## Older Uniform Acts

## Commentary on Cost of Credit Disclosure Act 1998

Page 9 of 9

Footnotes

Footnote: 11 AIT, Annex 807.1, paragraph 10.

Footnote: 22 The absence of disclosure requirements in favour of guarantors does nor reflect a conclusion that it would be inappropriate for legislation to create such requirements. Disclosure to guarantors is simply beyond the scope of the Uniform CCDA. For a thorough discussion of disclosure and other issues relating to consumer guarantees, see Law Reform Commission of British Columbia, Report on Guarantees of Consumer Debts (Vancouver: LRCBC, 1979).

Footnote: 33 12 CFR §226.22(a).

Footnote: 44 The last sentence of the definition of "Pa" in Proposal 1.2 says that principal "is the amount advanced, exclusive of any element of the cost of borrowing". So Proposal 1.2 says what "principal" is not, but it does not say what it is.

Footnote: 55 Would it not be simpler to ignore the charges mentioned in paragraphs (3)(e) and (f), rather than to treat them as advances? It might be a little simpler to ignore such charges where they are paid in cash. Often, however, charges such as those mentioned in these paragraphs are "capitalized," that is, added to the initial balance of the loan and amortized over the term. In such cases, treating the charges as advances, rather than ignoring them, will actually simplify APR calculations.

Footnote: 66 See Law of Property Act, R.S.A. 1980 c. L-8, s. 65.1, which requires mortgage lenders in Alberta to provide such documents free of charge.

Footnote: 77 SOR / 92-320.

Footnote: 88 See e.g. R.S.A. 1980, c. I-7, s. 22(3); R.S.B.C. 1979 c. 206, s. 25(4); R.S.S. 1978 c. I-11, s. 17.11.

Footnote: 99 12 C.F.R §226.17(d).

Footnote: 1010 SOR / 92-320.

Footnote: 1111 Suppose that the APR disclosed at the beginning of the transaction accounted for a non-interest charge of $X. An amendment that extended the payment schedule would decrease the APR; an amendment that compressed the schedule would increase the APR.

Footnote: 1212 Since the estimated residual value is based on the anticipated lease-end wholesale price, an option price that equals or exceeds the estimated residual value might still seem like a bargain if it is less than the anticipated lease-end retail price. The option also has value to the extent that the lessee acquires the benefit of the possibility that the actual value of the goods at the end of the term will exceed their anticipated value.

Footnote: 1313 For the purposes of this part, the definitions in Part 1 are read by substituting "lessor" and similar terms for "credit grantor" and similar terms: see the commentary on section 37(2).

Footnote: 1414 In theory, if a lessee pays a security deposit of $X at the beginning of the lease and gets back $X at the end of the lease, the effective APR will be higher than it would have been had the lessee not been required to post the security deposit.

Footnote: 1515 An ordinary down payment and prepayment of end-of-term payments serve essentially the same purpose. In either case, the payment reduces the initial amount financed by the lessor.

Footnote: 1616 15 U.S.C. §1641.

Footnote: 1717 Given the jurisprudence regarding section 6 of the Interest Act, it might be more accurate to say that section 6 applies to mortgage loans with uncertain characteristics, or that it applies to mortgage loans with certain characteristics but no one, including the courts, knows what those characteristics are.

Footnote: 1818 The unproclaimed amendment to section 6 of the Interest Act is in the Agreement on Internal Trade Implementation Act, S.C. 1996 c. 17, s. 18. Most sections of the latter Act were proclaimed in force on July 15, 1996, but sections 17 (which replaces section 4 of the Interest Act) and 18 have not yet been proclaimed.

Footnote: 1919 Strictly speaking, any non-interest finance charge, no matter how small, affects the APR. But section 5(5) of the Schedule only requires the APR to be accurate to within 1/8 of one percent, and a small charge might not increase the actual APR by as much as 1/8 of one percent.

Footnote: 2020 In certain circumstances there could be multiple solutions to the equation. Technically, to anticipate this possibility one should take the same approach as the drafter of the U.K. regulations and specify that the APR is the positive value of "r" closest to zero that satisfies the equation, or if no positive value satisfies the equation, the negative value closest to zero: see Consumer Credit (Total Charge for Credit) Regulations 1980, SI 1980/51, s. 9(3). But most legislation leaves this refinement implicit.

