Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Financial Services, May 2009
On May 21, 2009, the Government of Canada (Department of Finance) released the proposed new Credit Business Practices Regulations (the CBP Regulations). These regulations implement certain consumer protection measures promised by the federal government in its January 27, 2009 budget. Once implemented, the CBP Regulations will apply to credit cards and, in some cases, lines of credit and other loans offered by federally regulated financial institutions (FRFIs). The government also released proposed amendments to the existing Cost of Borrowing Regulations under federal financial institutions legislation (the COB Regulations). The government is accepting comments on the proposed regulations until June 13, 2009. As drafted, the two sets of regulations would come into force upon registration and there is no indication of any transition or implementation period.
The government press releases and the regulatory impact statement published with the draft regulations consistently refer to consumers. However, as drafted, portions of the draft CBP Regulations would apply to corporate credit cards, even where there is no individual cardholder liability. Issuers of corporate card programs may wish to make representations to the Department of Finance on this issue.
We also note that the proposed CBP Regulations apply to FRFIs and the affiliates that they control. As drafted, this is not limited to affiliates carrying on business in Canada and would include affiliates of an authorized foreign bank or a foreign company.
The proposed regulations will require significant changes to customer documentation (including applications, disclosure statements, credit agreements and monthly statements), calculation methods and business practices. We expect that implementation of these changes will be time-consuming and expensive for FRFIs.
The following are some of the highlights of the proposed regulations, together with our comments on some aspects of the proposals.
MINIMUM GRACE PERIOD FOR NEW PURCHASES
Credit card issuers typically provide a grace period on new purchases, which generally means that no interest will be charged on new purchases if the cardholder pays the balance on the card in full by the payment due date. But many cardholder agreements currently provide that the cardholder loses the interest-free grace period for new purchases if the cardholder is carrying a balance from the previous month. Under the proposed CBP Regulations, FRFIs would be required to provide a minimum 21-day interest-free grace period on all new purchases if the cardholder pays the full balance by the payment due date in respect of those new purchases (which, under the proposed regulations, cannot be less than 21 days after the last day of the billing cycle), even if the cardholder did not pay the balance in full the previous month.
If this proposed change comes into effect, many FRFIs that issue credit cards in Canada will have to change the manner in which they charge interest.
MANDATORY APPLICATION OF PAYMENTS
Many credit cards now offer different rates for different uses; such as rates applicable to balance transfers, cash advances, purchases and promotional purchases. When the cardholder does not pay the balance on the card in full, any payment made is allocated to the different types of charges in accordance with the cardholder agreement – most often being applied first to the charges with the lowest interest rate. The proposed CBP Regulations will require that any payment made by the borrower in excess of the required minimum payment be applied either: (a) to the charges with the highest rate first, then the next highest and so on, or (b) pro rata to each type of charge with a different rate in proportion to the amounts of such charges.
The proposed provisions do not provide a mandatory method for application of the minimum payment amount.
PROHIBITION AGAINST OVER-LIMIT FEES DUE TO HOLDS
Some merchants place a hold on a credit card for an amount that exceeds the actual charges. The hold may stay in place for several days after the actual charges have been determined. For example, a cardholder swipes her card to "pay at the pump" prior to purchasing $25 of gas. This may result in a $100 hold being put on her card, even though the actual charge is only $25 for the gas purchased. The cardholder, not realizing this hold has been placed on her card, may use it again and, as a result of the hold, exceed her credit limit. Some issuers charge an over-limit fee in these circumstances. The proposed CBP Regulations would prohibit such a fee, unless the cardholder would have exceeded her credit limit in any case.
EXPRESS CONSENT FOR INCREASES IN CREDIT LIMITS
Under the proposed CBP Regulations, FRFIs would be prohibited from increasing the credit limit on a credit card without first obtaining the cardholder's express consent to do so. Consent may be provided orally if the issuer provides written confirmation of the consent. Such confirmation may be provided electronically.
APPLICATION TO CORPORATE CARDS
Under the proposed CBP Regulations, a "borrower" is defined as "a person who holds a credit card or has applied to an institution to become a holder of a credit card". Unlike the COB Regulations, these proposed regulations do not contain a general provision to the effect that they do not apply to credit cards issued for business purposes, with the exception of the provisions on debt collection practices. As a result, employees holding cards issued under a corporate program will be "borrowers" under the proposed regulations for the purposes of notices, disclosures and consents. For example, an increase in the credit limit applicable to a specific corporate credit card would require the prior consent of the employee cardholder. Given the emphasis on consumer protection in the government press releases and the regulatory impact statement, perhaps the application of portions of the proposed CBP Regulations to business credit cards and, particularly, corporate credit cards issued without individual liability, is unintended, but revisions to the proposed regulations would be required to avoid this consequence.
