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Regulatory Measures Related to Credit
As part of the measures to improve access to financing and strengthen Canada's financial system in Budget 2009, the Government noted that it would bring forward measures to help consumers of financial products.
To ensure that consumers have access to credit on terms that are fair and transparent, the Government is moving forward with two sets of regulations. The Credit Business Practices Regulations are proposed to limit business practices of financial institutions that are not beneficial to consumers. The second set of regulations amend the existing Cost of Borrowing Regulations to improve disclosure and transparency for consumers.
Credit Business Practices Regulations
These new proposed regulations would limit practices that are not beneficial to consumers, specifically:
Requiring a minimum 21-day grace period on new credit card purchases. Currently, some card issuers offer 15 to 24 days grace period on new purchases when a customer pays the outstanding balance in full. However, other issuers accrue interest in that period, i.e. there is no grace period, if there is an outstanding balance carried forward from the previous period. This proposal would provide that a grace period applies to all new purchases when consumers pay in full in the current month, regardless of an outstanding balance the month before.
As an example, Tom pays his monthly balance in full as a rule. In April, he paid part of his balance during the course of the billing period, but he missed the deadline to pay the remaining balance, and carried a balance of $300 into May. On May 5, Tom made a new purchase of $50. He paid his outstanding balance of $350 in full by the due date shown on his statement (June 19). Here's how the existing two different grace-period methods would affect him.
If Tom's credit card issuer uses Method 1, he will have to pay interest only on the $300 carried over from April. He will get an interest-free period on his new purchase of $50, because he paid his balance in full by the due date of June 19.
If Tom's credit card issuer uses Method 2, he will have to pay interest on the $300 carried over from April and on the new purchase of $50, because he carried a balance over from April.
The regulations will ensure that all credit card issuers use Method 1 for the application of grace periods. Moreover, that grace period must be at least 21 days.
Allocation of payments in favour of the consumer. Many credit cards apply different interest rates to purchases, balance transfers and cash advances. Currently, payments from the consumer are often allocated to the balance with the lowest interest rate. The measure would require banks to allocate payments made in excess of the required minimum using a method that is beneficial to consumers, either allocating payments to the balance with the highest interest rate first, or distributing the payments based on the relative proportion of each.
For example, Christian obtained a credit card and transferred a balance of $1,000 with an interest rate of 2%. He made $600 in purchases with his new card at an interest rate of 15%. When he receives his statement at the end of the month, he makes a payment of $800.
Under the new rules, the card issuer can either allocate the $800 first to the balance with the highest interest rate, i.e. purchases, and the remaining amount to the balance transfer or, alternatively, it can allocate the $800 proportionally, i.e. $300 for purchases and $500 for the balance transfer. In both cases, this will lead to lower interest charges for Christian.
Express consent for credit limit increases. The rule would prohibit federally regulated financial institutions from increasing someone's credit limit unless that person explicitly agrees. This would assist consumers to keep track of their financial situation.
For example, Nicole has a credit limit of $10,000, and her bank is prepared to increase that limit to $12,000. Under the new measure, the bank would either call Nicole directly or include a message in her monthly statement.
If Nicole wants her credit limit increased, she can call the bank and provide her consent. Alternatively, if she does not feel that more credit is a good idea for her at that time, she does not need to take any action.
Limits on debt collection practices. The measure would ensure a uniform standard that would apply to the debt collection practices of all federally regulated financial institutions.
For example, Eric owes a balance on a loan. Currently, there are no rules limiting how his institution can contact him to collect the debt. Under this measure, for example, his financial institution would be restricted from contacting him after 9 p.m. on weekdays and Saturdays, and after 5 p.m. on Sundays.
Restrictions on fees due to merchant holds. Certain merchants, such as gas stations or hotels, place holds on a credit card (for example, typically $100 at a gas station) and it may take time for the transaction to be fully processed and the hold released. The hold reduces the credit available to the consumer, who then could inadvertently go over their credit limit and incur fees. This measure would prohibit financial institutions from imposing a fee when the credit limit is exceeded solely because a hold was placed on available credit.
For example, Alexis has a credit limit of $500 with a balance outstanding of $400. She uses her credit card at a gas station, and the gas station puts a hold of $100 on her account. While she only spends $20, the hold remains for 3 days, during which time she spends another $50. Because of the hold, she is charged a fee for going over her limit, despite the fact that her outstanding balance is $470.
The proposed measure would restrict the charging of an over-the-limit fee, because in the absence of the hold, Alexis would have a balance of $470.
Regulations Amending the Cost of Borrowing Regulations
Federally regulated financial institutions are currently required to provide certain disclosures to customers in relation to credit. The regulations would be amended to encompass the following provisions:
Summary box on credit contracts and credit card applications to improve disclosure. While institutions are already required to make certain disclosures to consumers, the information can be placed anywhere in the documentation. The measure would require that for credit contracts and credit card applications, all salient information, such as fees and rates, be provided in a summary box to bring the information to the consumer's fingertips.
For example, Susan applied for a credit card. She received a variety of information, but it was spread throughout the documentation, and she may not be fully aware of some of the costs. The summary box will allow her to get the key information she needs up front, in clear and simple language: annual interest rates on new purchases, on cash advances and on balance transfers; grace periods to pay for new purchases before interest is charged; how minimum payments are calculated; and other fees. Because this will be consistently applied to all credit card applications, Susan can compare this information easily and make the best choice.
Improving consumer understanding of the implications of only making the minimum payment. This would enhance disclosure by showing consumers how long it would take to pay off the balance owing on a credit card if they only made the minimum payment every month. It would provide a clear example monthly of how compound interest affects those who pay it.
For example, Charles currently makes his minimum payment each month on his credit card, as required. He may not be aware that for his balance of $1,000 on his credit card that charges 18%, it would take more than 10 years to pay off the existing balance. Providing this disclosure allows Charles to assess his options and take appropriate action.
Timelier disclosure of interest rate changes. This measure would provide consumers advance notice on monthly statements, if interest rates are going to be increased in the short term. This would capture situations such as rate increases following the end of low introductory rates or rate increases triggered by the consumer skipping one or more minimum payments, thus allowing consumers to act to avoid the increase.
For example, Kim got a credit card with an introductory rate of 2.99% for 6 months. When she applied for the card, the initial disclosure noted that her rate at the end of the initial 6 months would increase to 18%. While Kim received the disclosure, 6 months later she may not recall that the introductory offer expires, and that her interest rate and minimum payments will increase. This measure would require her credit card issuer to provide notice in advance of the increase. This allows Kim to make the necessary adjustment to her financial planning.