Formatted PDF: 1966-1967- Leon Letwin – Canadian Consumer-Credit Legislation (Boston College Industrial and Commercial Law Review) – OCR
Citation: 8 B.C. Indus. & Com. L. Rev. 201 1966-1967
CANADIAN CONSUMER-CREDIT LEGISLATION
LEON LETWIN*
- INTRODUCTION
American and Canadian legislation regulating consumer-credit
transactions invites comparison. Each country presents the consumer
with similar credit arrangements and lending institutions; each has,
in recent years, experienced stress upon its credit-regulating apparatus
due to an explosive growth in consumer credit;1 and each must cope
with the resulting problems within the context of a similar economic
order and legal heritage. This article examines some of the principal
areas of Canadian consumer-credit legislation and draws comparisons
with analogous U.S. legislation 2
The scope of this study is restricted in several ways. First, it
does not attempt to evaluate the impact of the various aspects of the
law that have an important but only indirect bearing upon the consumer-
credit problem. The general law of sales and contracts, bankruptcy,
and remedies is of this type. Second, some of the legislation
considered has been the subject of judicial interpretation; however,
this case law has not been systematically canvassed, since the intent
here is to examine broad trends in Canadian consumer-credit legislation
rather than to answer the innumerable legal questions involved.
* Ph.B., University of Chicago, 1948; LL.B., University of Wisconsin, 1952; Member,
Wisconsin Bar; Acting Associate Professor, University of California Law School.
This article is based on a study made by the author in behalf of the Special Comnittee
on Retail Installment Sales, Consumer Credit, Small Loans and Usury of the
National Conference of Commissioners on Uniform State Laws. The views expressed
herein are those of the author and do not necessarily reflect the views of the Staff,
Advisors, or Commissioners. The author gratefully acknowledges the numerous valuable
criticisms of a draft of this paper made by his colleague, Professor Robert L. Jordan,
and by Professor Jacob S. Ziegel, University of Saskatchewan Law School.
1 See the chart in Proceedings of the Special Joint Committee on Consumer Credit
of the Senate and House of Commons, 26th ParI., 2d Sess. 118 (1964) [hereinafter cited
as Canadian Hearings]. The chart compares the two countries for the years 1948-1963
with respect to the total volume of consumer credit outstanding and the ratios of such
credit to disposable income and to gross national product. During the period 1953-1963,
these ratios corresponded quite closely. The rate of growth of consumer credit for
Canada (about 10%) compares with the figure for the United States (about 832o).
Each country also evidences similar rates of growth in personal disposable income and
gross national product.
2 Comparison between the two is facilitated by recent studies in each country
evaluating aspects of the consumer-credit problem. Heavy reliance is placed upon the
following sources: the extensive record of the Canadian Hearings; the broad survey of
the Canadian financial system found in the Report of the Royal Commission on Banking
and Finance (1964) [hereinafter cited as Royal Commission]; and the highly useful
analysis in Curran, Trends in Consumer Credit Legislation (1965) [hereinafter cited as
Curran].
Legislation concerning consumer credit is undergoing continual change. Analysis,
however, is restricted to those Canadian statutes available by October 1, 1965.
201
— 8 B.C. Indus. & Com. L. Rev. 201 1966-1967
BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW
Third, there is no attempt to review all the laws dealing with the consumer-
credit problem, but only a limited number dealing with some
of the more important facets.
Credit can, of course, be extended either as a direct loan to the
borrower or as a credit sale of goods or services to the consumer. In
Canada, as in the United States, each type of credit has essentially
been regulated by a separate body of law. In Canada, federal legislation
deals with lender credit, while provincial legislation deals primarily
with vendor credit. This division of economic control results
in part from the constitutional distribution of power. Section 91 of
the Canadian Constitution expressly delegates to the Federal Parliament
exclusive control over interest and banking. Under these powers,
Parliament has enacted the Interest Act,3 the Small Loans Act,4 the
Pawnbrokers Act,’ and the Bank Act.6 Section 91 also confers on
Parliament authority to legislate with respect to bankruptcy, bills of
exchange and promissory notes, and the regulation of trade and commerce.
Section 92 of the Canadian Constitution, on the other hand, confers
on the provinces exclusive legislative authority regarding property,
civil rights, and “generally all matters of a merely local or private nature
in the province.” By virtue of these powers, the provinces have
enacted laws concerning credit unions and certain types of credit transactions,
such as installment sales, conditional sales, and “unconscionable”
transactions.
Potential conflicts between such “exclusive” grants of provincial
and federal jurisdiction can be readily imagined. For example, since
the Constitution allocates to the Dominion control over “interest,”
does this include the regulation of other loan charges? Are such
charges “interest”? If not, are they nonetheless within the federal
power as necessary incidents to the effective regulation of interest?
If such charges are “interest,” is their regulation necessarily denied
to the provinces? Or, on the other hand, does such power fall within
one of the broad areas of “exclusive” provincial power mentioned
above?
Even assuming that the regulation of such loan charges is within
the federal jurisdiction, what of finance charges imposed by a merchant
selling goods on credit? Are such charges within the ambit of the
federal interest power, or are they merely part of the price of the
merchandise, and therefore beyond the control of Parliament? In fact,
3 Can. Rev. Stat. c. 156 (1952).
4 Can. Rev. Stat. c. 251 (1952), as amended by Can. Stat. c. 46 (1956).
G Can. Rev. Stat. c. 204 (1952).
6 Can. Stat. c. 48 (1953-1954).
— 8 B.C. Indus. & Com. L. Rev. 202 1966-1967
CONSUMER-CREDIT LEGISLATION
federal interest legislation has not been construed to apply to a
merchant’s charges for the buyer’s privilege of buying on time.7 It
by no means automatically follows, however, that “interest” in the
constitutional sense must receive an equally restrictive interpretation.
The matter has yet to be definitely resolved.s
The language of the Canadian Constitution might lead one to
conclude that a broader federal power over consumer-credit transactions
exists in Canada than in the United States. Examination of
the relevant legislative application, however, indicates that parliamentary
control may be less “exclusive” than a casual reading of section
91 suggests. On the other hand, the commerce clause probably grants
the U.S. Congress ample power to regulate the vital aspects of the
consumer-credit field. This, at any rate, is the premise of the Douglas
bill which seeks to compel the disclosure of finance charges in credit
transactions; 9 and the premise is not likely to prove unsound.”°
- NATIONAL LEGISLATION: REGULATION OF LENDER CR EDIT
- A Contrast in the Scheme of Legislation
Broad usury statutes are in effect throughout most of the United
States.” The rate limits found in these statutes, however, have proven
unrealistic for the demands of the developing U.S. credit market. The
history of U.S. loan regulation is, therefore, largely the story of successive
exceptions to the usury laws. These exceptions developed in
response to the expanding needs and pressures of the credit market.
The affected category might be a class of lending institution or a type
of lending arrangement, but in either case the category is withdrawn
from the scope of the usury law and is governed by a different schedule
of maximum rates.
In Canada, however, no such general usury law exists today. A
lender may charge what he wishes unless specific legislation limits his
power to do so. Actually, such limiting legislation does exist in abundance,
and it applies to the principal participants in the consumer loan
market-banks, small loans companies, and credit unions. It therefore
seems that the distinctions in the scheme of legislation between
the two countries are of no more than formal significance.
7 In the Matter of Pyke, 9 N.S. 342 (1873).
8 See Canadian Hearings 480-81 (brief of Professor Ziegel).
D Truth in Lending Bill, S. 2275, 89th Cong., 1st Sess. (1965).
10 Compare, e.g., Katzenbach v. McClung, 379 U.S. 294 (1964); Heart of Atlanta
Motel, Inc. v. United States, 379 U.S. 241 (1964).
11 Exceptions are Maine, New Hampshire, and Massachusetts. Curran 15. For a
discussion of interest and usury statutes in the United States, see generally id. at 15-16.
