter loans would be much higher than on larger, longer loans. This would create a misleading impression that borrowers of smaller amounts are being charged much higher interest rates than are borrowers of larger amounts.
If flat charges are not permitted, mainstream lenders might simply decline to offer fixed loans for relatively small amounts. Instead, consumers who want small loans will be forced to look to non-mainstream lenders for a fixed loan or borrow through an open credit agreement.
In addition to the consequences mentioned by commentators, I would suggest the following possibility.
Even if interest rates are customized for each loan, the initial costs of setting up a non-mortgage loan (for which no prepayment charges are permitted) will be recovered only if the original payment schedule is adhered to. If the loan is prepaid, the initial costs will not be fully recovered from the borrower. They will be recovered from someone else, another form of cross-subsidization.
Other commentators pointed out possible drawbacks of allowing flat charges. In addition to those mentioned in the passage quoted earlier, these include:
Allowing flat charges for fixed loans will impair the value of the annual interest rate as a means of comparing the cost of credit from different source if all lenders do not impose the same flat charge.
Many consumers would not appreciate that flat charges can significantly increase the true annualized cost of the loan.
I would add another potential problem with flat charges:
The higher the flat charge a lender imposes, the more it reduces its "prepayment risk". Where a loan is prepayable without a prepayment penalty (i.e. any non-mortgage loan) a lender might well be tempted to lock in its rate of return by inflating the flat charge and reducing the interest rate. But the essential characteristic of a flat charge -- its flatness -- and competitive considerations would make it awkward to use flat charges for this purpose.
I believe that CCDA's approach is reasonable and workable, and that the advantages of allowing flat charges -- for both consumers and lenders -- outweigh the disadvantages. On the other hand, there is a potential for abuse of flat charges in certain contexts. The potential for such abuse is recognized by section 8(6), which authorizes regulations that would cap, or even, prohibit flat charges in certain circumstances.
Adopt CCDA 3.2's approach to flat charges for fixed loans.
Disclosure of Finance Charge Information for Certain Leases
Additional Reference: Discussion Notes, Part A.6 (pp. 16-17).
The main issue regarding CCDA's provisions regarding long term leases of goods concerns the proposed requirement to disclose certain "finance charge information" for some leases. Finance charge information consists of (1) the cash value of the goods, (2) the implicit annual interest rate and (3) the implicit dollar finance charge. CCDA 3.2 would require disclosure of finance charge information for any lease where the lessee has a right to buy ("RTB lease") and any lease with a guaranteed residual value ("GRV") provision.
One commentator questioned whether finance charge information was of any benefit to prospective lessees. I disagree. I think finance charge information, while it would not necessarily be decisive, could be quite useful to consumers for comparison purposes where it is practicable to provide such information.
This leads to the issue raised by a commentator who did not directly question the benefit of finance charge information to consumers, but argued that it would be impracticable to provide this information in many of the situations contemplated by CCDA 3.2. This latter commentator took issue with the term "guaranteed residual value lease", suggesting that "finance lease" would be a better term to describe the relevant sort of lease. More importantly, the commentator observed that finance leases are confined to the business leasing context simply because "[w]e are not aware of any consumer who has found a finance lease attractive." With respect to RTB leases, the commentator drew a distinction between leases where the option price represents a genuine pre-estimate of the market value of the leased goods and leases where the option price is nominal. The commentator characterized the latter as disguised conditional sales contracts and suggested that they be treated as such (or, in CCDA's terms, as supplier loans). However, with respect to leases with market value purchase options, the commentator argued that disclosure of finance charge information would be impractical.
The second commentator's comments were directed only to automobile leasing because "leases of other movables/personal property to consumers are a negligible activity in Canada". This raises a semantic point regarding the term "lease". This term is not defined in CCDA, but was meant to include any bailment for hire. Short term contracts for the rental of goods were meant to be included within the term "lease", although most short term rental contracts would be excluded from the application of Part 5 by section 48(2)(a). One type of rental arrangement not involving automobiles to which Part 5 is definitely meant to apply is "rent to own" contracts for household goods. Although the dollar value of the rent to own market is undoubtedly dwarfed by that of the automobile leasing market, the rent to own market is significant for our purposes.
