|
Return to First Part of Chapter Here
3. Disclosure Duties At Commencement and During Credit Agreement
(a) Overview
Perhaps the primary forms of CPA regulation of credit agreements are the extensive financial disclosure duties imposed on lenders, intended to provide the consumer with straightforward information about the details of their sometimes complex credit agreement.
Financial disclosure breaks down into 'initial disclosure', 'subsequent disclosure' (after changes in circumstances), 'supplementary disclosure' (after changes in agreement) and several miscellanous other forms.
The primary initial disclosure must be delivered to the borrower "at or before the time that the borrower enters into the agreement". To avoid repetition, this duty is excepted where a loan broker is involved and "the lender has adopted the loan broker's initial disclosure statement as his, her or its own" [CPA s.79(1)]. Loan broker initial disclosure duties are set out in the Part B chapter of that same title, at s.2 ["Content and Disclosure Requirements for Loan Brokering Agreements"].
As well, the details of the disclosure requirements vary according to whether the credit agreement is 'open' or 'fixed', as those terms are defined in s.2(c) above.
(b) General Disclosure Requirements
General CPA requirements for disclosure are explained at this link:
General Disclosure Requirements
More specifically, disclosure required in this chapter may be "based on an estimate or assumption" if [CP Reg 70(2)]:- the information is not ascertainable at the time the disclosure is made;
- the estimate or assumption is reasonable; and
- the estimate or assumption is clearly identified as an estimate or assumption.
Note: Some exceptions to these allowances for estimates and assumptions are found in CP Reg 70(2), which relate to the definition of "Annual Percentage Rate" as discussed in the "Glossary of Key Terms", at s.2(d) above.
Disclosure statements required under this section may be made in separate documents, or parts thereof [CP Reg s.70(1)].
Where a disclosure of a monetary amount is in currency other than Canadian dollars, the currency shall be stated [CP Reg 70(3)].
(c) Disclosure Duties for Fixed Credit
. Initial Disclosure Statement: Fixed Credit- Overview
Recall from s.2(c) above that 'fixed credit' is generally where the amount of the credit or loan advanced is just that, fixed or certain in amount. The CPA defines all credit agreements that are not 'open' (ie. where draws may be made at the will of the borrower, subject to limits), to be fixed [CPA s.66].
General requirements for disclosure are explained at this link:
General Disclosure Requirements
More specifically, the initial disclosure statement for a fixed credit agreement must be in writing, and shall contain the following information [CPA s.79(2), CP Reg s.63(1-3)]:
- Initial Principal Balance
The outstanding principal balance as at the beginning of the term of the credit agreement. 'Principal' refers to the original amount of loan or credit being advanced to the borrower, and is distinct from interest or other charges.
- Advances and Retails
The total of the advances to be made to the borrower. These are the amounts of credit or loan given to the borrower.
If more than one advance is to be made to the borrower, the nature, timing and amount of each advance.
- Terms and/or Amortization Length
The length of the term of the credit agreement must be set out in the disclosure. As well, if the amortization period is different from the term length, that must be set out as well. The amortization period is the length of time that payments are required before the debt is discharged.
Normally these two periods will be the same, as final payment usually ends the credit agreement.
- Cost of Borrowing
As per the glossary in s.2(d) above, "cost of borrowing" is basically the additional money that the borrower will have to pay over and above the principal of the transaction (ie. total interest and other fees). This 'cost of borrowing' must be set out in the disclosure. For purposes of calculating the cost of borrowing where the interest rate is variable, the rate that shall be used for this calculation is the initial interest rate [CPA 63(3)].
- Extra Charges
With respect to each element of the non-interest costs of borrowing, the lender must disclose "the nature of the element and amount payable by the borrower."
- Interest Rates
If the interest rate is fixed through the term of the credit agreement, that rate.
If the interest rate is variable, then the initial rate and "the manner of determining the annual interest rate at any time during the term of the credit agreement". As well, unless the schedule of payments is already adjusted to account for the variable interest rates, then the lender must also disclose "the lowest interest rate at which the scheduled payments would not cover the interest that would accrue between consecutive scheduled payments based on the outstanding principal balance as at the beginning of the term of the credit agreement". This last provision is meant to inform the borrower when their payments are inadequate to cover accruing interest charges alone (let alone the principal). Above this rate the debt would in fact be increasing, despite the consumer's belief that the regular payments they make 'are paying it down'.