203
— 8 B.C. Indus. & Com. L. Rev. 203 1966-1967
BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW
- The Interest Act
The Interest Act’2 establishes a legal rate of interest 8 of five per
cent per annum, but section 2 permits the parties to contract for “any
rate of interest or discount” they please, with one narrow limitation:
Whenever the interest rate is expressed in terms of any period less
than a year, the interest must also be stated in terms of the annual
rate; if it is not, the maximum rate allowed is five per cent.’ 4
Since very little consumer credit today can be profitably extended
at five per cent per annum, this provision might be thought
more effective as a disclosure requirement than as a rate limitation.
Yet this is probably not the case. First, the provision applies to written
contracts only. Second, it applies only to interest rates for periods
less than a year, and therefore appears to be inapplicable to loans in
which the charge is expressed as a lump sum rather than as a rate
over time. 5 Third, “interest” is undefined in the act, thus inviting the
usual abuses accorded an interest rate regulation that does not unequivocally
specify what charges must be included within the limit.
Finally, the only remedies provided in case of overcharge are restitution
or an equal deduction from any principal or interest outstanding
under the contract;’ 6 these are hardly remedies calculated to secure’
maximum compliance.
- The Small Loans Act
The Small Loans Act,”r passed in 1939, has proven highly effective,
both in regulating legitimate moneylenders and in curbing loan
sharks.'” Originally covering only loans up to $500, the act has, since
1956, regulated loans up to $1,500 made by those in the business
of lending money.’9 Its restrictions are enforced by rigid licensing
requirements and effective administrative supervision. A detailed consideration
of its provisions follows.
Coverage in General. The Small Loans Act defines two categories
of regulated lenders: “moneylenders” and “small loans companies.”
The principal distinction is that the latter are federally
incorporated, whereas moneylenders are companies provincially incorporated,
partnerships, or individuals. 0 Except for chartered banks
12 Can. Rev. Stat. c. 156 (1952).
13 The “legal rate” of interest is the rate which governs if the parties agree on no
other.
14 Can. Rev. Stat. c. 156, § 4 (1952). This provision applies to all written or printed
contracts except real estate mortgages.
15 Canadian Hearings 27 (testimony of the Superintendent of Insurance).
16 Can. Rev. Stat. c. 156, § 5 (1952).
17 Can. Rev. Stat. c. 251 (1952), as amended by Can. Stat. c. 46 (1956).
Is Canadian Hearings 25-26 (testimony of the Superintendent of Insurance).
19 Can. Rev. Stat. c. 251, § 2(c) (1952), as amended by Can. Stat. c. 46, § 1 (1956).
20 A few partnerships and individuals were in business before the act came into
204
— 8 B.C. Indus. & Com. L. Rev. 204 1966-1967
CONSUMER-CREDIT LEGISLATION
and registered pawnbrokers, which are regulated under separate
federal acts, these categories appear to embrace every participant in
the small loans market. As in the case of the American acts, the Small
Loans Act applies only to money loans, although “loan” is defined in
section 2(c) to include the purchase of a wage assignment .2 The act
does not apply to credit granted by the seller of goods.
Licensing and Supervision. Sections 5 and 13(1) of the act require
those in the business of making small loans (under $1,500) to
be licensed by the Minister of Finance. No license is required, however,
of lenders whose charges never exceed one per cent per month
on the unpaid principal. Technically at least, credit unions may fall
within this class of unlicensed moneylenders, since the charges on their
small loans generally do not exceed this designated rate. The Superintendent
of Insurance is empowered to investigate all unlicensed
lenders to verify that they are in fact not charging in excess of one
per cent, nor otherwise violating the terms of the act. Credit unions,
however, are not subjected to such scrutiny, perhaps because the job
is adequately performed by local authorities under the provincial
credit union acts.
The licensing requirement is an important feature of the Small
Loans Act, and serves two distinct functions: first, it permits the
licensing authority to limit access to the lending market; second, the
concomitant power of license revocation provides a continuing stimulus
for lender compliance with the terms of the act.
The standard for issuance of licenses differs sharply from that
found in many of the U.S. acts, including the Uniform Small Loan
force in 1939, but are today licensed under it. Subsequent licensees have all been corporations,
incorporated either by special act of Parliament (thus “small loans companies”)
or by the provinces (thus “moneylenders”). The Report of the Superintendent
of Insurance for Canada, Small Loans Companies and Money-Lenders Licenced Under
the Small Loans Act for the Year Ended December 31, 1962 [hereinafter cited as 1962
Report] indicates that as of 1962, there were 7 licensed small loans companies and 80
licensed moneylenders. Among the moneylenders were 1 partnership and 2 individuals.
The remainder were provincially-incorporated bodies. Id. at 68-69. In 1963, 559 of the
small loans business was conducted by wholly-owned subsidiaries of U.S. companies.
Canadian Hearings 819.
21 Whether the definition of “loan” found in § 2 is applicable to small loans companies
is not clear, since the provisions refer only to “moneylenders.” The structure of
the act suggests that the two business categories are mutually exclusive. On the other
hand, the act provides no separate definition of “loan” applicable to small loans companies.
If § 2(c) were read to apply only to moneylenders, and not to small loans companies,
the word “loan” would be undefined with respect to the latter, even though used
repeatedly in the provisions relating to such companies. Fortunately, for most purposes
it is unnecessary to determine the precise relationship between the two categories, since
most of the key provisions of the act are separately stated with reference to each.
Where significant, however, it is assumed that moneylenders and small loans companies
are mutually exclusive categories.
— 8 B.C. Indus. & Com. L. Rev. 205 1966-1967
BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW
Law.2 Sections 5(2) and 13(1) of the Canadian act provide the following
guideline: the “experience, character, and general fitness” of
the applicant must warrant the belief that he would carry on the
moneylending business “with efficiency, honesty and fairness to borrowers
. . . .” This standard focuses upon the personal qualities of
the applicant-his integrity and competence-rather than upon the
community need for lending facilities. The approach of the U.S. uniform
law, on the other hand, is to condition issuance upon a finding
that the “convenience and advantage of the community” will be promoted.
23 Under this standard, a license might be denied an exemplary
applicant if additional facilities would, for example, result in “excessive”
competition.24 A consequence of the Canadian licensing standard
is that once the business entity receives a license it is free to open
branch offices as it pleases. Under the approach of the U.S. uniform
law, however, a separate license is required for each office.2
Lending Powers. The Small Loans Act imposes restrictions upon
the lending powers of small loans companies which are different from
those imposed upon moneylenders. For example, small loans companies
are barred from lending on the security of real property.20 They
have under section 14(a), however, the power to “buy, sell, deal in
and lend money on the security of, conditional sale agreements, lien
notes, hire purchase agreements, chattel mortgages, trade paper, bills
of lading, warehouse receipts, bills of exchange and choses in action
. . ” Small loans companies may thus engage in sales financing
through the purchase of conditional sales agreements from retail merchants.
In contrast to the practice in the United States, these sales
financing activities are carried on in the same premises as the small
loans activities.2″ The sales financing aspect of a licensee’s business
is, however, wholly unregulated under the act.
22 Uniform Small Loan Law (Tent. Draft No. 7, 1942) [hereinafter cited as Uniform
Small Loan Law].
23 Uniform Small Loan Law § 4(b)2.
24 Sympathy for such a “convenience and advantage” standard is to be found In
Canada. In 1956, the Superintendent of Insurance observed: “Too many [lending]
offices must tend to encourage people to borrow …. As competition increases, expenses
are prone to rise through more aggressive advertising, the opening of additional lending
offices in close proximity to those of competitors, and in other ways.” Brief of the Department
of Insurance, Small Loans Act, p. 32, submitted to the Standing Committee of
the House of Commons on Banking and Commerce, 22d Panl., 3d Sess. (1956). He concluded,
however, that a “convenience and advantage” standard would “clearly be unconstitutional
since it would not be legislation respecting interest.” Ibid. In the event
excessive competition were to result in higher rates, however, it might be plausibly
argued that restrictive licensing was constitutionally justified as an aspect of interest
regulation.