In evaluating the commentators' concerns, it will be helpful to undertake a very brief review of how leasing is presently (or proposed to be) dealt with by ccdl in Canada and several other countries.
Currently three provinces' ccdl deals with long-term consumer leases of goods.
Alberta's Act has disclosure requirements for consumer leases with terms of 4 months or more and total payments of $50,000 or less. It does not contain any special disclosure requirements for RTB or GRV leases and does not require disclosure of finance charge information.
Manitoba's Consumer Protection Act applies to "retail hire-purchase" agreements, which, by definition are leases with an option to purchase. There is, however, an important exclusion:
a hiring in which the hirer is given an option to purchase the goods exercisable at any time during the hiring and which may be determined by the hirer at any time prior to the exercise of the option on not more than two months' notice without any penalty.
I am informed that most leasing contracts in Manitoba are written so as to come within this exception, and that very few leases are entered into that come within the definition of a "retail hire purchase". Where the act does apply, it requires disclosure of finance charge information and gives the consumer a prepayment right.
Quebec's Consumer Protection Act applies to leases in similar circumstances as Alberta's Act. The act requires disclosure of finance charge information for "a contract of lease with guaranteed residual value". However, the act does not require disclosure of finance charge information for leases with an option to purchase.
Consumer leases are dealt with in two separate federal Acts: TILA and the Consumer Leasing Act ("CLA"). TILA defines the term "credit sale" ("supplier credit" under CCDA) so as to include a lease with an option to purchase if the option price is nominal. More precisely:
The term ["credit sale"] includes any contract in the form of a bailment or lease if the bailee or lessee contracts to pay as compensation for use a sum substantially equivalent to or in excess of the aggregate value of the property and services involved and it is agreed that the bailee or lessee will become, or for no other or a nominal consideration has the option to become, the owner of the property upon full compliance with his obligations under the contract.
Such lease arrangements attract the same disclosure requirements as any other credit sale (including disclosure of a calculated APR).
The CLA does not apply to lease arrangements coming within the definition of "credit sale" in TILA. Apart from that, it applies in more or less the same circumstances as Alberta's Act and Quebec's Act. The CLA does not require disclosure of finance charge information for the consumer leases to which it applies.
The U.K. Act divides the world of consumer leasing into "hire-purchase" and "consumer hiring". The former is basically a consumer lease with an option to purchase and the latter is a consumer lease without the purchase option. Unlike the U.S. legislation, the U.K. Act is not concerned with whether the option price is nominal or based on the estimated market value of the goods at the end of the term. The U.K. Act treats all hire-purchase agreements as just another form of credit agreement to which the normal disclosure requirements apply. This includes disclosure of finance charge information. The U.K. Act also gives the hirer (lessee) under a hire-purchase the right to exercise the option before the end of the term and get a partial rebate of the "total cost of credit" in accordance with a prescribed formula.
The Act applies to consumer hire agreements (leases without options to purchase) unless they are for a definite term of less than three months. The disclosure requirements for such agreements are similar to those for long-term leases in other jurisdictions. Disclosure of finance charge information is not required.
The Code's approach is similar to that of the U.K. Act. Section 10 provides that "a contract for the hire of goods under which the hirer has a right or obligation to purchase the goods is to be regarded as a sale of the goods by instalments". Leases without an option to purchase are dealt with in Part 10, entitled "Consumer Leases". Part 10 does not apply to leases for a fixed period of 4 months or less or to leases for an indefinite period. The disclosure requirements for consumer leases do not include disclosure of finance charge information.
It can be seen that the classification scheme and disclosure requirements for leases varies considerably from jurisdiction to jurisdiction. CCDA's approach is yet another variation. Its approach is most similar to that followed by the U.K. Act and the Australian Code. CCDA does not actually deem RTB leases to be loan agreements but its disclosure requirements -- in particular, the requirements relating to finance charge information -- are similar to those that would be required for a supplier loan. Moreover, CCDA gives lessees under RTB leases prepayment rights that are very similar to those provided to buyers under supplier loans. In particular, the implicit annual interest rate for a RTB lease is used to calculate the balance outstanding on a RTB lease at any given time.
