On March 4, 2012, as part of its Economic Action Plan 2011, the federal government released a new code of conduct and guidance from the Financial Consumer Agency of Canada (FCAC), both relating to disclosure of mortgage prepayment information to consumers, and announced progress regarding three proposed regulations applicable to Federally Regulated Financial Institutions (FRFIs) (the Announcement). These disparate measures aim to enhance the quality and volume of information available to consumers, protect consumers and ensure that financial products and services are not imposed on consumers, with the intention of facilitating informed consumer choices.
Compliance with these measures will require a variety of responses, including updates to systems and processes, revisions to policies, changes to documents and website disclosure, internal co-ordination to ensure documents reflect what systems actually do, employee training and ongoing monitoring by FRFIs, but the disclosure requirements should not be a significant departure from the information many FRFIs already provide to their borrowers.
One of the new regulations, the Access to Funds Regulations, represents the first time the federal government has extended consumer protection to small and medium-sized enterprises, which are defined in the Access to Funds Regulations as "eligible enterprises".
Enhanced Disclosure Relating to Mortgage Prepayment Penalties
The Code of Conduct for Federally Regulated Financial Institutions (the Code) and the FCAC's CG-8 Mortgage Prepayment Penalty Disclosure Guidance (the Guidance) focus on disclosure and promotion of borrower comprehension and choice. However, while the Code and the Guidance espouse the same goal, they apply to different stages of the mortgage process. The Code applies to consumer mortgages that have been advanced and requires FRFIs to make available general information with respect to mortgages. The Guidance applies to the required initial disclosure for consumer mortgages.
The Code and Guidance are indicative of other domestic and international work to better regulate mortgages. Since its establishment in April 2009, the Financial Stability Board (the FSB), composed of representatives from the G20, has worked toward the development of international standards and codes of good conduct in a variety of financial sectors. Their efforts include developing a principles-based framework for sound underwriting practices. In October 2011, the FSB published a consultation paper outlining seven principles, providing minimum acceptable mortgage underwriting standards and emphasizing the need for customer information to be "clear, concise, reliable, comparable, easily accessible, timely and comprehensive". The Office of the Superintendent of Financial Institutions immediately followed suit by publishing nine supplemental principles. Both sets of principles focus on better evaluation of the risks presented by borrowers and better structuring of the FRFI's operations.
The stated purpose of the Code is to ensure that FRFI lenders enhance the information provided to borrowers in respect of credit agreements secured by mortgages where a prepayment charge could apply, to assist borrowers in making decisions about prepayment of their mortgages. The Code sets out five broad policy elements that are applicable to mortgages entered into by natural persons. The five elements are summarized below. For additional details, consult the Code.
- A lender must provide certain prepayment information to individual borrowers on an annual basis. This information is listed in the Code and includes customized information about the mortgage so the borrower can estimate any prepayment charges.
- If a prepayment charge applies and the borrower confirms to the lender that the borrower is making a prepayment, the lender must provide a written statement to the borrower that sets out the applicable prepayment charge, the period of time for which the prepayment charge is valid, and a description of the factors that could cause the prepayment charge to change over time, among other things.
- A lender must set up a toll-free telephone line staffed by knowledgeable individuals who can calculate and provide the borrower's prepayment charge and follow up with a written statement of the prepayment charge.
- A lender must post financial calculators on its website that enable borrowers to calculate an estimate of the current prepayment charge.
- A lender must enhance borrower awareness by making certain information available to borrowers, including the actions that may result in a borrower having to pay a prepayment charge, ways to avoid prepayment charges and the differences between different types of mortgages, among other things.
Despite the purported voluntary nature of the Code, FRFIs are expected to implement the first three policy elements no later than 12 months from the time the Code is adopted and the latter two no later than six months after the Code is adopted. The FCAC is tasked with monitoring compliance with the Code. As with other voluntary codes, the unstated result of industry non-compliance would likely be legislated requirements.
In response to continuing borrower complaints arising from confusion with respect to prepayment charges, despite the regulated disclosure, the FCAC has developed this guidance with respect to certain requirements of the Cost of Borrowing Regulations. Accordingly, FRFIs must review their mortgage prepayment disclosure documents to ensure that they include the four elements that are summarized below. For additional details with respect to the elements, consult the Guidance.
- FRFIs must disclose the manner in which a mortgage prepayment charge or penalty is actually calculated by disclosing the formula or a description of the process used to calculate the charge.
- FRFIs must provide a description of the components included in the calculation. Disclosure of the formula alone is not sufficient.
- All disclosure must be made in language, and presented in a manner, that is clear, simple and not misleading. FRFIs must be able to demonstrate they have applied the principles of clear language, as set out in other guidance of the FCAC.
- Complex prepayment penalty calculations must be accompanied by a simplified method for calculating an estimate of the prepayment penalty.
There is nothing in the Guidance with respect to whether any of this information should be covered in the Information Box or, if not, as to placement of the information in the disclosure documents.
The Guidance, as originally published, stated that a response by affected FRFIs is mandatory and must be received by the FCAC no later than May 7, 2012. This section of the Guidance has been removed. We understand the FCAC has sent letters to all affected FRFIs detailing the nature and timing of the required response.
Other Regulatory Developments
The Announcement included a proposal to amend the Credit Business Practices Regulations to ban unsolicited credit card cheques. Amending regulations are expected to be published for consultation in the near future. The Announcement also mentioned that final publication of the Negative Option Billing Regulations and Access to Funds Regulations would be made in the coming weeks. These regulations were subject to pre-publication consultations and then published for comments in March 2011. Since then, both regulations have been moderately revised. The final Negative Option Billing Regulations (SOR 2012-23) and Access to Funds Regulations (SOR 2012-24) will be published in the Canada Gazette on March 14, 2012, and are currently available. Both will take effect on August 1, 2012. Surprisingly, federal regulation of prepaid cards was not addressed in the Announcement, except to note that measures to protect consumers of prepaid cards are part of the Economic Action Plan 2011.