25 Uniform Small Loan Law § 4(b)2.
20 This can be inferred both from the definition of small loans companies in § 2(f)
and from the enumeration of powers of such companies in § 14(a).
27 Canadian Hearings 818 (testimony of the President of the Canadian Consumer
Loan Association).
— 8 B.C. Indus. & Com. L. Rev. 206 1966-1967
CONSUMER-CREDIT LEGISLATION
The act contains no restriction on a moneylender’s powers which
is analogous to that imposed on small loans companies. Such limitations
are left to the provincial authorities that charter the moneylender.
The powers granted moneylenders by provincial charters,
however, normally parallel those set forth in the act for small loans
companies2 Nothing in the act appears to bar moneylenders from
making loans over $1,500. In defining the powers of the small loans
companies, however, section 14(b) provides that they may “lend
money in sums not exceeding fifteen hundred dollars . . . .” Taken
literally, these words would appear to bar loans in excess of the stated
sum. Nevertheless, in view of the history and objectives of the act,
there probably was no intent to prohibit larger loans. Licensees do,
in fact, frequently lend greater amounts,29 and the enforcing officials
do not take issue with the practice.
Charges Permitted the Licensees and Other Terms of the Loan
Contract. The Canadian act, like the U.S. Uniform Small Loan Law,
provides a graduated scale of maximum charges applicable to different
ranges of the loan. The “cost of a loan” may not exceed 2 per cent
per month on the unpaid principal balance not exceeding $300; 1 per
cent on the amount exceeding $300 but not exceeding $1,000; and
2 per cent on the remainder.3 In the case of long-term loans (loans
up to $500 for over 20 months and loans exceeding that amount for
over 30 months), the loan cost ceiling is 1 per cent per month on the
unpaid principal balance.3 1 The statutory limits are almost invariably
charged.3″ These rates must, of course, be applied to the principal
balance outstanding at the time of payment, and not taken in
advance. The premise behind such a variable rate structure is, no
doubt, that the cost of lending is disproportionately high for smaller
or shorter term loans.
Assuming a borrower made an additional loan before an existing
one was repaid, it would frequently be to the lender’s advantage to
regard them as separate loans, since he could then impose the higher
rates permitted for smaller loans. The act, however, bars this. If such
an additional loan is made, either by the borrower or the borrower’s
spouse, the separate loans must be added, and the cost computed on
the new total.33
28 See Canadian Hearings 28 (testimony of the Superintendent of Insurance).
29 Outstanding balances of large loans on the books of licensees during 1962 totaled
almost $117 million, compared with about $482 million for small loans. 1962 Report at
vii.
30 Can. Rev. Stat. c. 251, §§ 3(2), 14(2) (1952), as amended by Can. Stat. c. 46,
- § 2, 6 (1956).
31 Can. Rev. Stat. c. 251, § 3(3), 14(3) (1952), as amended by Can. Stat. c. 46,
- 9 2, 6 (1956).
32 Royal Commission 211.
33 Can. Rev. Stat. c. 251, §§ 3(4)a, 14(4)a (1952), as amended by Can. Stat. c. 46,
- 9 2, 6 (1956).
— 8 B.C. Indus. & Com. L. Rev. 207 1966-1967
BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVWN
Credit regulation is rarely effective if it extends only to that portion
of the loan charge the lender pleases to designate “interest.” Other
charges making up the cost of the loan, however styled, must also be
controlled. On this premise, no doubt, the “cost” of a loan was comprehensively
defined to mean the whole cost, whether designated “interest”
or
discount, deduction from an advance, commission, brokerage,
chattel mortgage and recording fees, fines, penalties or charges
for inquiries, defaults or renewals or otherwise, and whether
paid to or charged by the lender or paid to or charged by any
other person, and whether fixed and determined by the loan
contract itself, or in whole or in part by any other collateral
contract or document by which the charges, if any, imposed
under the loan contract or the terms of the repayment of
the loan are effectively varied …1.1
Thus far, few items have fallen outside the definition of “cost”
to be allowed as additional charges. Exceptions have been made, however,
for the following items: credit life insurance, though the imposition
of this charge is closely regulated;,” property insurance on property
given as security on the loan, provided the insurance is placed
through an agency other than that of the licensee; 0 court costs in the
event of default and attorney fees if permitted by provincial law;8 7
and certain expenses of recovery of the security on chattel mortgage
loans, including out-of-pocket expenses of seizure, charges by public
officials, and reasonable expenses of repair to render the seized chattel
saleable.” Expenses for storage and sale of the chattel and other de-
34 Can. Rev. Stat. c. 251, § 2(a) (1952). The preamble of the Small Loans Act
suggests that this listing is a tribute to the ingenuity of earlier generations of moneylenders
in devising various forms of additional charges to circumvent usury legislation
that reached only “interest.” Such legislation included the Interest Act, Can. Rev. Stat.
- 156 (1952), and the Money-Lenders Act, Can. Rev. Stat. c. 181 (1952) (repealed).
35 See the lengthy directive, Memorandum for Licensees Under the Small Loans
Act, Re Group Insurance on the Lives of Borrowers (April 3, 1959), issued by the
Superintendent of Insurance. The lender must offer the service through a group life
policy and on a wholly voluntary basis. While the maximum charge is not specified, the
lending institutions and the Superintendent of Insurance have informally agreed that
the premium will not exceed 590 per $100 of the initial amount of the loan. There has
been full compliance with this agreement. See Canadian Hearings 65 (testimony of the
Superintendent of Insurance). As of December 31, 1962, 59 of the licensees under the
act were offering group life insurance, the cost in one case being borne by the lender
and, in the other 58 cases, by the borrower. 1962 Report at viii. In 1962, 96.2% of the
small loans made were covered by credit life insurance. Id. at 53.
86 Report of the Superintendent of Insurance for Canada on Small Loans Companies
and Money-lenders Licenced Under the Small Loans Act, 1939, at 6 (1940).
37 Letter from K. L. Bullerwell, Administrative Officer of the Canadian Department
of Insurance, to the author, March 2, 1966.
38 Department of Insurance, Small Loans Act, 1939-Memorandum for Licensees
(March 12, 1940).
— 8 B.C. Indus. & Com. L. Rev. 208 1966-1967
CONSUMBR-CRRDIT LEGISLATION
fault costs, on the other hand, form a part of the cost of the loan, and
no additional charges for such expenses are allowed. 9
It has been pointed out above that licensees do grant loans in
excess of $1,500-the point after which there ceases to be regulation
of loan costs. The question arises whether the first $1,500 of such a
loan remains subject to the statutory limits. It does not.40 Once a loan
exceeds $1,500, no part of it is regulated. An exception arises when
the $1,500 figure is exceeded as a result of successive small loans to
the same borrower or the borrower’s spouse. In that case, the first
$1,500 of the loan remains subject to the statutory limits while the
charge on the excess is restricted to one-half of one per cent per
month.41
The Canadian practice of not regulating loans which are in excess
of the small loans limits is in contrast to the situation under many U.S.
small loans acts. In the United States, regulation generally takes place
against the back-drop of a broad usury statute. Thus, that portion of
the loan above the small loan limit42 is not exempt from operation of
the usury law.
The theory of the Canadian arrangement probably is that loans
over $1,500 are not typically made to the class of needy small borrowers
for whose protection the act was designed. A substantial school
of thought, represented by the Royal Commission on Banking and
Finance, is, however, of the view ‘that regulation should extend up
to $5,000, and that the maximum loan charge applicable to a balance
in the range of $300 to $5,000 should be one per cent per month.
Such a proposal may imply objectives broader than those of the classical
small loans act. In any event, such a change would raise the
ceiling, but would not eliminate the abrupt termination of regulation
once the ceiling was reached.
