Cost of Credit Disclosure

The term “cost of credit” is used to describe the difference between the value received by a borrower as a result of a credit agreement, and the value of what the borrower must eventually pay back. The cost of credit typically includes the total of all interest charges, mandatory fees, and any other charges that the borrower can expect to pay to the lender as a result of entering into the credit agreement.

Last reviewed: October 2014

Cost of credit disclosure is the process by which the lender informs the borrower of what the cost of credit is or will be in any given credit agreement.

Last reviewed: October 2014

The Consumer Protection Act creates rules that govern when and how lenders must disclose the cost of credit to borrowers. Cost of credit disclosure is regulated to ensure that borrowers are presented with clear and straightforward information about the true total cost of any credit agreement that they enter into.

Last reviewed: October 2014

To be covered by the Consumer Protection Act, a credit agreement must be between an individual borrower who enters into the credit agreement primarily for personal, family, household or farming purposes and a lender who enters into the agreement in the course of carrying on a business. The Consumer Protection Act also covers credit agreements that are arranged by a loan broker. The Consumer Protection Act does not cover borrowing by businesses.

Last reviewed: October 2014

Credit agreements that are covered by the Consumer Protection Act include:

• fixed credit, such as mortgages, other loans where there is a fixed amount lent, or credit sales where the purchase of a product is financed by the seller or manufacturer;
• open credit, such as lines of credit and credit cards; and
• lease agreements.

Different types of credit agreements are regulated by the Act in different ways.

Last reviewed: October 2014

Yes. The Act establishes regulations requiring that clear and accurate cost of credit information must be included in advertisements that are aimed at encouraging individuals to enter into credit agreements.

Last reviewed: October 2014

Before someone enters into a credit agreement, the lender must provide him or her with an initial disclosure statement in writing. Initial disclosure statements are intended to provide clear and straightforward information to the borrower regarding all aspects of the cost of credit.

Last reviewed: October 2014

Open credit means credit under a credit agreement that anticipates multiple advances, to be made when requested by the borrower in accordance with the agreement, and does not establish the total amount to be advanced to the borrower under the agreement. However, it may impose a credit limit. A fixed credit agreement refers to a single advance at a set amount.

Last reviewed: October 2014

There are different requirements for each of the types of credit agreements. The lender is obligated to disclose all cost of credit information that is applicable to the specific agreement.

Last reviewed: October 2014

For fixed credit agreements, initial disclosure statements should include:

• the outstanding balance and information about the charges, payments, or 
advances that are included within the balance;
• the term (and amortization period, if it is longer than the term);
• the date on which interest begins to accrue and the particulars of any grace 
period;
• details about the interest rate, including how the interest rate may change during the term;
• the nature of any charges other than interest that will be payable by the borrower;
• the amount and timing of any advancements and/or payments to be made after the effective date of the statement;
• the total of all advances made and to be made by the lender to the borrower as a result of the credit agreement;
• the total of all payments to be made by the borrower to lender as a result of the credit agreement;
• the total cost of credit (i.e. the difference between the total advances and the total payments due);
• the annual percentage rate (or APR), which expresses the cost of credit (interest plus all other charges) as an annual percentage;
• the nature of any charges that the borrower must pay in case of default;
• a description of any item that has been put up as security by the borrower in 
order to secure the loan;
• for credit sales, a description of the product purchased on credit by the borrower;
• for mortgage loans, a description of the circumstances, if any, under which the 
borrower may make prepayments, and any charges for doing so;
• for non-mortgage credit agreements, a statement that the borrower is entitled to prepay the entire outstanding balance at any time without penalty and is entitled to make partial prepayments without penalty on any scheduled payment date; and
• if scheduled payments are not included as part of the credit agreement, the circumstances under which the outstanding balance, or any portion of it, must be paid

Last reviewed: October 2014

For open credit agreements, initial disclosure statements must include:

• the credit limit;
• the minimum periodic payment or the method of determining the minimum periodic payment;
• the initial annual interest rate and the compounding period;
• if the annual interest rate may change, the method of determining the annual 
interest rate at any time;
• when interest begins to accrue on advances or different types of advances, and 
the particulars of any grace period;
• the nature and amount, or the method of determining the amount, of any 
non‐interest finance charges that may become payable under the agreement;
• any optional services purchased by the borrower for which payments are to be 
made to or through the credit grantor, and the charges for such services;
• a description of the subject‐matter of any security interest;
• the nature of any default charges provided for by the agreement;
• how often the borrower will receive statements of account;
• if the borrower is required to pay the outstanding balance on each statement of account in full on receiving the statement:
• a statement to that effect,
• the period within which the borrower must pay the outstanding balance to avoid being in default, and;
• the annual interest rate that applies to any amount that is not paid when due;
• a telephone number at which the borrower can make inquiries about the 
borrower’s account during the credit grantor’s ordinary business hours without 
incurring any charges for the call; and
• if the open credit agreement is for a credit card, the lender must also disclose
the maximum liability for unauthorized use of the credit card if it is lost or stolen

Last reviewed: October 2014

For lease agreements, initial disclosure statements must include:

