On Thursday May 21, 2009, Canadian Finance Minister Jim Flaherty announced new draft federal regulations that will change disclosure requirements and set new rules for federally regulated financial institutions that extend credit to consumers. These new rules are set out in the draft Credit Business Practices Regulations and Amending Disclosure Regulations.1 Meanwhile, the Senate and House of Commons committees continue their respective studies on Canada’s credit and debit payment systems, the results of which are not expected to be received until later in June at the earliest.
Although media coverage has highlighted how these new rules affect issuers of credit cards, these regulations have a much broader impact. Other than government student loans, these regulations will affect all credit products that are issued to consumers by banks, branches of foreign banks, retail associations, Canadian and foreign insurance companies, and trust and loan companies (defined as “institutions” in the Credit Business Practices Regulations). As a result, institutions will need to reconsider current practices and procedures.
Credit Business Practices Regulations: Feds mandate certain practices
The Credit Business Practices Regulations create a series of new restrictions and positive obligations on institutions, the affiliates they control, and any agents or representatives of those institutions and affiliates.
- Grace Period – For credit cards, a grace period must be implemented such that interest is not charged earlier than 21 days after the last day of that billing cycle. In addition, interest is only payable on balances carried over from a previous billing cycle, as new purchases would be subject to the 21 day grace period in respect of the new billing cycle.
- Allocation of Payments – If different interest rates apply to different amounts owing in a billing cycle on a credit card, and payment is made in an amount over and above the minimum amount due in that billing cycle, this additional amount must be allocated in one of two methods that are set by the regulations: (1) by applying the payment firstly to the highest interest rate with any remainder to amounts with lower interest rates in descending order or (2) by applying the payment proportionately among amounts owing at different interest rates according to their relation to the total balance outstanding.
- Fees – A consumer may not be charged a fee for surpassing their credit limit as a result of a hold placed on the credit card.
- Credit Increases – Express consent must be obtained from the borrower for any prospective increase in their credit card limit. Where that consent is obtained verbally, written confirmation of the consent must be provided to the borrower in paper or electronic form.
- Debt collection – New restrictions are implemented regarding debt collection practices for all debtors including who may be contacted, when they may be contacted, and how they may be contacted. Certain forms of communication are deemed unacceptable and the charges institutions may pass on to the borrower as a result of their attempts to recoup amounts owed are limited.
Amending Disclosure Regulations: A requirement for clear, simple disclosure, which is not “misleading”
For the most part, the Amending Disclosure Regulations affect the form of the disclosure more than they affect the substance of the information that must be disclosed. The most significant change is the requirement that disclosure statements must include certain information in a summary box at the beginning of the document, akin to the “Schumer” box contents that American consumers see for credit cards. The information required differs depending on the type of credit agreement and the type of interest rate.
Some aspects of the Amending Disclosure Regulations are credit card specific. For example, the regulations require changes to the supplementary monthly disclosure statements that credit card issuers must provide. In addition to the information that was previously required, the following new information must also be incorporated:
- an estimate of how long it will take to pay off the outstanding balance if only minimum payments are made; and
- any potential increases to an interest rate that could occur in the next period together with the new interest rate and the circumstances that would prompt the increase.
The Amending Disclosure Regulations also affect initial disclosure. Previously, an issuer of credit cards was not required to disclose information on interest rates, grace periods, or the amount of non-interest charges on credit card applications if that application or a related document prominently indicated that the relevant information was available by calling a telephone number. The new regulations eliminate this option. The Amending Disclosure Regulations also specify the manner in which disclosure must be provided when the agreement is entered into with one or more borrowers. Some credit card issuers may already comply with certain aspects of the Amending Disclosure Regulations. Regardless, all issuers will need to expend resources to review and respond to these changes.
Issues Under the New Regulations: Invitation for Comment
These new regulations raise a number of issues that must be considered. For example, while the Credit Business Practices Regulations require express consent to be obtained from borrowers in certain circumstances, they do not outline what will qualify as express consent. It is clear from the regulation that simple use of the credit card will not qualify. It is not clear, however, if express consent could be obtained as part of the initial application for credit in a standard form. In addition, the Amending Disclosure Regulations remove the provisions that previously permitted disclosure to be provided in electronic form. However, it may be that this is not intentional given the references to electronic forms of consent in the regulations.
Clearly, compliance with the Credit Business Practices Regulations and the Amending Disclosure Regulations, if promulgated in their current form, will add additional expense and burden to institutions and will require significant changes to practices and procedures. Some of these changes may also have unintended effects and consequences. For example, conflicting and differing provincial disclosure requirements must be reviewed to ensure no documentation changes are made that are not in compliance with those requirements.
Consumers in general and in particular those who do not pay off their balance owing at the end of a billing cycle or those who are delinquent in payment will be winners under the new rules. However, there will also be losers, as institutions will need to make up for the cost of compliance somewhere. It may be that consumers who pay off their balances in full every billing cycle could see new annual fees or that certain rewards programs are curtailed. It is also possible that consumer access to credit will be harder to come by.
The Department of Finance has invited interested parties to make comments by June 12, 2009.