An unintended result of the Canadian system is that relatively
few loans are made in the $1,000-$1,500 range. The policy of one
company, for example, permits it to make loans in the “dead” area
between $1,000 and $1,500 only if it is “trapped” by competitive pressure,
but in no event for an amount “in excess of $1222 on up to
$1500. ‘ 14 Such a policy reflects a preference for the higher rates permitted
for smaller loans, or the unregulated rates for those over
$1,500.
44
39 Ibid.
40 See Canadian Hearings 27 (testimony of the Superintendent of Insurance).
41 Can. Rev. Stat. c. 251, §§ 3(4)b, 14(4)b (1952), as amended by Can. Stat. c. 46,
- § 2, 6 (1956).
42 $300 under the Uniform Small Loan Law and $200 to $5,000 under the various
state laws. Curran 21.
43 Royal Commission 382.
44 Canadian Hearings 835 (testimony of the President of the Canadian Consumer
209
— 8 B.C. Indus. & Com. L. Rev. 209 1966-1967
BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW
Loans must be made repayable in approximately equal installments
of principal, plus interest computed on the outstanding balance, which
results in declining payments as the loan cost decreases, or of principal
and cost of loan, which results in uniform payments, but with a growing
proportion allocated to principal as the loan cost decreases.4 In
the event of default, no special charges are permitted. The borrower
merely continues to pay the ordinary contract rate. If, however, the
default continues beyond the due date of the final installment, one
per cent interest per month from that date may be charged on the
installments in default .4 No such interest charge for default, nor any
loan cost, may be compounded; nor may either be deducted or received
in advance.47 This, of course, bars the use of the discount form
of loan contract. Prepayments of any portion of the principal balance
are permitted on any regular payment date, and no penalties whatever
may be assessed for such payments.4
Compulsory Disclosure of Loan Costs by Licensees. The disclosure
problem is confronted at two points: first, in the lender’s advertising
practices; second, in his manner of stating loan costs in the
contract. Neither aspect is in any way regulated by the act. However,
in a manner perhaps less formal than commonly encountered in the
United States, lenders’ advertising practices are in fact regulated. The
Superintendent of Insurance has testified that
from the time the licensee is first licensed we get proof copies
of proposed advertising, and always copies of the contracts.
In fact the licensees are generally anxious to have us look at
them to comment on them …. [The requirement] is not in
the act. But as a matter of practice we do it …. [The companies]
have been very cooperative in their advertising ….
[O]ur disposition has been to keep them away from superlatives
and anything of any unjustifiable nature.4 9
With respect to disclosure in the loan contract, it has been previously
observed that under limited circumstances the Interest Act
Loan Association). It is interesting to observe that in many of the loans for over $1,500,
the companies depart from the method of charging rates under the Small Loans Act, and
utilize instead the add-on or discount method. Canadian Hearings 860 (brief of the
Canadian Consumer Loan Association).
In 1962, the number of loans between $1 and $500 was 642,108; between $501 and
$1,000, 584,825; and between $1,001 and $1,500, 77,222. 1962 Report at v, 64. The rate
charged by small loans companies on loans over $1,500 seems to average about 1Y2%
monthly. Royal Commission 210.
45 Can. Rev. Stat. c. 251, §§ 6(1), 14(5)a (1952), as amended by Can. Stat. c. 46,
- § 4, 6 (1956).
46 Ibid.
47 Can. Rev. Stat. c. 251, §§ 6(2), 14(5)b (1952).
48 Can. Rev. Stat. c. 251, §§ 6(3), 14(5)c (1952).
49 Canadian Hearings 68.
— 8 B.C. Indus. & Com. L. Rev. 210 1966-1967
CONSUMER-CREDIT LEGISLATION
indirectly presses a lender to disclose interest in terms of annual rate,
upon penalty of being restricted to a five per cent interest charge.5″ The
question arises, however, whether this applies to transactions under
the Small Loans Act. Are “loan costs” under the Small Loans Act
“interest” under the Interest Act? The Superintendent of Insurance
believed they were. And, in fact, all licensees do state loan costs in
terms of both monthly and annual rates in their contracts.5 The practice,
moreover, is to provide every borrower with a copy of the loan
contract,52 though the act does not require this.
- The Bank Act
Growth in personal installment lending by chartered banks has
been rapid since 1958.’ 3 The Federal Bank Act,5 4 which provides the
general framework of bank regulation, contains some provisions that
bear on such consumer loans.5″ This, however, is an incidental effect
rather than the original purpose, since the relevant provisions were
in effect long before banks entered the consumer loan market. Section
91(1) of the Bank Act, governing “interest and charges,” provides:
[N]o bank shall in respect of any loan or advance payable
in Canada stipulate for, charge, take, reserve or exact any
rate of interest or any rate of discount exceeding six per cent
per annum and no higher rate of interest or rate of discount
is recoverable by the bank.55
The annual interest rate of most banks actually ranges from 9%
per cent to 11% per cent. This amount of loan charge may be justified
despite the statutory language just quoted. First, the six per cent
statutory maximum applies to rate of interest or rate of discount, at
the lender’s option. Assume a loan of $100, for example, was arranged
on a one-year installment basis at the discount rate of six per cent
50 See p. 204 supra.
51 Canadian Hearings 27 (testimony of the Superintendent of Insurance).
52 Ibid.
53 See chart, Canadian Hearings 803-04. The total of outstanding bank loans at the
end of 1963 has been broken down as follows:
loans secured by motor vehicles $319,000,000
loans secured by other personal property 51,000,000
other personal loans repayable by installments 465,000,000
other personal loans 597,000,000
Total $1,432,000,000
Id. at 109 (brief of the Bank of Canada).
54 Can. Stat. c. 48 (1953-1954).
55 The Small Loans Act, it will be remembered, expressly excluded chartered banks
from its provisions. See pp. 204-05 supra.
GO Section 91(2) permits the following exceptions: The bank may charge a minimum
of $1 on loans and advances over $25 and a minimum of 500 on those under that
amount.
— 8 B.C. Indus. & Com. L. Rev. 211 1966-1967
BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW
authorized by the statute. Six dollars would be deducted in advance,
leaving net proceeds of $94. The borrower would be obliged to repay
the principal amount of $100 in twelve equal monthly installments.
Such an arrangement would produce a yield in the 94 per cent to
114 per cent range noted above, if calculated in terms of simple
annual interest.5 The reason that a given discount translates into a
higher simple interest rate is, of course, that the former is figured
on the original amount of the loan, and the latter on the declining
balance. Second, section 93 (2) of the act provides that “no bank shall
directly or indirectly charge or receive any sum for the keeping of an
account unless the charge is made by express agreement between the
bank and the customer.” This could be interpreted to authorize additional
charges for the loan “account,” so long as the parties expressly
agree.”8 Third, neither “rate of interest” nor “rate of discount” are
defined in the act, nor is any method of computation prescribed.
Therefore, various other loan charges might be justified in addition
to the maximum rate. 59 Whatever the theory, “banks have taken the
view that the charges under these plans do not involve a breach of
Section 91 of the Bank Act and this interpretation has not been challenged
by the authorities.”8 0
It is interesting to contrast the provisions regulating loan charges
in the Bank Act with those of the Small Loans Act. For example, the
Small Loans Act defines the maximum loan charge with considerable
precision; 1 the Bank Act merely refers to “rate of interest or rate
of discount.” In addition, the maximum rate of charge under the Bank
Act differs from that permitted for an equivalent loan under the Small
Loans Act.62 Also, the Small Loans Act regulates the rates only on
loans under $1,500; the Bank Act provides no cutoff point.
Why are there differences in the regulation of similar loans by the
two types of lending institutions? The phenomenon is probably not
the product of policy, but rather the unintended result of an explosive
57 It appears to be the common practice for banks to disclose their rate of loan
charge neither in terms of true interest rate nor in terms of total dollar charge. See
Canadian Hearings 29 (testimony of the Superintendent of Insurance), 478 (brief of
Professor Ziegel). This produces considerable dissatisfaction in other segments of the
lending industry, which fear the existence of a public illusion that banks merely charge
an annual rate of six per cent. See, e.g., id. at 148 (testimony of a representative of the
Ontario Credit Union League).