- Commencement of Interest Accrual
This is the date that interest starts to operate, increasing the debt owing.
- Interest Compounding
The circumstances under which interest is compounded under the credit agreement. 'Compound interest' refers to the situation where interest accumulates on previously charged interest, as though it were part of the principal amount. Where interest is not charged on interest the arrangement is described as 'simple interest'.
- Grace Periods
As per the glossary above, 'grace period' is a period during which certain charges otherwise payable under the credit agreement are forgiven. The details of such grace periods must be disclosed.
- Annual Percentage Rate
As it is defined in the glossary [s.2(d)] above, the "annual percentage rate" must be disclosed.
- Optional Services Details
As per the glossary above, "optional services" are ones offered to the borrower which they may accept or decline while still entering into the main credit agreement.
The disclosure must include which optional services have been accepted, the charges for each of them, and "the borrower's right to terminate any optional service of a continuing nature and the manner of exercising that right".
However, this disclosure requirement may also be met by disclosure in a "separate statement delivered to the borrower before the optional services are provided to the borrower" [CP Reg s.63(2)].
- Payment Terms
Payment terms are broken down into two types: scheduled (the more common) and non-scheduled.
Where payments are scheduled, the disclosure must include "the total of all payments the borrower is required to make in connection with the credit agreement and the timing and amount of each payment, including, without limitation, any down payment, trade-in allowance, balloon payment and final payment". For purposes of calculating the cost of borrowing where the interest rate is variable, the rate that shall be used for this calculation is the initial interest rate [CPA 63(3)].
Where payments are not scheduled, the disclosure must include either "the circumstances under which the outstanding balance or a portion of it is required to be paid by the borrower, or the provisions of the credit agreement that set out those circumstances".
- How Payments Applied to Outstanding Debt
There are different methods prioritizing how payments made are applied against the elements of the debt (ie. principal, interest and charges), and they can have different impacts on the total debt owed after the payment is so allocated. Lenders will usually structure these so that the payment is allocated in a manner that is most favourable to them.
The method that the lender uses to allocate payment to principal, interest and charges must be disclosed.
- Prepayment Rights and Refunds
Borrowers have some prepayment rights under credit agreements (see s.6 below).
Full prepayment by the borrower under a credit agreement for fixed credit entitles the borrower to a refund or credit of a portion of non-interest charges made against or paid by him. The method of calculating such refunds or credits must be disclosed.
- Default Charges
Charges due in the event of borrower default under the credit agreement must be disclosed.
- Personal Property Security Details
It is common for loans and credit to be secured in favour of the lender by the granting of a security interest in personal property (chattel property). Such arrangements are sometimes called 'chattel mortgages' and they are almost always registered as to their security priority (in case the same chattels have otherwise been encumbered) with Ontario's Personal Property Securities Act (PPSA).
The lender must disclose a description of any chattel property so encumbered.
Note that where real estate is mortgaged in order to secure a loan or credit, Part VII of the CPA (the subject of this chapter) does not apply at all, by virtue of an exemption contained in the definition of "credit agreement" [CPA s.66]. See s.12: "Exemptions".
- Where Insurance Required
Some credit agreements, as an additional form of security for the lender, require that the borrower purchase default insurance such that if the borrower defaults in payment the lender can collect against the insurance company. Invariably fees for this insurance are paid by the borrower as a term of the credit agreement, and it is very common for the credit agreement to name the insurance company, which typically is closely affiliated with or even outright owned by the lender.
To counter the inherent conflict of interest in such practices, Where such insurance is required the lender must disclose to the borrower:
- "that the borrower may purchase the insurance from any insurer who may lawfully provide that type of insurance and may purchase the insurance directly from the insurer or through an agent of the borrower's choice", and
- if applicable by the terms of the credit agreement, that "the lender has the right to disapprove, on reasonable grounds, an insurer selected by the borrower".