FRFIs will need to update their automated systems, train staff on new procedures and revise policies to reflect the new regulations. With respect to the Negative Option Billing Regulations specifically, FRFIs should review their product and service offerings to determine which products and services are affected by the new regulations and what steps are necessary to ensure compliance. Similarly, before the Access to Funds Regulations come into force, FRFIs must review their current cheque holding policies and ensure they have the appropriate systems in place to accommodate both the new requirements and the exceptions.
The details of the proposed amendments to the Credit Business Practices Regulations and the final Negative Option Billing Regulations and Access to Funds Regulations are discussed below.
Amended Credit Business Practices Regulations
The Announcement indicates that regulations will be proposed that will amend the Credit Business Practices Regulations to require express consent from a credit card holder before credit card cheques may be distributed to the credit card holder, effectively banning the distribution of unsolicited credit card cheques. The amendment will implement one of the consumer-friendly measures included in the Economic Action Plan 2011. The proposed amendments appear to be in response to card holder confusion with the immediate application of interest upon use of a credit card cheque. Draft amendments have not yet been published but, like the Negative Option Billing Regulations, it is likely they will prescribe the timing, manner and content of the required consent, as well as any ongoing disclosure requirements. FRFIs that plan to use electronic consents will have to ensure compliance with the regulatory requirements for such consents.
Negative Option Billing Regulations
Effective August 1, 2012, the Negative Option Billing Regulations require FRFIs to obtain the express consent of individuals ("opt-in") before providing new products and services of an FRFI to an individual for non-business purposes. Generally, the Negative Option Billing Regulations prescribe the timing, manner and content of disclosure that must be provided to individuals before they can expressly consent to new services or products, as well as a formula by which FRFIs must calculate refunds for cancelled optional products or services on a pro-rated basis.
Under the Negative Option Billing Regulations FRFIs must disclose a summary of the key information relating to a product or service before obtaining an individual's express consent. The disclosure may be provided orally or in writing but if provided orally, it must also be provided in writing to the individual without delay.
Once the individual provides such consent and enters into an agreement for the optional product or service, the FRFI must provide comprehensive disclosure of any other terms and conditions for a new product or service within 30 days. The Negative Option Billing Regulations also require FRFIs to continuously provide advance notice of any changes to the terms and conditions of an optional product or service provided on an ongoing basis, as well as advance notice of the expiry of a promotional offer. If a consumer cancels an optional product or service, the Negative Option Billing Regulations prescribe a formula by which an FRFI must calculate the amount of refund owed to a customer for any charges paid by the customer relating to an unused part of the optional product or service. Again, FRFIs that plan to use electronic consents will have to ensure compliance with the regulatory requirements for such consents.
Access to Funds Regulations
Effective August 1, 2012, the Access to Funds Regulations repeal the current Cheque Holding Policy Disclosure Regulations and reduce the cheque holding periods and prescribe the amount of funds that must be immediately available in relation to paper-based cheques encoded with magnetic ink and drawn on a branch located in Canada and issued in Canadian dollars. The new maximum cheque holding period for such cheques deposited in person and not exceeding $1,500 is no more than four business days, and no more than five business days for such cheques deposited in person and exceeding $1,500. Cheques not deposited in person are to be held for no more than five business days if the cheque is for an amount less than $1,500 and no more than eight business days if the cheque is for an amount greater than $1,500. The holding periods apply to cheques deposited to a personal deposit account, opened with a deposit of $150,000 or less (retail deposit account) or a deposit account held by an eligible enterprise, and begin the business day after the date of deposit. FRFIs must prepare a written notice disclosing the maximum holding periods and the FRFI's own holding policies. This notice must be distributed to customers and displayed at all branches where personal deposit accounts, namely accounts held in the name of natural persons for non-business purposes, are offered, all points of service and the FRFI's websites through which it offers services and products in Canada. If the FRFI's policy changes (other than to reduce the hold period), it must provide at least 30 days' notice to customers holding retail deposit accounts.
Some limited exemptions to the holding requirements are available to FRFIs to assist them to effectively manage risks posed by small and medium-sized enterprises. For example, FRFIs are not required to comply with the maximum holding periods when dealing with small and medium-sized enterprises with negative changes in their credit scores. Further, the requirements do not apply to deposits that an FRFI has reasonable grounds to believe are being made for illegal or fraudulent purposes, cheques endorsed more than once, cheques deposited more than six months after they are dated or accounts that have been open for less than 90 days.
As noted above, the Access to Funds Regulations provide the first extension of federal consumer protection to small and medium-sized businesses which are referred to as "eligible enterprises". An "eligible enterprise" is defined in the Access to Funds Regulations as "a business with authorized credit of less than $1 million, fewer than 500 employees and annual revenues of less than $50 million." This extension is something we may see in other areas in the future.
Regardless of the hold period, the Access to Funds Regulations mandate immediate access to the first $100 deposited by a cheque in person in a branch or access on the next business day for cheques deposited by other means (such as an automated teller machine deposit). The provisions relating to the availability of the first $100 apply only to cheques deposited to retail deposit accounts; that is, they do not apply to accounts held by eligible enterprises. If an FRFI refuses to provide an in-person depositor with immediate access to the first $100 deposited, the FRFI must provide the depositor with a statement of refusal. The statement of refusal must indicate that the depositor can contact the FCAC with any complaint or information requests.
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