• confirmation that the transaction is a lease;
• a description of the leased goods;
• the term of the lease;
• the cash value of the leased goods;
• the nature and amount of any other advances received or charges incurred by the lessee at or before the beginning of the term;
• the amount and purpose of each payment made by the lessee at or before the beginning of the term;
• the capitalized amount;
• the amount, timing and number of the periodic payments;
• the estimated residual value of the leased goods;
• if the lease agreement contains an option for the borrower to purchase the item 
being leased, information regarding the circumstances under which the option 
can be exercised and details regarding what the purchase price will be.
• for a residual obligation lease:
• the estimated residual cash payment;
• a statement to the effect that the lessee’s maximum liability at the end of the lease term is the sum of the estimated residual cash payment plus the difference, if any, between the estimated residual value and the realizable value of the leased goods;
• the circumstances, if any, under which the lessee or the lessor may terminate the lease before the end of the term and the amount, or the method of determining the amount, of any payment that the lessee will be required to make on early termination of the lease;
• details about any other circumstances that will cause the lessee to incur any additional charges related to the lease;
• the implicit finance charge;
• the Annual Percentage Rate (or APR); and
• the total lease cost.

Last reviewed: October 2014

The Initial Disclosure Statement is a statement that sets out the specifics of the credit agreement.

Last reviewed: October 2014

For mortgage loans, the lender must provide the borrower with the initial disclosure statement at least two business days before the earlier of the following occurs:

• the borrower incurs any obligation to the lender with respect to the mortgage; or
• the borrower makes any payment to the lender related to the mortgage loan.

This effectively creates a two-day ‘cooling-off period’ between when the cost of credit is disclosed to the borrower and when the credit agreement can be finalized. For any credit agreement that is not a mortgage loan, the lender must simply provide the initial disclosure statement before the borrower incurs obligations or makes payments related to the credit agreement. There is no mandated cooling-off period.

Last reviewed: October 2014

Not necessarily. Some credit agreements rely on a floating interest rate that is set relative to an index rate (such as the prime lending rate). In these agreements, the lender must provide a disclosure statement at least every 12 months that details changes to the rate in the period and the way in which these changes have affected the cost of credit, the outstanding balance, and the amount and timing of any applicable payments. In some other agreements, the interest rate does not float relative to an index, but can nevertheless be changed by the lender. In these circumstances, any increase in the interest rate of more than 1% requires the lender to provide the borrower with an updated disclosure statement within 30 days. In the case of credit cards without a floating interest rate, any increase to the interest rate requires 30 days advance notice.

Last reviewed: October 2014

Unlike fixed credit agreements, the outstanding balance in an open credit agreement can fluctuate frequently as the borrower either makes payments or uses more credit. As a result, along with an initial disclosure statement, the lender must provide the borrower with monthly statements of account. These statements must include:

• the period covered by the statement;
• the outstanding balance at the beginning of the period;
• the amount, description and posting date of each transaction or charge added to the outstanding balance during the period;
• the amount and posting date of each payment or credit subtracted from the 
outstanding balance during the period;
• the annual interest rate or rates in effect during the period or any part of the period;
• the total of all amounts added to the outstanding balance during the period;
• the total of all amounts subtracted from the outstanding balance during the period;
• the outstanding balance at the end of the period;
• the credit limit;
• the minimum payment;
• the due date for payment;
• the amount that the borrower must pay on or before the due date in order to take advantage of a grace period;
• the borrower’s rights and obligations regarding the correction of billing errors; and
• a telephone number at which the borrower can make inquiries about the borrower’s account during the credit grantor’s ordinary business hours without incurring any charges for the call.

Last reviewed: October 2014

You can only pay back a mortgage loan early if the mortgage agreement allows for it. Some mortgage loans restrict borrowers to paying according to a strict payment schedule, while others allow for prepayment with a penalty. For all other types of credit agreement, the Act provides that the borrower can prepay the entire or partial outstanding balance at any time, without penalty.

Last reviewed: October 2014

The Act does not guarantee that the cost of credit will stay the same in cases of default. However, the Act restricts default charges to those that are reasonable with respect to:

• legal costs incurred in collecting or attempting to collect payment;
• costs incurred in realizing a security interest or protecting the subject-matter of a security interest after default; and
• costs associated with the lender attempting to cash a bad cheque provided by the borrower.

Last reviewed: October 2014

If your credit agreement contains an acceleration clause, the lender can use it to raise the interest rate or accelerate the payment of the outstanding balance. However, the Act provides that the lender must first provide you with written notice of your default by registered mail. The lender can only apply the acceleration clause after ten days have passed since the registered mail was sent to your address.

Last reviewed: October 2014

Individual credit card agreements lay out specific rules to govern what happens once a credit card is lost or stolen, but the Act does establish minimum protections for the cardholder. Once you inform the credit card company that your card has been lost or stolen, you are not liable for any charges that subsequently accrue. If charges have accrued in the period before you inform the credit card company, the maximum amount for which the cardholder can be liable is $50. However, it should be noted that this $50 limitation does not apply if the lost or stolen card is used in combination with a personal identification number (PIN) at an automated teller machine (ATM).

Last reviewed: October 2014

For some credit agreements, purchasing insurance is required by law. Also, a lender can make a loan conditional upon the purchasing of insurance. However, in situations where the lender requires that insurance be purchased, the borrower is under no obligation to purchase insurance from or through the lender. Any lender that makes a loan conditional upon insurance, and then offers to provide or arrange that insurance must clearly disclose in writing that the borrower is free to choose to purchase the required insurance from any insurer that can lawfully provide it.

Last reviewed: October 2014