This topic is discussed in more detail in s.8: "Insurance Requirements".
. Subsequent Disclosure: Fixed Credit Where Payments Inadequate to Cover Interest
Additionally for fixed credit agreements, if - at any time - the number of scheduled payments is, by reason of missed payments or default charges increasing the principal debt, no longer adequate to cover the accrued interest, then the lender must so advise the borrower [CPA 80(3)]. Such Notice must be in writing and must be delivered within 30 days after the situation occurs [CPA 80(4)].
This is to warn the consumer when, despite making regular payments, they are not paying down the interest.
. Subsequent Disclosure: Fixed Credit with Floating Rate
As per the glossary above [s.2(d)], a "floating rate" is one that is tied to a frequently (at least weekly) published public index of some sort. Where the interest rate for a credit agreement for fixed credit is floating, then the lender must deliver a 'subsequent disclosure statement' to the borrower at least once every 12 months after the credit agreement commences [CPA 80(1)].
This subsequent disclosure statement shall be in writing and shall disclose [CP Reg s.65]:- the period covered by the disclosure statement;
- the annual interest rate at the beginning of the period covered by the disclosure statement and the annual interest rate at the end of that period;
- the outstanding balance at the beginning of the period covered by the disclosure statement and the outstanding balance at the end of that period;
- if the credit agreement requires the borrower to make scheduled payments, the timing and amount of each remaining payment, calculated in accordance with the interest rate at the end of the disclosure period.
. Subsequent Disclosure: Fixed Credit not Floating Rate but Changeable Rate
Where the credit agreement is not a floating rate but allows the lender to change the interest rate, then the lender must deliver a subsequent disclosure statement to the borrower within 30 days after "increasing the annual interest rate to a rate that is at least 1 per cent higher than the rate most recently disclosed to the borrower" [CPA 80(2)].
This subsequent disclosure statement shall be in writing and shall disclose [CP Reg s.66]:- the new annual interest rate;
- the date the new annual interest rate takes effect; and
- how the change in the annual interest rate affects the timing or amount of any payment the borrower is required to make under the credit agreement.
. Supplementary Disclosure Statement: Fixed Credit Where Amended Credit Agreement
If the parties amend a credit agreement for fixed credit such that it alters any of the information required under the "initial disclosure statement", then the lender shall deliver a 'supplementary disclosure statement' setting out the changes to the borrower within 30 days after the amendment [CPA 80(5). However where the only change is to the schedule of payments, then changes to the following need not be disclosed: the annual percentage rate, decreases in the total number of payments, and the
total cost of borrowing [CPA s.80(6)].
(d) Disclosure Duties for Open Credit
. Initial Disclosure Statement: Open Credit- Overview
Recall from s.2(c) above that 'open credit' is generally where the amount of the credit or loan advanced is at the will of the borrower, (such as a line of credit or a credit card), subject to a credit limit [CPA s.1]. Below I list the disclosure requirements for such 'open credit'.
Readers should note that credit card agreements are subject to both these 'open credit' disclosure requirements and to additional disclosure requirements respecting the pre-contract stages of application and solicitation [see s.7(d), below].
If any of the below-listed information has already been disclosed to the consumer before the contract is executed (eg. in negotiation or solicitation) that it need not be repeated in the initial disclosure statement [CP Reg 64(4)].
Otherwise, general requirements for disclosure are explained at this link:
General Disclosure Requirements
The initial disclosure statement for an open credit agreement must be in writing, and shall contain the following information [CPA s.79(3), CP Reg s.64(1-5)]:
- Initial Credit Limit
The lender shall disclose to the borrower the credit limit. This is the maximum amount of loan or credit available to the borrower.
However, the credit limit need not be disclosed in the initial disclosure if it has already been disclosed in either:
- the first statement of account delivered [see "Monthly Statement of Account: Open Credit", below], or
- in a separate statement delivered to the borrower on or before the day the first statement of account is delivered to the borrower [CP Reg s.64(2)].
- Annual Interest Rates
If the interest rate is fixed through the term of the credit agreement, that annual rate.
If the interest rate is variable, then the initial rate and "the manner of determining the annual interest rate at any time during the term of the credit agreement".