58 See id. at 29 (testimony of the Superintendent of Insurance).
50 See id. at 190-91 (testimony of the Executive Secretary of the Canadian Federation
of Agriculture).
60 Royal Commission 127. Though not apparently required to do so by the act, at
least some banks permit a borrower to prepay a discount loan with “a corresponding
equitable rebate in the cost of the loan.” See Canadian Hearings 478 (brief of Professor
Ziegel).
61 See p. 207 supra.
62 Ibid.
— 8 B.C. Indus. & Com. L. Rev. 212 1966-1967
CONSUMER-CREDIT LEGISLATION
growth in the consumer-credit industry to which the law has not yet
adjusted. The maximum loan rate prescribed by the Bank Act was
originally intended to protect small borrowers who, until recently,
were mainly business borrowers. Banks are today often unwilling to
lend at such rates, however, and the act therefore works against these
borrowers by “denying them access to bank funds and sending them
elsewhere to borrow at interest rates which are often well in excess of
the rates which banks would charge.””8 This same practice may similarly
be driving consumer borrowers to more expensive sources of
credit.
III. PRovn, ciA LEGISLATION: REGULATION OF VENDOR CREDIT
- Credit Unions
Canada was the continental birthplace of the credit union movement
. 4 In 1900 the first credit union, or as it was called, “caisse
populaire,” was established in Quebec, modeled after the cooperative
“Peoples’ Banks” of Europe. From that province, the institution
gradually spread across Canada and into the United States. The
Canadian credit union movement today consists of the “caisses populaires”
of French-speaking Canada and the “credit unions” of English-
speaking Canada. The traditional objective of these institutions
was to promote thrift by collecting the savings of members and lending
this money to them at favorable rates for “provident or productive
purposes.”65 Today these institutions play a vital role in the Canadian
consumer-credit market,0 6 and legislation regulating them has been
passed in every province.”
Maximum Rate of Charge. Loan rates are limited by statute in
every province except Newfoundland and Quebec. This limit is generally
set at one per cent per month computed on the unpaid balance
of the loan.68 Within this limit the union is free to set its own rates.
As with every statute imposing loan charge limits, the question
63 Royal Commission 129.
64 Id. at 155. For a general account of the history and operations of the Canadian
credit union movement, see id. at 155-71.
Or E.g., Ont. Rev. Stat. c. 79, § 4(1)b (1960).
66 See chart, Canadian Hearings 803-04.
67 Alba. Rev. Stat. c. 67 (1955), as amended by Alba. Stat. c. 19 (1961); B.C.
Stat. c. 14 (1961), as amended by B.C. Stat. c. 15 (1964); Man. Rev. Stat. c. 54 (1954),
as amended by Man. Stat. c. 12 (1964); N.B. Stat. (2d Sess.) c. 2 (1963), as amended
by N.B. Stat. c. 24 (1964); Newf. Rev. Stat. c. 172 (1952), as amended by Newf. Stat.
No. 4 (1963) ; N.S. Rev. Stat. c. 64 (1954), as amended by N.S. Stat. c. 20 (1964) ; Ont.
Rev. Stat. c. 79 (1960), as amended by Ont. Stat. c. 14 (1964); P.E.I. Rev. Stat. c. 38
(1951), as amended by P.E.I. Stat. c. 9 (1963); Que. Stat. c. 57 (1963); Sask. Stat. c.
40 (1962), as amended by Sask. Stat. c. 24 (1964).
08 E.g., Ont. Rev. Stat. c. 79, § 29(2) (1960); N.S. Rev. Stat. c. 64, § 47 (1954)
(50 minimum charge permitted for any loan even if actually more than 1%).
213
— 8 B.C. Indus. & Com. L. Rev. 213 1966-1967
BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW
arises as to which items are to be included in the calculation (and
therefore subject to the statutory limit) and which excluded (therefore
collectible in addition to the statutory limit). Credit union laws,
in contrast to the small loan laws of both Canada and the United
States, devote little attention to this problem. Several acts make no
mention of additional charges, but are content merely to limit “interest”
rates.6 9 Others provide that the rate limit applies to interest
together with “all charges and penalties,” 70 or to interest together
with “all charges incident to making the loan. ‘ 71 Prepayment penalties
are not normally barred by express language in these statutes.
With their emphasis on thrift, however, one would scarcely expect
credit unions to penalize members for excessive zeal in repayment.
Credit unions do not typically charge the highest rate the market
will bear and, therefore, do not seek to test the limits of legality.
The statutory rate is widely interpreted by the credit unions to apply
to every conceivable charge. “There is [sic] no hidden charges or
penalties in the credit union loan business,” the Ontario Credit Union
League has asserted.7″ Even the cost of credit life insurance is generally
included within the maximum rate. 3 In addition, “because of
the underlying philosophy of credit unions, delinquents are treated as
reasonably and fairly as possible, and everything possible is done to
help a borrower in difficulty, including the postponement of principal
payments, and sometimes the waiving or reduction of interest.”‘ 4
Credit unions probably constitute the only significant segment
of the consumer moneylending market which generally charges less
than the maximum permitted by statute. The methods by which this
is accomplished, however, vary. Some of these institutions follow the
practice of charging, initially, the maximum one per cent rate because
of the ease of calculation this permits. They then refund a portion in
the form of an annual rebate.75 Others charge less from the outset.”0
Whatever the technique, the Royal Commission has estimated that
the effective charges of credit unions, “after allowance for insurance
benefits and the partial rebates of loan interest which are a regular
part of the annual distribution of some co-operatives’ income, range
between 8% and 10% for most credit unions and a little lower for
the larger ones and for rural societies.””1
69 E.g., N.S. Rev. Stat. c. 64, § 47 (1954).
70 E.g., Ont. Rev. Stat. c. 79, § 29(2) (1960).
71 N.B. Stat. (2d Sess.) c. 2, § 23 (1963).
72 Canadian Hearings 165.
73 Id. at 140 (testimony of the General Manager of the Ontario Credit Union
League).
74 Id. at 167 (brief of the Ontario Credit Union League).
75 Id. at 165 (brief of the Ontario Credit Union League).
76 Id. at 255 (brief of the Credit Union National Association).
77 Royal Commission 158.
— 8 B.C. Indus. & Com. L. Rev. 214 1966-1967
CONSUMER-CREDIT LEGISLATION
It should also be noted that such interest regulation takes place
in the face of the constitutional allocation of the interest power to
Parliament. The legislation, however, has apparently never been challenged;”‘
nor is it likely to be, so long as credit unions are content
to operate within the one per cent rate limit.
Maximum Amount of Loans. Most of the provinces set no general
limit on the amount unions may lend to individuals. In some
acts, no mention is made of the subject;79 in some, the matter is left
to the directors; 0 and in others, it is to be determined by the bylaws.
81 A substantial number of the acts do, however, set limits on
the size of unsecured loans and specify at least some of the types of
security that may be accepted for loans exceeding that amount. The
dividing line is generally drawn between $300 and $500. Some laws
permit this unsecured amount in addition to the unencumbered value
of any shares the member holds in the union,8″ while others regard
an assignment of shares or deposits as good security.83 Several expressly
give the union a lien on a member’s shares and deposits to
the extent of his debt.” Another form of acceptable security mentioned
in some of the acts is “an endorsement of a note” 8 or real
estate.86 Presumably, the statutory designations of valid security
are not intended as exclusive. Some acts expressly provide that loans
may be made upon such security as is satisfactory to the credit committeeY
Though not required in the acts, it is the widespread practice of
credit unions to disclose loan charges in terms of both total dollar
cost and interest rate. 8 Not surprisingly, the Credit Union National
Association recommended legislation requiring such disclosure for the
“extenders of every kind of credit.”8 9
78 See Canadian Hearings 28 (testimony of the Superintendent of Insurance).
79 E.g., Quebec.
80 E.g., Alba. Rev. Stat. c. 67, §§ 28(1)b(ii), (1)f (195); N.B. Stat. (2d Sess.)
- 2, § 14f (1963).
