On May 21st, only days before President Obama signed into law the Credit Cardholders’ Bill of Rights of 2009 to amend the US Truth in Lending Act, Minister of Finance Jim Flaherty announced proposed Credit Business Practices Regulations (CBPR Regs) to change certain credit card practices and proposed amendments to the existing Cost of Borrowing Regulations (COB Regs) to change disclosure requirements for both credit cards and all other consumer credit agreements, including mortgages. Both the CBPR Regs and the amendments to the COB Regs will apply to domestic and foreign banks and insurance companies, federal trust and loan companies, and their affiliates.
The changes proposed to credit card practices in Canada are similar in many respects to those set out in the US legislation, but are less extensive. The US legislation addresses a number of practices that have not seen widespread use in Canada, particularly among the banks. Nonetheless, the proposed changes to credit card practices in Canada could potentially have a significant adverse effect on the credit card operations of banks and other federally regulated financial institutions.
While the Minister’s announcement focuses on credit cards, it is important to note that many of the changes to the COB Regs also apply to disclosure of cost of borrowing and other credit terms for every other kind of consumer loan, including lines of credit and fixed and variable rate loans — including mortgages. The result is that the disclosure with respect to virtually all consumer credit agreements will have to be changed to meet the new requirements. This will be an expensive and laborious process.
Credit Business Practices
The purpose of the CBP Regs (http://www.fin.gc.ca/n08/data/09-048_1.pdf) is, in the words of the "Backgrounder" (http://www.fin.gc.ca/n08/data/09-048_1-eng.asp) accompanying them, to "limit business practices of financial institutions that are not beneficial to consumers," with a primary focus on reducing the cost of carrying credit card debt. Five such practices have been identified:
- grace periods that are less than 21 days, or where there is no grace period because the cardholder has not paid off his or her credit card balance from the previous billing period (referred to as the M2 method)
The proposal is that a minimum 21-day grace period will apply to all new purchases in the current billing period if the entire balance is paid in full by the end of the current grace period (referred to as the M1 method).
- the application of payments to the portion of the balance carrying a lower interest rate (generally balance transfers and promotional offers) before application to the higher interest rate portion of the balance
Now payments in excess of the minimum payment due must be allocated either (i) to the portion of the balance carrying the highest interest rate and then to other portions in descending order of the rate of interest payable on those portions, or (ii) pro rata based on the relative proportion of each part of the balance bearing a different rate. This may spell the end of, or at least curtail, promotional and introductory offers.
- the increase in credit limits without consent of the cardholder
The express consent of the cardholder will be required. Consent over the phone would be sufficient, but that consent must then be confirmed in writing or by fax or e-mail. Use of the card does not constitute express consent. Does this mean a card issuer cannot authorize any transaction, however minor, that permits a cardholder to exceed his or her credit limit?
- improper debt collection practices
Currently federally regulated institutions are subject to varying provincial requirements. Standard federal requirements placing limits on debt collection practices will be imposed.
- overlimit fees that are imposed when credit limits are exceeded as a result of holds on credit transactions that reduce credit availability
An overlimit fee may not be imposed in these circumstances.
Useful explanations and examples of each prohibited practice are found in the first part of the Backgrounder.
Amendments to COB Regs
As mentioned above, while the Minister’s remarks seem to be directed at credit cards, the proposed amendments to the COB Regs (http://www.fin.gc.ca/n08/data/09-048_2.pdf) will affect all types of consumer credit agreements. Many will involve substantial changes to forms, back-office systems and procedures and call centre phone scripts and procedures. The following is a brief summary of the proposed changes.
- There is now an unequivocal requirement that if a disclosure statement is part of a credit agreement, "the [disclosure] statement must be presented in a consolidated manner in a single location" in the credit agreement.
- In addition to the disclosure statement, there must be a "summary box" at the beginning of the credit agreement (if the disclosure statement is part of the credit agreement) or at the beginning of the disclosure statement (if the disclosure statement is separate from a credit agreement) that contains what is called "salient information." What constitutes "salient information" depends on the particular type of credit agreement. For example:
- for credit cards: initial credit limit; minimum monthly payment; the manner in which interest is calculated; the fixed annual interest rate; the grace period; annual fee; administrative fees; penalty fees; annual interest rate for cash advances and balance transfers; and the interest rate that will apply following the expiry of a promotional or special introductory interest rate.
- for fixed-rate fixed amount loans (i.e., mortgages): the principal amount of the loan; the term; the amortization period (if different than the term); the annual interest rate; when interest is compounded; the APR; that payments are applied first to interest then principal; the amount of each payment and when it is due; and the nature and amount of any fees and charges that are levied but are not included in the cost of borrowing; and default charges.
As is evident, the "summary box" will contain a substantial amount of information. Because it must be found at the beginning of the credit agreement or at the beginning of the disclosure statement, forms may need to be substantially reconfigured.
- Monthly credit card statements must now include an estimate of the time that would be required to repay the outstanding balance at the annual interest rate if only the minimum payment were made on the due date each month.
- Monthly credit card statements must also include notice to a customer if the annual interest rate could, as a result of certain circumstances, increase in the next billing period, and notice of what the new rate would be. Accordingly, if, for example, the annual interest rate will increase as a result of the failure to make two minimum payments during a 12-month period, then it would seem that in each monthly statement for the 11 months following the billing period in which a minimum payment was not made, the customer would have to be warned that failure to make one more minimum payment will result in an increase in the annual rate. This would also seem to apply in the month prior to the expiry of an introductory rate.
There are also other proposed changes to disclosure requirements relating to:
- providing disclosure statements where there is more than one borrower
- the circumstances under which delivery of an initial disclosure statement is not required within the time limits imposed by Section 7(1) of the COB Regs
- providing periodic disclosure for dormant lines of credit and dormant credit cards
- the information that must be provided to a credit card applicant at the time of the application
The Department of Finance has stated that it will receive submissions on the proposed changes until June 13, 2009. Apart from policy issues raised by the restrictions on certain business practices, there are numerous deficiencies in the drafting of the proposed changes that should be addressed to avoid further uncertainty in interpretation. If credit card customers are to receive equal treatment and if credit card issuers are to be able to compete fairly, then the rules must be clear. Also, it is unfortunate that this initiative at the federal level — after substantial conformity on disclosure has at long last been achieved with many of the provinces — once again creates an uneven playing field between banks and those credit grantors that are subject only to provincial regulation.