- Credit Cards
Where the credit agreement is for a credit card, the manner in which interest is calculated must be disclosed.
If a credit card agreement requires the borrower to pay off the outstanding balance in full on receiving a statement of account, that requirement shall be disclosed to the borrower, along with when such payment is due and the annual interest rate charged on any overdue balances.
The lender must also disclose the maximum liability of the borrower for charges that are incurred without the authorization of the borrower when the credit card is used after having been lost or stolen.
- Commencement of Interest Accrual
This is the date that interest starts to operate, increasing the debt owing.
- Extra Changes
Where its amount can be determined at the time of disclosure, the lender must disclose to the borrower the amount of any non-interest costs of borrowing (eg. extra charges and fees). Where these amounts cannot be determined at the time of disclosure the lender shall disclose "the manner of determining the amount payable by the borrower" for such charges and fees.
- Grace Periods
As per the glossary above [see s.2(d)], 'grace period' is a period during which certain charges otherwise payable under the credit agreement are forgiven. The details of such grace periods must be disclosed.
- Optional Service Details
As per the glossary above [see s.2(d)], "optional services" are ones offered to the borrower which they may accept or decline without jeopardizing their ability to enter into the main credit agreement.
The disclosure must include which optional services have been accepted, the charges for each of them, and "the borrower's right to terminate any optional service of a continuing nature and the manner of exercising that right".
However, this disclosure requirement may also be met by disclosure in a "separate statement delivered to the borrower before the optional services are provided to the borrower" [CP Reg s.64(3)].
- Frequency of Statements of Account
The lender shall disclose to the borrower "each period for which a statement of account will be delivered to the borrower'. Typically this is monthly.
- Minimum Payments
The minimum payment due with each statement of account must be disclosed. However if the the minimum payment cannot be determined at the time of the disclosure, the lender shall disclose the manner of determining such minimum payment.
- Default Charges
Charges due in the event of borrower default under the credit agreement must be disclosed.
- Toll-free Account Inquiry Number
The lender must disclose to the borrower a 'telephone number at which the borrower can make inquiries about the borrower's account during ordinary business hours without incurring any charges for the telephone call'.
- Personal Property Security Details
It is common for loans and credit to be secured in favour of the lender by the granting of a security interest in personal property (chattel property). Such arrangements are sometimes called 'chattel mortgages' and they are almost always registered as to their security priority (in case the same chattels have otherwise been encumbered) with Ontario's Personal Property Securities Act (PPSA).
The lender must disclose a description of any chattel property so encumbered. As well, the lender must disclose the amounts, determined at the time of disclosure, that the borrower will be charged for the following:
- the cost of professional services for confirming the value, condition, location or conformity to law of the property,
- the cost of insurance for the property,
- with respect to the encumbered property, the cost (PPSA fees and fees paid to a registry agent) of registering a Personal Property Securities Act (or equivalent system's) financing statement or financing change statement, and the cost of searching or obtaining information from the registry, and
- the cost of registering in the land titles or registry system (real estate registries):
- a notice of security interest under clause 54 (1) (a) of the PPSA,
- an extension notice under subsection 54 (3) of the PPSA or a certificate to discharge or partially discharge a notice of security interest under subsection 54 (4) of the PPSA and
- the cost of searching or obtaining information from the system, in relation to the security interest given by the borrower.
- the cost (official fees and fees paid to a registry agent) of:
- searching vehicle records under the Highway Traffic Act in order to confirm the ownership or vehicle identification number of a vehicle,
and
- of obtaining a statement, or a certified copy of a statement, containing information from the vehicle records.
Note that where real estate is mortgaged in order to secure a loan or credit, Part VII of the CPA (the subject of this chapter) does not apply at all to the credit agreement by virtue of an exemption contained in the definition of "credit agreement" [CPA s.66; see s.11: "Exemptions", below].
- Where Insurance Required
Some credit agreements require, as an additional form of security for the lender, that the borrower purchase default insurance such that if the borrower defaults in payment the lender can collect the balance of payments from the insurance company. Invariably fees for this insurance are paid by the borrower as a term of the credit agreement, and it is very common for the credit agreement to name the insurance company, which typically is closely affiliated with or even outright owned by the lender.