81 E.g., Ont. Rev. Stat. c. 79, § 15(c) (1960).
82 E.g., B.C. Stat. c. 14, § 18(3)a (1961).
83 E.g., N.B. Stat. (2d Sess.) c. 2, § 18(2) (1963).
84 E.g., Ont. Rev. Stat. c. 79, § 27(2) (1960).
85 E.g., N.B. Stat. (2d Sess.) c. 2, § 18(2) (1963).
86 See Sask. Stat. c. 40, § 70 (1962). This section also prescribes that the maximum
loan which may be made on the security of real estate is a percentage of its value, and
provides that a loan higher than that percentage can be made if guaranteed by any
organization approved by the supervisory authority.
87 E.g., Man. Rev. Stat. c. 54, § 63(3) (1954).
88 The Credit Union National Association has stated:
Our credit unions stress the fact that their rates include all borrowing
costs, and they are careful to provide each borrower with full information
about the amount of his repayment, and the total cost of the loan expressed
both in dollars and cents and in terms of per centum per annum.
Canadian Hearings 255.
89 Id. at 257.
— 8 B.C. Indus. & Com. L. Rev. 215 1966-1967
BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW
Summary. In both the United States and Canada, the form and
tone of credit union legislation differ sharply from that of small loan
legislation. The latter type was a reaction to moneylenders who had
repeatedly and ingeniously taken advantage of needy and helpless borrowers.
The legislation therefore aimed at precise control of the terms
of the lending agreement.
Credit unions, on the other hand, developed as membershipcontrolled
cooperative ventures dedicated to the service of their members.
The statutes tend to focus on guaranteeing their continued
democratic operation under sound financial practices. Provisions are
made to insure that the membership will have knowledge of and control
over the activities of the society. The credit union’s bylaws are
regulated, and it is subject to inspection and supervision by government
officials and sometimes also by the credit union league or
“central” with which it may be affiliated. Substantial reliance is placed
on such devices and on the underlying benevolent objectives of the
movement, rather than on detailed control of the terms of the loan
agreement.
- Retail Installment Sales
The principal types of retail credit sales arrangements prevalent
in Canada roughly parallel those found in the United States.0 Each
country utilizes the short-term, thirty-day charge account, under
which payment in full is expected of the purchaser shortly after receipt
of the bill. No finance charge is made, and the seller normally
retains no security interest in the goods. There is no relevant regulation,
and such accounts are not further considered herein.
The revolving charge account is also found in both countries.
Under this arrangement, the buyer may make purchases from time
to time and charge them to his account. He is billed for accrued
charges, usually on a monthly basis. He then has the option either
to pay the entire amount, in which case there is no finance or “service”
charge, or to pay a lesser amount down to a specified minimum, in
which case a finance charge is computed on the unpaid balance and
added to the following bill. The service charge is sometimes stated as
a flat amount for a given range of account balance (e.g., $.60 for
an account balance between $35.01 and $45.00; $.75 for an account
balance between $45.01 and $55.00, etc.) and sometimes as a
percentage per month on the outstanding balance as of a given date.
90 For Canada, see generally id. at 461-65 (brief of the Retail Council of Canada);
for the United States, see generally Curran 10-13. For a comparative study of conditional
sales arrangements covering the Commonwealth countries and the United States,
see generally Goode and Ziegel, Hire-Purchase and Conditional Sale-A Comparative
Survey of Commonwealth and American Law (1965).
— 8 B.C. Indus. & Com. L. Rev. 216 1966-1967
CONSUMER-CREDIT LEGISLATION
With some sellers, the percentage rate varies depending upon the balance
outstanding; with others, it remains constant. Though not required
by statute, some sellers remit a portion of the finance charge
if the account is paid before maturity. 1
In both Canada and the United States, the credit sale of higherpriced
durable goods is traditionally arranged under a retail installment
sales contract covering a single purchase. 92 The seller gives
possession of the goods to the buyer who agrees to pay the cash price
plus finance charges over a specified period of time. The seller usually
retains a security interest in the property in the form of a conditional
sales agreement or chattel mortgage. While a feasible alternative, the
chattel mortgage is rarely used for this purpose.93
A greater degree of flexibility is introduced into the purchase
of such higher-priced items by the add-on or open-end form of the
retail installment sales contract. Such a contract differs from the traditional
single-item installment sales contract by expressly permitting
further purchases on the same account. When this right is exercised,
the amount of the new purchase and finance charge is added to the
old balance, resulting in a new schedule as to the number and size of
payments.
As in the United States, the Canadian seller frequently does not
retain the installment sales contracts until maturity. He sells such
contracts at discount to a sales finance company, or to some other
participant in the sales financing market, which thereafter collects
the payments. The finance company then credits part of the finance
charge to the dealer as his payment for having obtained the business
for it. Instead of paying him immediately, “the company normally
credits the amount to a ‘reserve’ account against which losses, or deductions
resulting from rapid repayment, are charged.’ 4 ” In addition,
the finance company and seller share the risk of default. “In most
cases, the company accepts part of the risk by agreeing to find the
goods if the buyer has ‘skipped,’ repossess them and deliver them to
the dealer who then repurchases the contract, usually by a charge
against his reserve with the company.” 95
Thus, as in the United States, there tends to be a close relationship
between dealer and finance company. Generally, however, under
the terms of the sale contract, the buyer’s defenses against the seller
are waived as against an assignee of the contract. The finance com-
01 See Canadian Hearings 465 (brief of the Retail Council of Canada).
92 Succeeding purchases require a separate contract or revision of the original contract.
93 Goode and Ziegel, op. cit. supra note 90, at 13.
94 Royal Commission 205-06.
05 Ibid.
— 8 B.C. Indus. & Com. L. Rev. 217 1966-1967
BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW
pany’ is thus insulated from such defenses, and its detached position
is often fortified by its status as holder in due course of the buyer’s
promissory note. While Canadian courts have recently demonstrated
a tendency to deny the company such insulation, 0 legislation has not
yet dealt with the problem. National legislation does govern some of
the institutions that participate in the installment sale process-small
loans companies, for example, part of whose business is sales financing
-but it does not regulate the process itself. Any effort to intervene
in this area would probably raise a substantial constitutional issue as
to the authority of Parliament.
The provinces have, on the other hand, legislated with respect
to many aspects of vendor credit. 7 The treatment varies widely
among the provinces in a number of respects. First, variations exist
as to the scope of the regulated transactions. In some provinces, for
example, the legislation pertains only to sales in which the seller retains
a security interest in the goods; in others, it applies generally
to installment sales or to a defined category of retail installment sales.
Second, there are variations in the functional aspect of the transaction
governed. Thus, the object of legislation may be to regulate finance
charges and minimum down-payments, to require disclosure of finance
charges, or to protect the purchaser’s equity in the goods in the event
they are seized by the seller because of the purchaser’s default. Finally,
there are significant variations among the provinces in the
substance of analogous provisions.
The principal aspects of vendor credit legislation can be classified
as follows: (1) The regulation of finance charges. Potentially,
at least, this embraces the regulation of the initial finance charge,
penalties, the rebate of “unearned” charges in the event of prepayment
of the credit balance, and, in the case of sales finance companies,
the dealer’s reserves maintained by the finance company and rebates
to the dealer.” (2) The requirement of disclosure of finance charges,
either in the advertising practices of the seller or in the sales contract,
and in the case of revolving charge accounts, in the periodic statements
to the buyer. (3) The protection of the buyer’s interest in the
property in the event of repossession by the seller.
Cutting across the substance of such protective measures is the
issue as to how they are to be enforced. To what degree should lender
compliance depend upon the buyer’s desire or ability to enforce his
96 See Goode and Ziegel, op. it. supra note 90, at 112 & n.14.
97 For a useful general review and critique of the Canadian legislation, see Ziegel,
Retail Instalment Sales Legislation: A Historical and Comparative Survey, 14 U. Toronto
L.J. 143 (1962).
