Decision #118

From: Financial Consumer Agency of Canada

Decision stemming from a Notice of violationFootnote 1 

Note:

This Notice of Violation concerns a contravention of subsections 13(1) and 13(2) of the Cost of Borrowing (Bank) Regulations

The Violation

The Deputy Commissioner of the Financial Consumer Agency of Canada (FCAC) issued a Notice of Violation against the bank stating reasonable grounds to believe that it had committed one violation by contravening subsections 13(1) and 13(2) of the Cost of Borrowing (Bank) Regulations.

The Bank failed to disclose in writing to the borrower:

  • any resulting changes to the initial disclosure statement 30 days after the day on which an amendment to a credit agreement for a residential mortgage is made, as per subsection 13(1) of the Cost of Borrowing (Bank) Regulations.
  • an amended payment schedule for fixed amount residential mortgages not later than 30 days after the day on which the amendment is made, as per subsection 13(2) of the Cost of Borrowing (Bank) Regulations.

The Deputy Commissioner proposed a penalty of $50,000 for this violation.

Subsequent to the Notice of Violation, the bank advised that it did not intend to file written representations; therefore it was deemed to have committed the violation.

The Facts

In August 2010, the consumer contacted the bank requesting a change to his mortgage loan. Specifically, the consumer requested that the mortgage payment frequency be modified from bi-monthly to a bi-weekly schedule.

In September 2011, the consumer complained to the FCAC, following the payment frequency change, when his mortgage fell into arrears due to a bank error.

Although the consumer’s issue had been addressed and corrected by the bank, the resulting investigation by the Compliance and Enforcement Branch (CEB) revealed a broader compliance issue. The CEB’s investigation revealed that the bank did not provide any type of amended disclosure documents to borrowers when consumers requested changes to the frequency of their mortgage payments that resulted in reductions in the cost of borrowing.

The Law

Section 452 (1)(c) of the Bank Act states:

Where a company makes a loan in respect of which the disclosure requirements of section 450 are applicable and the loan is required to be repaid either on a fixed future date or by instalments, the bank shall disclose to the borrower, in accordance with the regulations,

(c) at the prescribed time and place and in the prescribed form and manner, any prescribed changes respecting the cost of borrowing or the loan agreement;

Paragraph 8(1)(i) of the Cost of Borrowing (Banks) Regulations states:

A bank that enters into a credit agreement for a loan for a fixed interest rate for a fixed amount, to be repaid on a fixed future date or by instalment payments, must provide the borrower with an initial disclosure statement that includes the following information:

(i) the amount of each payment and when it is due;

Subsection 13(1) sets out the general requirements when an amendment is made to a credit contract, and reads as follows:

Subject to subsection (2), if a credit agreement is amended, the bank must, not later than 30 days after the day on which the amendment is made, disclose in writing to the borrower any resulting changes to the information that was required to be disclosed in the initial disclosure statement.

Subsection 13(2) of the Cost of Borrowing (Banks) Regulations further requires a bank to provide an amended payment schedule within a specific timeframe if changes are made to the payment schedule. Specifically, the regulation states:

If a credit agreement for a fixed amount has a schedule for instalment payments and the schedule is amended, the bank must, not later than 30 days after the day on which the amendment is made, disclose in writing to the borrowers the amended payment schedule and any increase in the total amount to be paid or in the cost of borrowing as a result of that amendment.

Compliance consideration

When a credit agreement is amended, subsection 13(1) requires the bank to disclose in writing to the borrower any resulting changes to the information that was required to be disclosed in the initial disclosure statement, in this case, the amount of each payment and when it is due. The Cost of Borrowing (Banks) Regulations does not set out any exception to this requirement. The Bank must comply regardless of whether the resulting change to the information was initiated by the borrower or the bank and whether or not the change results in an increase or a reduction in the cost of borrowing.

The inclusion in a credit agreement of a provision enabling the borrower to change the repayment frequency of the loan does not dispense the bank from its prescribed disclosure obligations.

Following the investigation, the Bank implemented a new automated process that will ensure that a written confirmation, including the amended payment schedule and the revised cost of borrowing information is provided to the borrower. The bank confirms this disclosure is sent for all payment frequency amendments.

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