This topic is discussed in more detail in s.8: "Insurance Requirements", below.
To counter the inherent conflict of interest in such practices, Where such insurance is required the lender must disclose to the borrower:
- "that the borrower may purchase the insurance from any insurer who may lawfully provide that type of insurance and may purchase the insurance directly from the insurer or through an agent of the borrower's choice", and
- if applicable by the terms of the credit agreement, that "the lender has the right to disapprove, on reasonable grounds, an insurer selected by the borrower".
. Monthly Statement of Account: Open Credit
Recall from s.2(c) above that 'open credit' is generally where the amount of the credit or loan advanced is at the will of the borrower, (such as a line of credit or a credit card), subject to a credit limit [CPA s.1].
Where the credit agreement is for open credit, then the lender must deliver a statement of account to the borrower at least monthly [CPA s.81(1)], except that no statement is required at the end of any period where [CPA 81(2)]:- there has been no activity (eg. no advances and payments) since the last statement,
AND,
either
- the outstanding balance payable is zero,
or
- the borrower is in default and has been notified that the lender has cancelled or suspended his or her right to obtain advances under the agreement and has demanded payment of the outstanding balance.
The statement of account shall include a 'telephone number at which the borrower can make inquiries about the borrower's account during ordinary business hours without incurring any charges for the telephone call' [CPA 81(3)] (actually the provision calls for the number to be provided to the borrower, but is silent with respect to including it in the statement of account - but in the context that seems the only reasonable interpretation to take).
The statement of account itself shall be in writing and shall disclose the following information [CPA 81(4); Reg 68]:- Period of the Statement
The period covered by the statement of account.
- Opening and Closing Outstanding Balances
The outstanding balances at the beginning and end of the period covered by the statement of account.
- Charge Details
The posting date, amount and description of each consumer transaction charged to the account during the period, and the total amount charged during the period.
The description is adequate if, along with the transaction receipt given at the time of the purchase (or included with the statement of account), they together 'can reasonably be expected to enable the borrower to verify the transaction" [CP Reg 68(2)].
- Credit Details
The posting date and amount of each payment made or credit granted to the account during the period, and the total amount so credited during the period.
- Annual Interest Rates
The annual interest rates in effect during the period or part periods covered by the statement of account, and in the case of part periods which different rates apply.
- Total Interest Charged
The total amount of interest charged to the borrower.
- Credit Limit
The credit limit.
- Minimum Payment Due
The minimum payment due by the borrower, and its due date.
- Grace Period Criteria
The criteria that must be met in order for the consumer to take advantage of any grace period.
A "grace period" is a period during which "charges specified in the credit agreement that accrue during the period will be forgiven if the borrower satisfies conditions specified in the credit agreement" [CP Reg s.53]
- Billing Error Rights
The rights and obligations of the borrower with respect to the correction of billing errors.
Any errors made in a statement of account must be corrected by the lender "in accordance with the prescribed requirements" [CPA s.71], although to date no Regulation provision appear to have been issued 'prescribing' these requirements. This leaves the lender with a legal duty, which must be performed in a specific - and completely unspecified - way. A more perfect recipe for confusion on the issue I can't imagine.
- Contact Phone Number
A telephone number at which the borrower can make inquiries about their account during ordinary business hours without incurring any charges for the telephone call.
. Supplementary Disclosure Statement: Open Credit
If the parties amend a credit agreement for open credit such that it alters any of the information required under the "initial disclosure statement", then the lender shall deliver to the borrower within 30 days after the amendment a 'supplementary disclosure statement' setting out the changes [CPA 81(6)].
However if the credit agreement is in respect of a credit card, and the change is a 'material change', then the delivery of the 'supplementary disclosure statement' shall be made at least 30 days BEFORE the amendment is made [CPA s.81(7)]. For this purpose, the following changes to the initial disclosure statement are NOT 'material changes", while any other changes ARE [CP Reg 69]:- a change in the credit limit;
- a decrease in the annual interest rate;
- a change in the manner of determining the annual interest rate payable by the borrower, if the change can result only in a decrease in the annual interest rate payable by the borrower;
- a decrease in the amount payable by the borrower for an element of the cost of borrowing, other than interest.