98 These reserves and rebates are generally not subject to regulation. The exception
is Nova Scotia. N.S. Stat. c. 4, § 11(n) (1965).
218
— 8 B.C. Indus. & Com. L. Rev. 218 1966-1967
CONSUMER-CREDIT LEGISLATION
statutory rights in a lawsuit? To what degree should enforcement be
remitted to the public authority through criminal prosecutions? Should
the power to license, inspect, and supervise be given to some specialized
administrative authority? In the moneylending field, the Small
Loans Act utilizes all of these techniques, although its effectiveness
no doubt depends largely upon the provisions for administrative supervision.
A few provincial statutes have begun to utilize a similar device
with respect to vendor credit transactions.
Regulation of Finance Charges. As has been noted above,99 the
limitations found in Dominion legislation on maximum interest or loan
charges do not apply to finance charges imposed in connection with
the credit sale of goods. Such charges are not viewed as interest, but
rather as an increase in the price of goods for the risk of selling on
time.100 This produces the anomaly, from the point of view of credit
regulation, that if a person borrows $1,000 from a small loans company
to finance the purchase of an automobile, the loan cost and
other aspects of the transaction are rigidly controlled; but, if he buys
the car with a credit balance of $1,000 due the seller, the finance
charges are, in general, unregulated. And this is so even though,
typically, the automobile vendor will promptly sell the sales contract
to a finance agency.
Disclosure of Finance Charges in the Contract. The question of
compulsory disclosure is not so much whether it is desirable or not,
but the form it should take. Consumer representatives and the credit
unions have traditionally favored disclosure in terms of annual interest.
Lenders have opposed such a requirement, preferring disclosure
in terms of the dollar amount of credit charges. Among the
arguments heard during the Canadian Hearings in support of the
latter method were the following: (1) Disclosure in terms of annual
percentage rate serves no useful purpose since borrowers are interested
in the dollar amount of charges and monthly payments. (2) Disclosure
in terms of annual percentage rate introduces a spurious degree
of accuracy since there are various ways to calculate this rate,
each producing a different result. (3) To translate credit charges into
annual percentage rates is a difficult undertaking at best, and in some
situations impossible.
This last argument was advanced with particular vehemence by
those retailers who offered revolving charge accounts. 0 1 The reduc-
99 See pp. 206, 218 supra.
100 For a discussion of the time-price doctrine prevalent in the United States, see
Curran 13-14, 84-90; Warren, Regulation of Finance Charges in Retail Instalment Sales,
68 Yale Lj. 839, 840-51 (1959).
101 Service charges on revolving charge accounts are unregulated in Canada, in
contrast to the case in some of the United States. For the U.S. practice, see Curran
101-02.
— 8 B.C. Indus. & Com. L. Rev. 219 1966-1967
BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW
tion of service charges in such accounts to annual interest would, they
claimed, be literally impossible owing to the unpredictability of the
dates and the amounts of both payments and purchases. 102
The argument for percentage-rate disclosure was perhaps best
summarized in the report of the Royal Commission.0 3 It acknowledged
that there were different formulas for calculating yield, but that
the variations were not great. Besides, a single formula could be
adopted, since “comparability is more important than the precise
level.”‘ 014 As to the argument that borrowers were more interested in
dollar cost than percentage rate, the Commission responded that the
latter information “will certainly not do any harm-and may well do
much good . . .. “105 The Commission conceded that it is difficult to
calculate the annual rate of a revolving charge account, but suggested
it might be enough if the customer were shown the effective charge
under a typical plan.
Protection of the Buyer’s Interest in the Property in the Event
of Repossession. Every province makes some provision for protection
of the buyer’s interest in the property in the event of his default.100
Generally, the seller must retain the property for twenty days during
which period the buyer has the right to redeem.07 The amount he
must pay to redeem varies from merely the existing deficit to the entire
balance of the contract price together with charges such as interest
o and the actual “costs and expenses of taking and keeping
possession.” 09 The opportunity to redeem on condition that he pay
off the entire balance due on the contract is, of course, of dubious
utility to the over-extended debtor.
If the buyer does not redeem the property, the seller may resell
- In several of the provinces the sale must be by public auction if
the seller wishes to preserve his right to a deficiency judgment.’ In
the others, the sale may be made either privately or by public auc-
102 Canadian Hearings 466-70 (brief of the Retail Council of Canada).
103 Royal Commission 382-83.
104 Id. at 383.
105 Ibid.
106 Alba. Rev. Stat. c. 54, § 19 (1955); B.C. Stat. c. 9, § 14 (1961); Man. Rev.
Stat. c. 144, § 3 (1954); N.B. Rev. Stat. c. 34, § 14(1) (1952); Newf. Stat. No. 62, §
12(1) (1955), as amended by Newf. Stat. No. 67, § 2 (1962); N.S. Rev. Stat. c. 47, §
11 (1954); Ont. Rev. Stat. c. 61, § 9(1) (1960); P.EJ. Rev. Stat. c. 28, § 10(1)
(1951); Que. Civ. Code, c. 73, arts. 1561a-j (1947), as amended by Que. Stat. c. 47
(1948); Sask. Stat. c. 97, § 14(1) (1957).
The repossession and resale provisions of these statutes, or their earlier versions,
are analyzed in chart form in Ziegel, Uniformity of Legislation in Canada, The Conditional
Sales Experience, 39 Can. B. Rev. 165, 231 (1961).
107 E.g., B.C. Stat. c. 9, § 14(1) (1961); Ont. Rev. Stat. c. 61, § 9(1) (1960).
108 E.g., Ont. Rev. Stat. c. 61, § 9(1) (1960).
109 E.g., B.C. Stat. c. 9, § 14(1) (1961).
110 E.g., N.B. Rev. Stat. c. 34, § 14(3) (1952).
220
— 8 B.C. Indus. & Com. L. Rev. 220 1966-1967
CONSUMER-CREDIT LEGISLATION
ion.”‘ In most cases, the statutes provide that notice of the intention
to sell and of other details must be given to the buyer or to the buyer
and guarantor.” 2 In some cases, however, notice is required only when
the price of the goods exceeds $30 and the seller intends to seek recovery
for any deficiency.” 8 In several of the provinces, the seller
must elect between repossession and the right to seek the balance of
the contract price,” 4 and thus is denied the right to a deficiency judgment.
The Quebec Installment Sales Act.”” Since they represent an
effort at broad protection of consumer interests in conditional sales
agreements, it is useful to review some provisions of the Quebec act.
The act does not cover sales exceeding $800 and some classes of
goods, such as the automobile,”” but does impose a ceiling on finance
charges.117 It also requires a minimum down-payment of fifteen per
cent and provides a graduated scale of maximum maturity periods
depending on the amount of the deferred payments. These provisions
contribute to a similar result-prevention of the financial over-commitment
of the buyer. The rate limitation does so by making it unprofitable
for the lender to extend credit to poor risks, thereby invoking
the seller’s self-interest to establish minimum credit standards.
Such standards are also created by the minimum down-payment and
maximum maturity requirements, both of which bar credit to buyers
unable to comply.
Deferred payments must be equal except that the last one may
be for a smaller amount. The buyer may prepay single payments or
the entire balance, and in so doing is entitled to a reduction of the
finance charge.”” Furthermore, the contract must disclose the regular
cash price, the time price, the down-payment, and the amount of each
payment, and the buyer must be given a duplicate of the agreement.” 9
It must be easily readable and, if printed, in at least six-point type. 20
In the event of default, the seller must elect between suing for
the installments due or repossessing the goods.’ In the event of re-
111 E.g., N.S. Rev. Stat. c. 47, § 11(2) (1954).
112 E.g., Ont. Rev. Stat. c. 61, § 9(2) (1960) (to buyer only); N.B. Rev. Stat. c.
34, § 14(3) (1952) (to buyer and guarantor).