The provisions regarding debt collection practices (discussed below) only apply where the debtor is a natural person who has entered into the credit agreement other than for business purposes, so those provisions should not apply to corporate card programs.
DEBT COLLECTION PRACTICES
Currently, federal legislation does not restrict debt collection practices of FRFIs. The proposed CBP Regulations include new provisions that would apply to FRFIs that communicate with debtors. These provisions apply where the debtor is a natural person who has entered into any kind of credit agreement (agreements for lines of credit, credit cards or any kind of loan) with the FRFI, other than for business purposes. The requirements imposed in connection with collection of debts are similar to those found in provincial legislation that regulates collection agencies and, in some provinces, creditors that collect their own debts.
FRFIs should take note that, although these provisions are under the heading "debt collection practices" and some provisions are specific to communications with a debtor in order to collect payment of a debt from the debtor, many of the provisions are drafted without specifying that the restrictions apply only to communications made for such purpose. As a result, as drafted, many of the restrictions will apply to all communications made by FRFIs with debtors and others.
Another point to be noted by FRFIs is that, as drafted, the CBP Regulations provide that an FRFI that has communicated with a debtor in order to collect payment of a debt may not continue to do so without the consent of the debtor if the debtor has notified the FRFI by registered mail that the debt is in dispute and that they intend to take the matter to court or to take it before a dispute resolution body. This appears to provide an indefinite "stay" on such communications, without imposing any obligation on the debtor to proceed in a timely way with litigation or dispute resolution and without even allowing the FRFI to communicate its responses in any such litigation or dispute resolution.
The proposed amendments to the COB Regulations would require FRFIs to include a "summary box" on each initial disclosure statement that is provided in respect of a non-business loan (such as a mortgage or term loan), a line of credit, or a credit card. The information that must be included in the summary box varies depending upon the type of loan; but, generally, the summary box must include information regarding interest rates, certain fees, minimum payments, and when interest accrues. For credit cards, if there is a promotional interest rate for a certain period, the summary box must also include the interest rates that are expected to apply following the introductory period.
The proposed amendments require disclosure of the "salient information", which is defined to include specified information. This leaves it to individual FRFIs to determine what other information may be "salient" and therefore should be disclosed.
In addition to the existing disclosure requirements for monthly statements, the proposed amendments to the COB Regulations would require a monthly statement to set out: (a) an estimate of the length of time that would be required to repay the outstanding balance if only the minimum payment were made each month (we note that this requirement does not contemplate the possibility of negative amortization, which would result if the minimum payment amount does not cover any of the principal); and (b) if the annual interest rate may increase in the next period, the circumstances that would give rise to the increase and the new rate that would apply. It will no longer be sufficient for credit card issuers to provide in the cardholder agreement (or a promotional rate offer) for circumstances in which an interest rate may increase. Rather, it is proposed that the issuer will also have to notify the customer in advance of the actual increase.
The current provision of the COB Regulations that permits certain required credit card application disclosures to be made available by telephone in some circumstances would be deleted.
A few of the proposed amendments to the COB Regulations clarify the existing COB Regulations in a way that may be helpful to FRFIs:
- Where an FRFI enters into an agreement for a line of credit, a credit card or any kind of loan with more than one borrower, proposed amendments to the COB Regulations would provide a means by which the FRFI may, with the consent of the borrowers, provide mandatory disclosures to a designated borrower.
- It appears that it is intended that monthly subsequent periodic disclosure statements will not be required for inactive accounts with very small balances (under $10) where no interest or fees are being charged or accrued. Instead, a statement will be required every three months. However, as drafted, it is not clear that this is the intention or the result.
- 30 days' advance notice to the borrower is not required where there is a decrease in the fixed rate of interest. We note that, as drafted, this exception does not apply where there is a decrease in the spread applicable to a variable rate of interest.
- Some stylistic or grammatical changes have been proposed to the French version of the COB Regulations.
Unfortunately, the confusion caused by the differences between the credit card solicitation and advertising disclosure requirements has not been clarified.
FEDERAL LOBBYING ACT
FRFIs that communicate with federal public office holders in connection with these proposed regulations should consider whether the Lobbying Act (Canada) requires any registration in respect of such communications.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.