- a change in the manner of determining an amount payable by the borrower for an element of the cost of borrowing, other than interest, if the change can result only in a decrease in the amount payable by the borrower.
- a decrease in any other charge payable by the borrower; and
- an increase in the length of a grace period.
. Change in Interest Rate: Open Credit
Where the lender changes the interest rate of a credit agreement for open credit, they shall deliver to the borrower a disclosure statement of the change [CPA 81(5)]:- where the credit agreement is for a credit card without a floating interest rate, at least 30 days before the change [this requirement is excepted where the change is a decrease in the interest rate: CP Reg 71(12)];
- where the credit agreement is not for a credit card, or where it is for a credit card without a floating interest rate but the change is a decrease in the interest rate), in the next statement of account [CP Reg 71(12)].
Interest rate disclosure issue has been considered by courts on two occasions, which I summarize here.
In CIBC v Donnelly (Ont Sup Ct, 2009) the court was faced with an account claim by a bank against a credit card holder. The court raised an issue on its own with the bank respecting the bank's compliance with CPA credit card disclosure requirements after a unilateral rate increase which occured about a year and a half before the last statement was issued [CPA 81(5)] (triggered by the card-holder's failing to meet 'minimum payment' requirements). The court asked for an received further submissions from the bank on this point as it appeared that the bank did not give notice of the increase.
In this additional submissions the bank argued firstly that the CPA had no application to the bank, it being a federally-regulated entity under s.91 of the Canadian Constitution. It also acknolwedged however that in all regards material to the case the Bank Act provisions that did govern it were identical to the CPA provisions.
The court did not feel it had to resolve the constitutional issue but attempted to decide the matter on the basis that whichever regime applied the substantive law was the same. However when it came to the effect of the default, the court considered that from the federal bank law perspective [the CPA allowed the borrower to ignore the increase: CPA 70].
That investigation revealed case law that tolerated rate increases within the terms of the contract as long as de facto notice was given, typically in the form of rate levels stated on monthly bills. These were cited in the cases as evidence that the borrower had acquiesced to the increases (presumaly an estoppel argument). The court followed that line of cases but did require the bank to defer the charging of the increase for one billing cycle after the rate change was indicated on the monthly statements.
It is unfortunate that the court did not consider the constitutional issues as the CPA remedy in this case would have been much more robust, denying the bank the benefit of any increase for which proper notice was lacking. I note that the defendant was unrepresented and so presumably no Notice of Constitutional Question had been filed (as it should have been to properly raise the federal bank jurisdiction issue), but it would still seem incumbent on the court to consider the constitutional issue rather than what it did, which was to effective operate on the assumption that the CPA did not apply - itself a conclusion of constitutional law.
The case of CIBC v Prasad (Ont Sup Ct, 2009) was essentially a carbon copy of the Donnelly ruling by the same judge, to the same effect.
(e) Disclosure of Interest Status When Deferral of Payments (Any Credit Agreement)
Sometimes, as a promotional enticement offered by the lender, the lender may invite the borrower to defer making payments (eg. 'until after Christmas' or similar). As well, similar invitations may arise when things get tight and the lender contacts the borrower to offer a deferral of payments in the hope of avoiding complete default.
Whatever the circumstances, when a lender invites a borrower to defer making one or more payments, the CPA requires that the lender disclose to the borrower whether interest will or will not accrue on the unpaid balance during the deferral period, and if it will at what rate [CPA 74(1)].
Note that the CPA imposes this requirement when the lender "invites" the deferral of payments, so it would probably not apply where the deferral is requested by the borrower - even if it is granted by the lender.
General requirements for disclosure are explained at this link:
General Disclosure Requirements
Note that where the lender does NOT so advise the borrower, the law infers that interest has been waived during the period of payment deferral [CPA 74(2)].