118 E.g., N.S. Rev. Stat. c. 47, § 11(3) (1954).
114 E.g., Alba. Rev. Stat. c. 54, § 19 (1955); Man. Stat. c. 15, §§ 3(1), 4 (1965).
115 Que. Civ. Code c. 73 (1947), as amended by Que. Stat. c. 47 (1948).
116 Que. Civ. Code c. 73, art. 1561j (1947).
117 Que. Civ. Code c. 73, art. 1561d (1947). The Civil Code allows the court to
reduce or annul finance charges which it determines to be excessive or unconscionable.
Que. Civ. Code arts. 1040c-d, added by Que. Stat. c. 67, § 1 (1964).
118 Que. Civ. Code c. 73, art. 1561b (1947), as amended by Que. Stat. c. 47 (1948).
119 Que. Civ. Code c. 73, art. 1561c (1947).
120 Que. Civ. Code c. 73, art. 1561e (1947).
121 Que. Civ. Code c. 73, art. 1561f (1947).
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BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW
possession, the buyer or his creditors may redeem within twenty days
of repossession, 22 “though it is not clear whether the amount which
must be paid is the whole of the unpaid balance of the time price or
only the installments-unaffected by any acceleration clause-which
are actually in arrears.’ ‘ 23
The sanction for violation of various provisions of the act is that
the seller loses his security interest in the property, leaving him only
his right to sue for the contract balance. 24
- The Unconscionable Transactions Relief Acts
In 1960, Ontario passed the Unconscionable Transactions Relief
Act,’ 25 providing that where the “cost of the loan” is “excessive” and
“the transaction is harsh and unconscionable,” the court may relieve
the debtor from the obligation to pay any excessive sum, order repayment
of any such amount already paid, and set aside or revise the
loan contract- 26 “Cost of the loan” is defined in section 1 (a) to mean
“the whole cost to the debtor of money lent and includes interest,
discount, subscription, premium, dues, bonus, commission, brokerage
fees and charges” except certain official fees.
The constitutionality of the act was upheld in 1963 in Attorney-
General v. Barfried Enterprises Ltd.127 It is useful to consider this
case because of its implications as to the constitutional distribution
between Dominion and provincial legislatures of power to regulate
loan charges. Sampson, the borrower, had executed a first mortgage
to Barfried Enterprises, obligating himself to pay a principal amount
of $2,250 with interest at seven per cent per annum. The amount
actually advanced by the lender to Sampson, however, had been only
$1,432.50. The difference represented a “bonus” of $750.00 (retained
by the lender) and a “commission” of $67.50 (paid to a firm of mortgage
brokers owned or controlled by the lender). 12 Sampson brought
suit under the Unconscionable Transactions Relief Act to have the
122 Que. Civ. Code c. 73, art. 1561h (1947).
123 Ziegel, supra note 97, at 154-55.
124 Que. Civ. Code c. 73, art. 1561i (1947).
125 Ont. Rev. Stat. c. 410 (1960). L
126 Ont. Rev. Stat. C. 410, § 2 (1960).
127 [1963] Can. Sup. Ct. 570, 42 D.L.R.2d 137 (1963). Encouraged by that dedsion,
three provinces recently enacted virtually identical laws. Alba. Stat. c. 99 (1964);
N.B. Stat. c. 14 (1964); N.S. Stat. c. 12 (1964). A similar statute had earlier been
enacted in Newfoundland. Newf. Stat. No. 38 (1962). Legislation has also been enacted
in Quebec, but it applies to finance charges in connection with sales transactions, as
well as money loans. Que. Civ. Code arts. 1040c-d, added by Que. Stat. c. 67
(1964). Similar legislation has been introduced in two other provinces, British Columbia
and Saskatchewan. See Canadian Hearings 57. The present status of these bills is unknown
to the writer.
128 Re The Unconscionable Transactions Relief Act (Ontario), [1962] Ont. 1103,
1104, 35 D.L.R.2d 449, 450 (1962).
,222
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CONSUMER-CREDIT LEGISLATION
terms of the mortgage revised. The trial court granted relief by reducing
to $1,500 the principal sum due on the mortgage, while increasing
the interest to eleven per cent per annum.
The Ontario Court of Appeals reversed,”9 holding that the
Constitution delegated to the federal government exclusive legislative
authority over interest, and that this included compensation for the
use of money, whether denominated bonus, discount, or premium.
Furthermore, the court held that the Ontario act conflicted with the
Federal Interest Act which permits any person to “stipulate for, allow
and exact, on any contract or agreement whatsoever, any rate of interest
or discount that is agreed upon,” unless Parliament otherwise
provides. 130
The Supreme Court of Canada reversed. 3′ It found no conflict
between the Ontario act and the Interest Act, since “it is settled that
a bonus is not interest” within the meaning of the Interest Act.’32 Nor
did the Ontario statute infringe on Parliament’s exclusive legislative
power of interest. It related rather to “annulment or reformation of
contracts” and, therefore, was legislation with respect to “property
and civil rights in the province.”‘1 33 The court declared that “the fact
that interference with such a contract may involve interference with
interest as one of the constituent elements of the contract is incidental.
134
The court concluded that most of the items of compensation
making up “cost of the loan” in the Ontario act were not interest, because
“the day-to-day accrual of interest seems … to be an essential
characteristic.”‘ 3 5 Did the court mean that the constitutional power to
regulate interest extended only to “day-to-day” accruals, but not to
components of the loan charge expressed in any other terms? If so,
how could Parliament effectively regulate loan charges? Was the Federal
Small Loans Act, with its sweeping definition of loan “costs,”‘ 136
now unconstitutional because its regulation extended to charges which
do not accrue on a day-to-day basis? Or did the court mean merely
that the exclusive federal power to regulate interest did not imply
exclusive power over other loan costs? If so, federal legislation would
129 Supra note 128.
130 Can. Rev. Stat. c. 156, § 2 (1952).
131 Supra note 127.
132 Id. at 575, 42 D.L.R.2d at 145. The court cited cases decided under § 6 of the
Interest Act. Why a “bonus” was not, however, a “discount” under § 2 was not discussed.
133 See the British North American Act, 1867, 30 Vict. c. 3, § 92(13).
134 [1963] Can. Sup. Ct. at 577-78, 42 D.L.R.2d at 147.
135 Id. at 575, 42 DJL.R.2d at 145. The implications of this remark have caused a
good deal of concern and comment among Canadian observers. See, e.g., Canadian Hearings
43-56 (testimony of the Superintendent of Insurance).
136 For that definition see p. 208 supra.
223
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BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW
not necessarily be precluded. Provincial and Dominion power might
overlap “in which case neither legislation will be ultra vires if the
field is clear . .* .”‘. In the event both jurisdictions acted, however,
federal power would presumably prevail. 88 The full implications of
the Barfried case for the respective powers of Dominion and province
have yet to be clarified.
Nor is the intended scope of coverage of unconscionable transactions
relief acts yet clear. It seems likely that they will have little
significance for those moneylending transactions governed by the Federal
Small Loans Act or the Bank Act, since the provinces probably
lack authority to interfere significantly with such loans, and in any
event, loans complying with federal law are unlikely to be deemed
“unconscionable.” In addition, it should be noted that they restrict
themselves, except in the case of the Quebec act, to instances of unconscionable
money loans rather than “transactions in goods.”’80 So long as
vendor credit is not viewed as “money lent,” these Canadian acts
will, of course, not permit a review of harsh clauses in installment
sales contracts. Thus, the unconscionable transactions relief acts will
probably prove of limited significance in relation to consumer loans,
too.
137 Attorney-General for Canada v. Attorney-General for British Columbia, [1930]
A.C. 111, 118 (P.C. 1929) (Can.).
18 See ibid; [1963] Can. Sup. Ct. at 580, 42 D.L.R.2d at 139 (concurring opinion).
139 Compare Uniform Commercial Code § 2-302.
— 8 B.C. Indus. & Com. L. Rev. 224 1966-1967
Leon Letwin (1929-2015) 