Bill-134, Higher Minimum Payments and Increased Emphasis on Debt-to-Income Ratios
As a consumer, you deserve the right to know exactly what you’re agreeing to when you sign a contract with a lender or merchant. After all, it’s your hard-earned money that we’re talking about, and when you make a decision to make a large purchase or take out a loan, it’s your right to know precisely what terms and costs you’re agreeing to.
That’s exactly the purpose of consumer protection laws in Canada. They’re designed to protect the rights of consumers and require that the necessary disclosures are made available to all consumers who are engaged in a contract with merchants, lenders, and credit providers.
More specifically, the Consumer Protection Act of Quebec is intended to even out the negotiating power between consumers and lenders or merchants so that consumers are not at the mercy of terms and costs that are considered unfair.
But while the Consumer Protection Act is certainly a positive thing, it hasn’t been revisited and amended in over 40 years. The Act’s stance on credit, in particular, hasn’t been modified since 1978. It’s time that a change to suit today’s standards is made.
That’s exactly why Bill-134 was put in motion in an effort to modernize the rules governing consumer credit and regulate debt settlements. Back in the days when Jean Charest led the liberal government, similar legislation was introduced.
Known as Bill-24, amendments to the Act were proposed in order to modernize rules surrounding consumer lending and leasing. But the Bill never ended up passing through all the necessary stages before the summer election of 2012, and it stopped short of becoming law.
But under the leadership of Philippe Couillard, the liberal government once again has the opportunity to update credit provisions under the Act through Bill 134.
How Bill-134 Could Affect Your Financial Life
For the purpose of this article, we’ll be focusing on the following four categories that the changes found in Bill-134 set out to improve.
- Capacity to repay
- High-cost credit contracts
- Increased minimum payments for credit cards
- Improved disclosure of information about credit card contracts
If you’re interested in a complete understanding of how the bill will affect both consumers and financial services providers, you can check out the official document here.
A Consumer’s Capacity to Repay
Before a lender agrees to provide a loan to a consumer, they are required to go through a process of ensuring that the borrower is fully capable of repaying the loan amount in full under Bill-134. Further, if creditors are considering increasing loan or credit limits or offering high-cost credit, they must disclose the assessment that is made on the borrower along with information on the borrower’s debt-to-income ratio.
Traditionally, lenders look at loan applicants’ debt ratio to make sure the numbers don’t exceed a certain amount. A debt ratio simply refers to the amount of monthly income dedicated to paying debts.
With the new Bill in place, creditors will be required not to extend loaned funds to consumers with a debt ratio that exceeds what is deemed acceptable. When it comes to high-cost credit, debt ratios that exceed a maximum percentage according to the regulations would not allow a contract to be carried out.
If high-cost credit contracts are carried out despite high debt ratios, creditors could face some heavy repercussions, including refunding any charges paid and forfeiting all future credit charges.
Learn about finding the motivation to tackle your debt load, click here.
What is a High-Cost Credit Contract?
A high-cost credit product is one that involves credit or loans that are charged high-interest rates or fees that can make it difficult for certain borrowers to keep up with their debt payments. More specifically, contracts with rates that are higher than 22% are considered high-cost.
Prudent and honest lenders would assess a consumer’s capacity to pay the loan off before agreeing to enter into a high-cost credit contract. Failing to do so could leave consumers vulnerable to defaulting on their loans and creditors scrambling to recoup their losses. Such a scenario would not happen with Bill-134 in place, as long as creditors adhere to its rules.
Before completing high-cost credit contracts or agreeing to an increase in credit limit, lenders need to not only assess an applicant’s capacity to repay, but also look at the borrower’s debt ratio and provide a written document outlining this information to the applicant.
Consumers have a certain amount of time to look over the document and decide whether or not to go through with the contract. Consumers have the right to cancel the contract if they believe they would be entering into something that would be difficult to hold up their end of the bargain.
High-cost credit contracts that involve consumers with a debt ratio higher than 45% would be considered excessive and unconscionable. Any consumer in this situation would have some recourse to get out of it.
More Expensive Minimum Payments for Credit Card Users
Credit card holders are obligated to repay what they spend against their credit limits, but they don’t necessarily have to pay their credit cards off in full every month. Cardholders have the option to make a minimum payment, which many consumers opt for if the funds aren’t readily available to pay the entire balance off in full.
But with the new Bill-134 in place, minimum payment requirements will increase each year until they reach 5%. Credit card companies also have the option to boost their minimum payment requirement to 5% right away instead of waiting, and new credit card accounts will require 5% minimum payments right off the bat.
While this may sound bad to some, higher minimum payments can actually be a good thing for consumers. Those who perpetually make minimum payments on their credit card bills month after month can easily and quickly find themselves drowning in debt. Considering the notoriously high-interest rates that credit cards typically come with, any outstanding balance will continue to be charged these high rates, making it more and more difficult to pay off credit card balances in full.
With an increase in monthly payments, consumers would be forced to make higher payments on their cards, which can eventually help inch them toward paying off their credit card debt sooner rather than later.
To learn all about the secrets behind your credit card’s minimum payment, click here.
More Information For Consumers From Credit Card Providers
Consumers who apply for and use credit cards should be aware of the following regulations set forth by Bill-134:
- Consumers must be given a minimum 21-day grace period, after the last day of their billing period, where no credit charges are accrued, with the exception of cash advances.
- Consumers must provide express consent before any credit limits are increased.
- Consumers cannot be permitted to make any transactions that exceed credit limits, except if the merchant provides notice to the consumer and no charges are implemented for going over the credit limit. In this case, the excess needs to be included as part of the minimum payment for the following pay period.
- Consumers may end pre-authorized credit card payments at any time, as long as proper notice is provided to the merchant.
- Credit card issuers must detail current versions of credit card contracts on their websites.
- Consumers must be provided with information regarding the amount of funds withheld on a credit card before a transaction takes place, the reason why the funds are being withheld, and the amount of time that they will be withheld.
Bill 134 may require credit card issuers and lenders to put in more work and due diligence when providing loans and credit accounts, but the regulations are designed to help ensure that consumers are making sound borrowing decisions that won’t place them in precarious financial positions in the future. The new Bill will help ensure that lenders are acting in good faith and that consumers are provided with all the information needed to avoid getting themselves into mounting debt.
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