(f) Additional Initial Disclosure Where Loan Broker Involved (Any Credit Agreement)
The general topic of loan broker's involvement in credit agreements is discussed in the Part B chapter entitled "Loan Brokering". When they become involved in a credit agreement, loan brokers owe disclosure duties to borrowers that are practically identical to those owed by lenders themselves. In fact, the CPA allows lenders to - at their own risk - 'adopt' a loan broker's disclosure as their own [CPA 78(3)].
Thus when a loan broker first forwards a client's loan application to a lender, the loan broker must deliver an 'initial disclosure statement' including all the extensive lender's information set out above [see "Initial Disclosure Statement: Open Credit" or "Initial Disclosure Statement: Fixed Credit" (as the case may be)]. In addition however, and as PART of the initial disclosure statement, the loan broker must also [CPA 78(1,2), CP Reg s.63(1) and 64(1)]:- disclose the amount of the brokerage fee; and
- account for the brokerage fee in the annual percentage rate and in the cost of borrowing.
For these purposes [CPA 66]: "brokerage fee" means the payment that a borrower makes or agrees to make to a loan broker who assists the borrower in arranging a credit agreement, and includes an amount deducted from an advance made to the borrower that is paid to the broker; Note however that an independent duty lies on the lender to disclose this additional brokerage fee information to the lender once the "borrower pays or is liable to pay a brokerage fee to a loan broker, either directly or through a deduction from an advance" [CPA s.78(1)] (this is of course a duty in addition to the lender's primary disclosure duties discussed above). If the lender is satisfied with the loan broker's disclosure, the lender may (at their own risk) elect to adopt that earlier disclosure as their own - thus eliminating the need for them to perform their own disclosure. If not satisfied however, the lender may deliver their own (presumably revised) version [CPA 78(3)].
Note that while CPA s.79(4) authorizes the creation of additional disclosure requirements where "a loan broker assists in arranging a credit agreement", no Regulation has been promulgated to this effect, so it seems that at present the content requirements for both lender and loan broker disclosure to the borrower are practically identical.
General requirements for disclosure are explained at this link:
General Disclosure Requirements
(g) Consequences of Disclosure Non-Compliance
. Overview
In the several sub-sections [(c)-(f)] above I have set out the disclosure duties required by the CPA for various forms of credit agreements. Now I address the consequences (or 'remedies'), specific to the loan and credit economic sectors ('sector-specific remedies'), that are available to the borrower if the lender does not comply with their disclosure duties.
Other, more general, remedies may also be available to the borrower where a lender fails to comply with CPA requirements, including these disclosure requirements. These are discussed in s.11 ["Remedies"], below. The difference between the sector-specific remedies discussed here and the more general remedies discussed in s.11 is that the sector-specific ones are premised on the continuation (with some modifications) of the main credit agreement between the parties, while the more general remedies are usually associated with the complete rescission (cancellation) of the credit agreement.
The primary sector-specific remedy for non-compliance with disclosure duties is the barring of the lender's right to collect the 'cost-of-borrowing' element of payments due. The concept of "costs of borrowing" is explained in detail above [s.2(d): "Essential Concepts: Glossary of Key Terms"] [CPA s.70(a)] but essentially amounts to the costs of borrowing over and above the repayment of the principal, such as interest and most extra charges.
. Disclosure Error In 'Cost-of-Borrowing'
Where a disclosure statement contains errors that have the effect of understating the 'cost-of-borrowing', then the borrower can hold the lender to those understated costs [CPA s.70(b)]. This is meant to address both intentional and mistaken understatement of costs-of-borrowing.
. Complete Non-Disclosure
The CPA states that where "no [disclosure] statements required by this Part" (ie. Part VII of the CPA) are received by the borrower, then the borrower is not liable for any 'costs of borrowing' at all [CPA s.70(a)].
This provision will plainly apply where there has been absolutely no reasonable effort by the lender to comply with the disclosure requirements.
However, problems could arise in interpreting this rule where no timely 'initial disclosure statement' is issued, but where a later disclosure statement is issued in an attempt to correct the situation. At that point it can no longer be said that "no statements" have been issued, so the issue arises as to whether this later statement corrects the original default so as to prevent the operation of the 'no cost-of-borrowing' sanction? Would such a 'correcting' disclosure statement end the consumer's right to no-cost money?