As noted above, a commentator argued that it is impracticable to disclose finance charge information for RTB leases with a market-value option price. The reason is related to the difficulty of stipulating a cash value for such a transaction, particularly where the lease is arranged by a dealer, but is administered during the term by a finance supplier. In such cases, the commentator maintains that it would not be appropriate to use the price for which the individual dealer might be prepared to sell a vehicle to a cash buyer as the cash value for a RTB lease involving the same vehicle.
I am convinced that it would be useful for consumers to get finance charge information for any RTB lease. It would also be useful to provide a standardized method for calculating the balance outstanding at any time on an RTB lease, based on the implicit annual interest rate. The issue is whether it is always reasonably possible for lessors to provide finance charge information and whether there are circumstances where it would be inappropriate to apply a standardized balance calculation method. Further consultation on these issues would be extremely useful before any final decision is made. I would suggest that, for the time being, CCDA 3.2's basic approach to disclosure of finance charge information for RTB leases should be confirmed as the ULCC's preferred approach, subject to further consultation regarding its practicality. I would make the same suggestion regarding GRV (or "finance") leases.
CCDA 3.2's basic approach to disclosure of finance charge information for RTB and GRV leases should be adopted as the ULCC's preferred approach, subject to confirmation that the approach is practicable.
Civil Remedies for Non-compliance
Additional Reference: Discussion Notes, Part A.7 (pp 17-20)
CCDA 2 did not contain any "compliance" provisions, although the Commentary on CCDA 2 did solicit input on appropriate compliance provisions. It would be fair to say that CCDA 3.2's compliance provisions have not been subject to nearly as much scrutiny as have its other provisions. CCDA 3.2's provisions dealing with "criminal" and administrative sanctions are fairly conventional, but its approach to the civil consequences of non-compliance is somewhat unconventional and merits close scrutiny.
As mentioned in the Discussion Notes, CCDA 3.2 provides two sorts of civil consequences of non-compliance: compensatory remedies and civil penalties. This in itself is not particularly innovative; what sets CCDA 3.2 apart from other ccdl is its approach to determining when a lender may be subject to a civil penalty, and what that penalty is. One possible objection to CCDA 3.2's approach is that the whole concept of civil penalties is wrong in principle. Another line of attack might be that civil penalties are imposed in inappropriate circumstances, or that the particular civil penalties provided by CCDA are too harsh (or not harsh enough). Given the importance of this issue, it would be useful to begin with a brief (relatively speaking) survey of different approaches to this issue in Canada and abroad.
The consequences of noncompliance with section 4 or section 6 of the Interest Act are strict and inflexible. Non-compliance with section 4 means that a lender is limited to an annual rate of 5%. Non-compliance with section 6 means that the lender cannot recover any interest. Of course, no one knows for sure when section 4 or 6 applies, or what constitutes non-compliance when they do apply.
Federally Incorporated Financial Institutions
The civil consequences of a lender's failure to comply with the Bank Act's disclosure requirements are easy to state because there are none. The provisions dealing with disclosure do not impose any specific civil consequences on a lender who fails to comply with those provisions. And section 568 of the Bank Act provides:
Unless otherwise expressly provided by this Act, a contravention of this Act or the regulations does not invalidate any contract entered into in contravention of the provision.
So the consequences of non-compliance with the disclosure requirements of the Bank Act are confined to administrative or penal provisions of the act.
First Generation ccdl
The ccdl of New Brunswick, Newfoundland, Nova Scotia and Ontario contains a provision along the following lines:
(1) A borrower is not liable to pay to a lender, as a cost of borrowing, a sum that exceeds the amount or rate disclosed in accordance with [the section(s) setting out the disclosure requirements].
(2) Nothing in this Act deprives a lender of, or interferes with, his right to collect from a borrower
(a) the principal of a debt, loan or credit, or
(b) the amounts that the borrower is obliged to pay as cost of borrowing set out in accordance with section 15.
Second Generation ccdl
More recent provincial ccdl tends to set out the civil consequences of non-compliance a little more explicitly than does first generation ccdl. Although the details vary from jurisdiction to jurisdiction, British Columbia, Quebec, Alberta and Saskatchewan all take a similar approach. A lender who fails to comply with the disclosure requirements cannot collect any cost of borrowing ("credit charges" in Alberta), unless the case comes within the terms of a "saving provision". For instance, section 35 of British Columbia's CPA provides:
(1) A lender who
(a) fails to provide the debtor with a disclosure statement in accordance with sections 26 and 27 and the regulations; or
(b) fails to give the debtor a completed copy of the prescribed lending transaction documents on or before the date on which a cost of borrowing starts to accrue
is not entitled to collect any cost of borrowing.