Footnote: 2121 Although the true APR will be higher than the annual interest rate, a disclosed APR based on the annual interest rate might be within the 1/8 of one percent (.125%) tolerance permitted by section 5(5) of the Schedule. Whether it is or not depends on the magnitude of the interest rate: the higher the interest rate the greater the gap between the interest rate and the APR. For the example of daily compounding and monthly payments, an APR based on the annual interest rate would be within the permitted tolerance when the interest rate is 16% (true APR 16.10%) but outside the permitted tolerance at 18% (true APR 18.13%).

Footnote: 2222 This statement is based on an interpretation of the ambiguous reference in Proposal 1.2's definition of "Pa" to "the principal outstanding at the end of each of a series of equal interest calculation periods, as provided for in the loan contract". Suppose that the loan contract provides for monthly payments but also provides for the daily calculation and compounding of interest. According to the contract, within each monthly payment period the principal outstanding will increase on a daily basis, as interest is added to principal. The quoted phrase from the definition of "Pa" seems to imply that for the purposes of calculating the APR, the principal is assumed to increase on a daily basis as provided by the contract. However, this implication would offend the concluding statement in Proposal 1.2's definition of "Pa": "The principal is the amount advanced, exclusive of any element of the cost of borrowing" [emphasis added]. Since interest is an element of the cost of borrowing, adding interest to principal would offend the explicit statement that principal excludes any element of the cost of borrowing. The APR calculation algorithm in subsection (3) implements the "principal excludes cost of borrowing" rule through calculation rule (c).

Footnote: 2323 The terms of the equation in section 2(3) can be rearranged like so:

r~=~C over {`sum from {x`=`1} to {n}L_x~P_x}

Letting T represent the length of the term in years (as in Proposal 1.2), simultaneously multiplying and dividing the denominator of the foregoing equation by T gives the following:

Simultaneously multiplying and dividing the denominator by T is obviously pointless, except that the expression in square brackets gives the average principal outstanding during each year of the term (Pa in Proposal 1.2). Using the average principal to calculate r simply adds an unnecessary step to the calculation of the APR.

Footnote: 2424 The interest component will be $0 in the special case where the interest rate is 0%. This would not be all that uncommon, since retailers frequently offer "0% interest" financing arrangements with an administration fee. Since the administration fee will be a non-interest finance charge (unless it is also payable by cash customers), the total cost of credit and APR will be greater than 0%.

Footnote: 2525 The actual contractual interest rate is irrelevant when calculating the APR, except that the contractual interest rate determines the amount of the borrower's payments.

Footnote: 2626 12 CFR §226.22(a).

Footnote: 2727 12 CFR Pt. 226 Supp. I, §3 of commentary on section 226.22(a).

Footnote: 2828 12 CFR Pt. 226 Supp. I, §1 of commentary on section 226.22(a).

Footnote: 2929 Suppose, for example, that a 36 month loan is to be paid off in 30 equal monthly payments; the first regular payment not being made until the end of the seventh month. All else being equal, the APR for this loan would be somewhat lower if calculated using the actuarial method (as defined by Regulation Z) than it would be when calculated using the U.S. Rule. But the difference will not be dramatic, which presumably is why Regulation Z allows U.S credit grantors to use either method.

Footnote: 3030 It may be noted that, given their respective definitions of terms, the exponent x-n in the CCDA equation is equivalent to the exponent -(N-A) in the DHA.

Footnote: 3131 In fact, if a tax is added to the capitalized amount and amortized over the term of the lease, it is unlikely that the portion of each monthly payment that is attributable to that tax will be specifically identified.

Footnote: 3232 Consumer Credit (Total Charge for Credit) Regulations 1980, SI 1980/51, s. 6.

Footnote: 3333 Rounding a correctly calculated APR to the nearest decimal place (e.g 8.9%) yields a disclosed APR that will be within 1/20 of one percent (.05%) of the actual APR. Rounding a correctly calculated APR to the nearest quarter of one percent (e.g 7.25%) yields a disclosed APR that will be within 1/8 of one percent (.125%) of the actual APR.

Footnote: 3434 P.L. 90-321, Title I, Ch 5 §183(c), as added P.L. 94-240, §3, 90 Stat. 259, 15 U.S.C. 1667b(c).

September 1998

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