I think the answer to this question in most cases is 'no'. The initial default is plainly implicated in the borrower's decision to enter into the credit agreement - ie. it was not a properly 'informed' decision. Even then though the court can be expected to resist giving the consumer a fully 'free' loan or credit over the full life of an open-term credit agreement - and may be inclined just to tolerate excusing 'cost of borrowing' up to the date of the correcting disclosure.
. Other Disclosure Non-Compliance
The consequences of 'other' disclosure non-compliance [ie. other than those addressed in the above two paragraphs] are quite ambiguous under CPA law. The key provision has already been quoted above in part but I repeat it here in full for the sake of consideration [CPA s.70(a)]: s.70(a)
A borrower under a credit agreement is not liable to pay the lender,
(a) the cost of borrowing under a credit agreement if the borrower receives no statements required by this Part; ... The ambiguity all turns on whether an erroneous, incomplete or otherwise non-compliant disclosure statement can be considered to be a "statement() required by this Part" (my emphasis). If it CANNOT then its delivery to the borrower is equivalent to a complete failure to deliver a disclosure statement and the full s.70(a) consequence of waiver of the 'cost-of-borrowing' applies. If it CAN then the borrower may be forced to look to their more general (rescission) remedies summarized in s.11 ["Remedies"], below.
Resolution of this ambiguity is a complex legal issue, and in my view the outcome is by no means certain. Below I set out some of the arguments that might be raised on both sides of the issue:- Non-Compliant Representations Prohibited
The CPA provides that [CPA s.77]: CPA s.77
No lender shall make representations or cause representations to be made with respect to a credit agreement, whether orally, in writing or in any other form, unless the representations comply with the prescribed requirements. Plainly a statement made in disclosure is a 'representation' under CPA law [CPA 1], and this provision basically 'outlaws' the making of non-compliant representations - so (the argument goes) how could a lender try to advance an illegal act on their part to refute a borrower's refusal to pay the 'cost-of-borrowing' charges?
- If You Interpret s.70(a) To Block the Lender's Right to 'Costs-of-Borrowing' in All Cases, then Incongruity Results
This argument focusses on the situation where the degree or nature of disclosure non-compliance is minor, technical or immaterial to the interests of the borrower. It basically states: why should a minor error or omission have such drastic consequence to a lender (ie. complete cancellation of their right to 'cost-of-borrowing') when overt understatement of cost-of-borrowing (presumably a worse 'wrong' as it is inherently deceptive) only allows the borrower to hold the lender to the understated
amounts [as in the paragraph "Disclosure Error In 'Cost-of-Borrowing'", above]?
This argument involves a principle of statutory called the 'implied exclusion' argument (in latin: "expressio unius est exclusion alterius") which basically means that if a statute says one thing in one situation, but not in another, then it means to limit the thing to situations where it is clearly stated to apply. The slight twist on this is: how can a more extreme consequence apply against a lender for a lesser 'wrong'?
The argument is at its most persuasive when we consider that some open credit agreements are not fixed as to term (duration), potentially tying the lender to 'free' lending indefinitely into the future.
- Judicial Inclination
While the wording of CPA s.70(a) can bear the interpretation that ANY non-compliance triggers the right to withhold "cost of borrowing", judges (if the matter gets before one) are trained throughout their legal careers not to allow remedies against a defaulting party unless the wrong is related to the remedy sought (that is, the wrong must 'cause' the harm which the court will remedy). They are resistant to allowing the 'windfalls' that a literal reading of these (and similar) CPA provisions seems to direct .
Some court cases demonstrating this judicial inclination are discussed in Part B. Ch.7, s.3, when considering the similar CPA s.93(1) provision.
. Comment
It is unfortunate that the legislation did not clarify these key remedial issues, as it easily could have.
Remember though, if the 'broad' and consumer-generous interpretation of CPA 70(a) fails, then the consumer/borrower still has the chance to apply their general CPA remedies discussed in summary fashion in s.11 (below), and more fully in Part C, Ch.7, s.3: "CPA General Civil Remedies: Rescission or Cancellation". Readers are warned however that those provisions have their own, and quite similar, interpretation problems.
Continue Chapter Here
|