(2) A lender shall be deemed to have complied with the prescribed regulations on disclosure described in subsection (1), notwithstanding any error, omission, or incorrect or insufficient description in the disclosure, where a court is satisfied that such error, omission, or incorrect or insufficient description is not of a nature to mislead or deceive the debtor to his prejudice or disadvantage.
(3) The burden of proof that the error, omission, or incorrect or insufficient description is not of a nature to mislead or deceive the debtor to his prejudice or disadvantage is on the lender.
Section 271 of Quebec's Act is to a similar effect, although it also allows the borrower the option of demanding the nullity of the contract. Under both the B.C. and Quebec acts, the "saving provision" takes what might be described as an all or nothing approach. If the borrower has been even a little bit prejudiced, the court does not seem to have the discretion to allow the lender to recover any of the cost of borrowing.
Section 8 of Alberta's Act takes a similar approach to the B.C. and Quebec acts, except that the saving provision gives the court a somewhat wider discretion:
an amount, if any, in respect of the credit charges that a court, having regard to the intent of this Act, considers appropriate in the circumstances.
In other words, once a contravention of the disclosure requirements is established, the recovery of any credit charges depends on the discretion of the court. The Alberta Act also provides for the situation where there is an inconsistency between the APR and the dollar credit charges stated in a credit agreement; any inconsistency must be resolved in the borrower's favour. Section 10 of Saskatchewan's Act first sets out the "non-compliance means no cost of borrowing is recoverable rule" and then provides the following two exceptions:
except where the failure in compliance results from:
(e) a bona fide error in the quotation of the cost of credit . . . in which case the seller or the assignee of the seller shall have the right to recover the lesser of the dollar and cent cost expression or the annual percentage or scale of annual percentages expression; or
(f) a bona fide error other than in the quotation of the cost of credit and such error did not prevent the buyer or borrower from having knowledge of the essential elements of the agreement in which case the rights of the seller to recover the cost of borrowing shall not be affected.
Manitoba's Act deals with civil consequences of non-compliance in several different provisions dealing with different types of credit transactions. Rather than depriving the lender of all cost of borrowing, it limits the borrower to the "legal rate", which is defined as the rate payable under the Interest Act on liabilities on which interest is payable but no other rate is fixed. For example, section 23, which deals with non-compliance in the context of retail sales of goods on credit (section 4) and retail hire-purchase agreements (section 5), provides:
(1) Except as otherwise provided in the Interest Act (Canada), and subject to subsections (2) and (3), if a writing required by subsection 4 or 5
(a) does not contain a statement of the true annual rate of the cost of borrowing or understates it by more than the margin permitted by the regulations; or
(b) omits or states incorrectly [other required disclosures]
the seller may recover from the buyer no more than the total cash price with simple interest . . . at the legal rate . . . and if the buyer has paid the seller more than that amount, he may recover the excess from the seller or if the writing has ben assigned, from the assignee.
(2) Where clause (1)(a) applies, the court may permit the seller to recover [more than the cash price and simple interest at the legal rate] if it is satisfied that the omission or misstatement was due to inadvertence; but the seller may not, in any case, recover or keep a cost of borrowing which would exceed the rate stated in the writing to be the true annual rate.
(3) Where clause (1)(b) applies, the court may permit the seller to recover . . . the full amount that the buyer has agreed to pay, if it is satisfied that the omission or misstatement was due to inadvertence and the buyer has not thereby been misled as to the amount he had to pay; but where the result of a misstatement is to produce, in the writing, inconsistencies that make it uncertain how much the buyer has to pay, the seller may not, in any event, recover from the buyer more than the lowest amount which the writing can reasonably be construed to require.
Section 23 goes on to provide that where a credit grantor makes a claim of "inadvertence" the court must not adjudicate the dispute until the director has been advised of the situation and had a chance to investigate. The director can then introduce evidence and make submissions when the court hears the matter.
