Decision # 132

From: Financial Consumer Agency of Canada

Commissioner’s Reasons for Decision

Introduction

In December 2017, the Deputy Commissioner of the Financial Consumer Agency of Canada (FCAC) issued a notice of violation to [text omitted] (the Bank) under subsection 22(2) of the Financial Consumer Agency of Canada Act (FCAC Act), alleging reasonable grounds to believe that the Bank committed three violations of the Cost of Borrowing (Banks) Regulations (COBRs) in relation to credit agreements for a fixed interest rate for a fixed amount and for a variable interest rate for a fixed amount contrary to paragraphs 8(1)(c), 8(1)(d) and 9(1)(d) of the COBRs (Notice of Violation). The total penalties proposed for all three violations amount to $350,000.

In its representations dated January 2018 (Representations), the Bank confirms that it does not dispute the violations and associated penalties. The Bank disagrees only with the statement in the Notice of Violation that it was grossly negligent for launching a certain credit product while knowing it to be non-compliant. It provides further context on the launch and asks that I consider this matter in my decision.

There is ample undisputed evidence in the compliance report issued in December 2017 (Compliance Report) and the Representations to decide the issue of whether the Bank has committed the three violations on a balance of probabilities. On the issue of the Deputy Commissioner’s assessment of the degree of negligence—which the Bank has questioned—I have considered the Bank’s additional context in the Representations on the launch of the non-compliant credit product carefully. My decision follows.

Factual Background

The Compliance Report sets out the following undisputed facts. Certain credit agreements did not disclose the cost of borrowing accurately. The credit agreements in question are for:

  • fixed rate loans, [text omitted] unsecured lines of credit and home equity lines of credit entered into during the period of September 2001 to July 2017;
  • fixed rate [text omitted] mortgages entered into during the period of January 2005 to October 2017;
  • variable rate loans entered into during the period of September  2001 to July 2017;
  • variable rate [text omitted] mortgages entered into during the period of January 2005 to October  2017; and
  • [text omitted] home equity lines of credit entered into during the period of October 2016 to July 2017.

The formula applied by the Bank to express the cost of borrowing as an amount in the initial disclosure statements given to borrowers generated incorrect results and was different from the formula the Bank applied to calculate and charge the interest payable.

Appendix 10 of the Compliance Report sets out the Bank’s estimates on the amounts that were under or over disclosed to its borrowers on a per product basis as compared to those that were charged.

Analysis and Conclusion

The relevant provisions of the COBRs are as follows:

8 (1) 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:

[...];

(c) the total amount of all payments;

(d) the cost of borrowing over the term of the loan, expressed as an amount; [...].

and

9 (1) A bank that enters into a credit agreement for a loan with a variable interest rate for a fixed amount, to be repaid on a fixed future date or by instalment payments, must provide an initial disclosure statement that includes the following information in addition to that required by section 8:

[...]

(d) the total amount of all payments and of the cost of borrowing based on that annual interest rate; [...].

These requirements are clear. They apply to ensure that a bank provides borrowers with the amount of interest and the total amount of all payments payable under a credit agreement. Sections 450 and 451 of the Bank Act are also clear. They read in part as follows:

450 (1) A bank shall not make a loan to a natural person that is repayable in Canada unless the cost of borrowing, as calculated and expressed in accordance with section 451, and other prescribed information have been disclosed by the bank to the borrower at the prescribed time and place and in the prescribed form and manner. [...]

451 The cost of borrowing shall be calculated, in the prescribed manner, on the basis that all obligations of the borrower are duly fulfilled and shall be expressed as a rate per annum and, in prescribed circumstances, as an amount in dollars and cents.

In short, they provide that a bank is not to make a loan to a borrower unless the cost of borrowing is expressed as an amount in dollars and cents.

Importantly, a bank cannot point to information elsewhere in its credit agreement to describe how the interest is calculated to excuse a breach of its obligations to disclose the correct amount of the cost of borrowing.

Having reviewed the evidence before me, I accept the Bank’s admission of breach, and conclude that the credit agreements that are the subject of the Notice of Violation did not disclose the cost of borrowing accurately, contrary to the requirements in paragraphs 8(1)(c), 8(1)(d) and 9(1)(d) of the COBRs.

I now turn to the analysis of the criteria in section 20 of the FCAC Act on the amount of the penalties proposed in the Notice of Violation.

Degree of Intent or Negligence

On the issue of the degree of negligence, I do not see how the additional context in the Representations impacts the finding that the Bank was aware that there was a problem with its formula. In other words, the launch of the non-compliant product was done knowingly rather than accidentally.

The Bank has also explained that it launched the non-compliant credit product having assessed that the impact would be limited to less than 1% of its customers. In my view, this is a further indicator that the Bank made a decision to proceed with the launch based on a calculated risk; one that turned out to be of greater scope than originally assessed.

Harm Done

The Bank maintains that its borrowers did not suffer financial harm. However, the argument put forth in support of its position, namely that the statements of disclosure included a description of the correct formula for calculating the amount of the interest payable, is not relevant. Paragraphs 8(1)(c), 8(1)(d) and 9(1)(d) of the COBRs are quite clear. They require that a bank disclose the cost of borrowing as an amount; not a formula.

Considering the evidence before me, I cannot accept the Bank’s position on the issue of financial harm. In the majority of cases, the cost of borrowing amount that the Bank disclosed was lower than the amount it charged its borrowers. Any amount charged in excess of what was disclosed can be considered as direct financial harm. This problem impacted each of the credit products subject to these proceedings—albeit to varying degrees—without exception.

Compliance History

The Bank has had no violations in the five-year period prior to the issuance of the Notice of Violation.

Taking all of these factors into account, I see no basis for penalties that are less than the penalties proposed in the Notice of Violation.

Publication

The last issue for decision is whether to make public the name of the Bank in accordance with s.31 of the FCAC Act.

In deciding whether to make public the name of a regulated entity, I consider a number of factors, including deterrence and a bank’s willingness to assume responsibility for the breach and compensate affected consumers. I also look at the bank’s commitment to learning from its past non-compliance and its actions on improving its management of risks against future breaches.

In its Representations, the Bank concedes that a significant number of customers were impacted. However, it maintains that they did not suffer any direct financial harm. The evidence suggests otherwise and I am concerned with the Bank’s position in this regard. I am also concerned with the Bank’s decision to launch the enhanced product while being aware of problems with the formula that generated the amount for the cost of borrowing disclosure.

At the same time, the Bank has confirmed that this matter has received very senior executive support. I also note that the discrepancy in the amount charged to its borrowers—as compared to that disclosed—was minimal in 98% of the cases.  The Bank has commenced a proactive [text omitted] review of [text omitted] cost of borrowing disclosure [text omitted]. With respect to its remediation efforts, I see a willingness to provide borrowers with corrected disclosures. However, I would expect the Bank to do more, especially with those borrowers that were charged an amount in excess of the amount disclosed.

Ultimately, I am persuaded that the violation proceedings have had a sufficient deterrent effect in this case. For these reasons, I am satisfied that it is appropriate to not make public the Bank’s name.

Ottawa, July 18 2018

Lucie M.A. Tedesco

Commissioner

Financial Consumer Agency of Canada

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