A number of provisions of the U.K. Act provide that a creditor who fails to observe certain requirements in connection with a credit agreement may enforce the agreement only by applying to the court for an enforcement order. Section 65 is one such provision:
(1) An improperly executed
Section 127 sets out the principles to be applied by a court in deciding whether to grant such an order:
(1) In the case of an application for an enforcement order under --
(a) section 65 . . .
the court shall dismiss the application if, but . . . only if, it considers it just to do so having regard to --
(i) prejudice caused to any person by the contravention in question, and the degree of culpability for it;
(ii) the powers conferred on the court by subsection (2) and sections 135 [power to impose conditions, or suspend operation of order] and 137 [power to vary agreements and securities].
(2) If it appears to the court just to do so, it may in an enforcement order reduce or discharge any sum payable by the debtor or hirer, or any surety, so as to compensate him for prejudice suffered as a result of the contravention in question.
It would appear that a lender is entitled to an enforcement order unless the borrower convinces the court that he or she has been prejudiced by the error.
The U.S. Act creates several different sorts of civil consequences for non-compliance, and deals with the subject in much more detail than any Canadian legislation. The following describes the general contours of some very intricate legislative terrain.
Adjustments ordered by enforcement-agency
Section 108 of the Act (TILA) gives each enforcement agency (there are several) extensive powers, and in certain cases duties, to order a creditor to make adjustments to a borrower's account when the agency discovers that the creditor has inaccurately disclosed the annual percentage rate or finance charge. The adjustment is designed to ensure that the borrower pays only the lesser of an amount that reflects the disclosed APR and the disclosed finance charge.
Damages for non-compliance
Unlike most current Canadian ccdl (and CCDA 3.2), TILA does not expressly deprive a creditor of the finance charge as a consequence of non-compliance with the act's disclosure requirements. Instead, it provides borrowers with remedies in damages. Section 130(a) imposes liability to pay damages on a creditor "who fails to comply with any [disclosure, etc.] requirement with respect to any person". The damages to which such a creditor is liable are the sum of
any actual damage suffered by the person as a result of the failure;
the following statutory damages:
in an individual action, twice the amount of the finance charge, with minimum damages of $100 and a ceiling of $1000;
in a class action, whatever the court allows, but there is no minimum amount for each member of the class and the creditor's total liability is limited to the lesser of $500,000 and 1% of the creditor's net worth;
Limitations on liability
There are a number of provisions that may reduce or eliminate a creditor's civil liability for contravention of TILA's requirements.
Section 130(b) provides that a creditor or assignee has no liability for a violation if, within 60 days after discovering an error, the creditor or assignee voluntarily notifies the person concerned and makes whatever adjustments are necessary to ensure that the person will only pay the properly disclosed charges.
Section 130(c) provides that a creditor or assignee may not be held liable for a violation if it "shows by a preponderance of evidence that the error was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error." It provides a non-exclusive list of examples of bona fide errors, including "clerical", and states that it does not include "an error of legal judgment with respect to a person's obligations under this title".
Section 130(f) provides that provisions of the act imposing liability to not apply "to any act done or omitted in good faith in conformity" with official interpretations of the act of one sort or another.
In addition to the general limitations on liability, section 131 gives most assignees special protection. First, an action that can be brought against a creditor can only be maintained against an assignee if the relevant violation "is apparent on the face of the disclosure statement, except where the assignment was involuntary." Second, unless an assignee has knowledge to the contrary, a written acknowledgement of receipt of a disclosure statement by a person to whom a statement must be given is conclusive proof of delivery in an action by or against the assignee .
It should be stressed that I have glossed over many of the details, qualifications and exceptions to TILA's civil liability provisions.
The provisions in the Code dealing with civil liability are rather elaborate. The relevant provisions are found in Part 6, which is entitled "Civil Penalties for Defaults of Credit Providers". The provisions start with the concept of "key requirements"; section 102 lists a series of key requirements for credit contracts. Section 103 then provides for the forfeiture of interest where a credit provider has contravened a key requirement. The general rule is that all interest charges under the contract are forfeited; one exception is that where the contravention relates to a statement of account under a "continuing credit contract" (i.e. open credit), the credit provider only loses the interest for the relevant statement period.
A credit provider who contravenes a key requirement has several avenues for recovering the interest charges that would otherwise be forfeited under section 103.
Section 112 sets out a procedure by which the credit provider may rectify a contravention on its own initiative. To rectify a contravention, the credit provider must notify the debtor and the State Consumer Agency of the error, provide any corrected information, and give the debtor the benefit of any inconsistent information or reimburse the debtor for any unauthorized fee or charge. It is too late to rectify an error once it has been brought to the attention of the court by the debtor. Such a rectification can be set aside by the court if the court is satisfied (on an application by the debtor or the State Consumer Agency) that the contravention was intentional or reckless.
Section 109 is headed "Minor errors". A credit provider may apply to the court, on notice to the State Consumer Agency, for an order restoring interest charges "on the ground that the contravention is a minor error". This is defined as "an error which is unlikely to disadvantage the debtors concerned in any significant respect". The court must restore the whole of the interest charge if satisfied that the contravention "is a minor error and ought reasonably to be excused"; otherwise, the court must direct that the matter be dealt with under the more elaborate procedure provided by section 106.
Section 106 allows a credit provider to apply for an order restoring interest that would otherwise be forfeited, and the court may restore the whole or any part of the interest charge "if satisfied that the contravention of the credit provider ought reasonably to be excused." The court must consider a list of factors in making its decision on this point: e.g. the conduct of the parties; whether the contravention was deliberate or not; any systems or procedures of the credit provider to prevent or identify contraventions; any action taken by the credit provider to remedy the contravention or compensate the borrower; and so on.
Section 107 provides that the State Consumer Agency must be given notice of an application for restoration of interest charges under section 106. It also allows such an application to be made regarding multiple contracts or to a class of credit contracts in respect of which the same contravention may have occurred. It also makes provision for giving notice of the application to affected debtors by means of newspaper advertisements.
Section 113(1) places a cap on a credit provider's total liability (i.e. the amount of interest of which it can be deprived) for any one contravention. The amount of the cap depends on the assets of the credit provider in Australia. The cap ranges from $20,000 for a credit provider with assets under $50 million to $5 million for a credit provider with assets over $50 billion. Moreover, section 113(2) directs the court to "have regard primarily to the prudential standing" of the credit provider, and in light of its assessment of the credit provider's prudential standing the court may reduce the amount of interest forfeited. But in any event, "the amount of interest forfeited is to be not less than the amount of the loss" actually suffered by a debtor because of the contravention.
BACK TO CCDA 3.2
If nothing else, our brief world tour of compliance provisions makes it clear that, with one notable exception, legislators have considered that the goals of ccdl are most likely to be achieved if there are meaningful civil consequences of non-compliance. The lone exception is Canadian federal legislation applicable to banks and other federally incorporated financial institutions, which does not seem to impose any civil consequences for non-compliance with its requirements. Most jurisdictions create two basic types of civil consequences -- compensatory remedies and civil penalties -- and also provide a mechanism or mechanisms by which the lender can avoid the full sting of the civil penalties.
If you have diligently waded your way through the foregoing survey of compliance provisions, you will note that few, if any, elements of CCDA 3.2's package of civil remedies are unique. However, CCDA 3.2 puts these elements together in a somewhat different manner than any other existing or proposed act. The question is whether CCDA 3.2 strikes the right balance between encouraging lenders to comply with the act's requirements, compensating borrowers for injury, and ensuring that the civil consequences of non-compliance are fair and reasonable. I believe that the general approach strikes a reasonable balance, but concede that certain adjustments might be necessary or desirable.
Commentators expressed a range of views regarding the civil remedies provided by CCDA 3.2. Some commentators thought that the overall approach was reasonable and fair. One commentator expressed such a view, but cautioned that it might be more difficult for small businesses than for large lenders to set up an effective compliance procedure. Another commentator who supported the suggested approach noted that where a lender is restricted to recovering only the amount advanced to the lender, it may be appropriate to make it clear that the borrower can still pay the balance off over the original term of the loan. The lender should not be able to require immediate payment of the balance.
At the other end of the spectrum, one commentator strongly disagreed with the proposed approach:
Philosophically, I am opposed to bringing into Canada the American concept of the "private Attorney-General". What may work under their system of Justice does not necessarily work in Canada. The reality is that reputable lenders comply with statutes. They could not stay in business unless they did. I must admit that I do not understand the need for the complicated and discretionary system being proposed.
It should be noted, though, that CCDA's approach to civil penalties is not radically different from that of more recent Canadian provincial ccdl. The existing legislation of British Columbia, Alberta, Saskatchewan and Quebec follows the same basic pattern:
a lender who contravenes the disclosure requirements is prevented from recovering any "cost of borrowing"; but
a "saving provision" allows such a lender to recover all or a portion of the cost of borrowing in certain circumstances (which vary from province to province); and
if the lender provides inconsistent information to the borrower, the contract must be applied in accordance with the information that is most favourable to the borrower.
CCDA 3.2 does go further than any of this legislation in one respect. CCDA section 57 would not allow a lender who was guilty of a "deliberate contravention" to recover any non-interest or interest charges, and would even put the principal at risk.
The most significant departure of CCDA 3.2 from existing Canadian ccdl is in its concept of an "excusable error", which focuses on the steps that the lender took both to avoid the error in the first place and to remedy the error when it did occur. One commentator made the following point regarding CCDA's approach:
Although the suggested divisions of categories of lenders and sanctions appear at first glance very attractive, we believe that in view of the severity of the sanctions and their negative impact this proposal should be re-examined.
The suggested sanctions could effectively result in a borrower being able to walk away from a mortgage should he or she demonstrate that the lender misled them regarding any matters pertaining to the loan. For example, an institution may be required to write off the mortgage in its totality if the consumer has been misled on a minor item such as a $10 administration fee. The sanction in such a situation would definitely not reflect the harm done.
This commentator went on to express a preference for giving consumers who have suffered loss as a result of being deliberately misled by a lender a right to proceed by class action to recover that loss. I have some sympathy for the commentator's point. I will get to the sympathetic part of my response momentarily, but first I will reiterate a point made in the Discussion Notes. The civil penalty for deliberate non-compliance is indeed severe (loss of interest and non-interest charges and potential loss of principal), and the penalty for "careless" non-compliance is rather sobering as well (possible loss of all interest and non-interest charges). However, these penalties have these characteristics so as to give lenders lots of incentive to avoid incurring them. The method of avoiding them is (I think) clearly spelled out: to adopt an effective compliance procedure and promptly remedy errors that do occur once they are discovered. As emphasized in the Discussion Notes and CCDA itself, an "effective" compliance procedure is not synonymous with a "perfect" compliance procedure. For a lender that adopts an effective compliance procedure and acts quickly to remedy any errors that do occur, the civil penalties for deliberate non-compliance or careless non-compliance should be of little concern.
Having said that, I cannot casually dismiss the argument that the civil penalties provided for deliberate or careless contraventions of the act are too severe -- or at least too cumbersome -- in certain circumstances. It might be argued that the goal of encouraging lenders to adopt an effective compliance procedure could be achieved without making the consequences of deliberate or careless non-compliance quite so onerous. There are numerous ways in which this could be done. For example, instead of expressly depriving the lender of any portion of the interest or non-interest charges, the lender could be made liable for statutory damages, in the manner of TILA. Another possible approach, suggested by a commentator, would be to expressly provide for the granting of substantial exemplary damages.
In summary, for the reasons mentioned in the Discussion Notes, I think it makes sense to rely on robust civil remedies to ensure a high level of compliance with the disclosure requirements. In particular, the remedies should be designed to encourage lenders to adopt effective internal procedures to ensure compliance. This is the object of CCDA's division of contraventions into three categories: (1) excusable errors; (2) deliberate contraventions; and (3) other contraventions. I think this division is a reasonable approach but that the exact consequences of dealing with contraventions in each category certainly warrants further consideration.
The Uniform Law Section should decide upon the basic approach to the civil consequences of non-compliance with CCDA. In particular, the following questions should be answered:
(1) Is it appropriate for CCDA to provide for any civil consequences of non-compliance?
(2) Is it appropriate for CCDA to provide for "civil penalties"?
(3) Are the circumstances in which CCDA would impose a civil penalty appropriate?
(4) Are the civil penalties themselves appropriate, or should they be more or less severe?