Abstract
Consumer indebtedness may lead to meltdown, for the consumer and the financial system more generally. Overly generous access to credit and consumer indebtedness have been identified as one important reason for the 2007–2009 financial crisis. Admittedly, Canada passed through this crisis without any serious problems. However, growing indebtedness among Canadian households, fuelled mainly by increasing over-consumption and low interest rates in recent years, remains a continuing problem for the Canadian financial system. Facing the concerns of the Superintendent of Financial Institutions, recent steps have been taken by the Canadian and provincial regulators to address this issue. Unfortunately, despite these measures, reasonable credit, and hence, sustainable consumption of credit, has yet to emerge.
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Notes
- 1.
Dickson (2012), pp. 5–6.
- 2.
Governing Council of the Bank of Canada (2012), p. 27.
- 3.
This chapter focuses on mortgage credit.
- 4.
The maximum amount available to be borrowed is a loan-to-value ratio of 65%: Office of the Superintendent of Financial Institutions [OSFI], Guideline B-20: Sound Business and financial Practices, October 2017, online: http://www.osfi-bsif.gc.ca/Eng/Docs/B20_dft.pdf [OSFI], “Guideline B-20”. Practically speaking, the interest rate is usually above the mortgage rate.
- 5.
Bailliu et al. (2011–2012), p. 22.
- 6.
The Supreme Court of Canada has defined the ‘average consumer’ as a person who is vulnerable, credulous and inexperienced: Richard c. Time Inc., [2012] 1 S.C.R. 265, 2012 SCC 8. For an analysis of this concept, see e.g., Lacoursière (2011).
- 7.
Task Force on Financial Literacy (2011).
- 8.
World Economic Forum (2008), p. 456.
- 9.
Ibid.
- 10.
- 11.
International Monetary Fund (2012), p. 97.
- 12.
Statistics Canada (2012), p. 4. More precisely, the debt is distributed unequally among borrowing groups, whether it has to do with their income, their education or their region of living. See: Statistics Canada (2012), p. 6 (Table 1). In 2010, this indebtedness was 146.5% in Canada and 122.5% in the United States. See: OECD (2013), p. 28.
- 13.
On this topic, see e.g., Flávio de Oliveira and Moreira dos Santos Ferreira (2012), p. 31.
- 14.
French sociologist Bourdieu refers to capital inequality (distribution inégalitaire du capital). See: Bourdieu (2000), p. 244ff.
- 15.
Lazarus (2009).
- 16.
- 17.
On the federal level: Bank Act, S.C. (1991), c. 46, s. 450; Cost of Borrowing Regulations, SOR/2001-101, ss. 5–6. In Quebec: Protection Consumer Act, CQLR, c. P-40.1, ss. 69–72 [CPA].
- 18.
See supra note 2 and accompanying text.
- 19.
Supra Sect. 20.2.2.
- 20.
The CMHC proposes a ceiling of 40% of gross monthly income: CMHC (2018a).
- 21.
See e.g.: Crawford and Faruqui (2011–2012).
- 22.
CMHC (2015).
- 23.
Protection of Residential Mortgage of Hypothecary Insurance Act, S.C. 2011, c. 15, s. 20.
- 24.
Eligible Mortgage Loan Regulations, SOR/2012-281.
- 25.
National Housing Act, R.S.C. 1985, c. N-11; Insurance Housing Loan Regulations, SOR/2012-282.
- 26.
Insurance Housing Loan Regulations, SOR/2012-282; Eligible Mortgage Loan Regulations, SOR/2012-281.
- 27.
Section 1 of these regulations defines the high loan ratio as: ‘a housing loan that is secured by an eligible residential property and whose principal amount, together with the outstanding balance of any loan having an equal or prior claim against the eligible residential property, is greater than 80% of the value of the eligible residential property at the time the loan is approved’ (Insurance Housing Loan Regulations, SOR/2012-282; Eligible Mortgage Loan Regulations, SOR/2012-281). Conversely, a loan is considered of high ratio when the down payment is lower than 20% of the value of the property.
- 28.
On this topic, see: Department of Finance (Canada) (2012).
- 29.
Sec. 7(4)(b) of regulations Insurance Housing Loan Regulations, SOR/2012-282; Eligible Mortgage Loan Regulations, SOR/2012-281.
- 30.
Sec. 7(3)(b) of regulations: Insurance Housing Loan Regulations, SOR/2012-282; Eligible Mortgage Loan Regulations, SOR/2012-281.
- 31.
Department of Finance (Canada) (2008).
- 32.
Until the 1980s, financial institutions were giving on mortgage loans of an average 25 years (not divided into 5-year terms) a regular basis, for a fixed interest rate Following the economic crisis of the 1980s, which saw high rising interest rates, banks have encountered major loss in these operations. Since then, amortisation remains at 25 years, but terms are divided into 5-year periods, while financial conditions are renegotiated at these moments.
- 33.
Sec. 1 of regulations: Insurance Housing Loan Regulations, SOR/2012-282; Eligible Mortgage Loan Regulations, SOR/2012-281.
- 34.
Sec. 7(4)(a) of regulations: Insurance Housing Loan Regulations, SOR/2012-282; Eligible Mortgage Loan Regulations, SOR/2012-281.
- 35.
Sec. 7(3)(a) of regulations: Insurance Housing Loan Regulations, SOR/2012-282; Eligible Mortgage Loan Regulations, SOR/2012-281.
- 36.
Sec. 5(1)(h) of regulations: Insurance Housing Loan Regulations, SOR/2012-282; Eligible Mortgage Loan Regulations, SOR/2012-281.
- 37.
Sec. 5(3) of regulations: Insurance Housing Loan Regulations, SOR/2012-282; Eligible Mortgage Loan Regulations, SOR/2012-281.
- 38.
Sec. 5(1)(d) of regulations: Insurance Housing Loan Regulations, SOR/2012-282; Eligible Mortgage Loan Regulations, SOR/2012-281.
- 39.
Sec. 5(1)(g) of regulations: Insurance Housing Loan Regulations, SOR/2012-282; Eligible Mortgage Loan Regulations, SOR/2012-281. See Section 5(2) of these regulations for exceptions.
- 40.
Crawford et al. (2013), p. 69.
- 41.
These protective measures have been taken since the Civil Code of Lower Canada (CCLC) in 1866, a year after the foundation of the Canadian Confederation. It was replaced in 1994 by the Civil Code of Quebec.
- 42.
This section has replaced former Article 1040 (c) CCLC, in force in 1964, which reads as follows: ‘The monetary obligations under a loan of money may be reduced or annulled by a court so far as it finds that, having regard to the risk and to all the circumstances, they make the cost of the loan excessive and the operation harsh and unconscionable.’
- 43.
Real Estate Brokerage Act, CQLR, c. c. C-73.2.
- 44.
Art. 6.1 CPA.
- 45.
Article 1 of An Act mainly to modernise rules relating to consumer credit and to regulate debt settlement service contracts, high-cost credit contracts and loyalty programs, S.Q. 2017, c. 24 (assented to November 2017).
- 46.
An Act mainly to modernise rules relating to consumer credit and to regulate debt settlement service contracts, high-cost credit contracts and loyalty programs, ibid.
- 47.
Ibid, sec. 19 (proposed sec. 103.2 CPA).
- 48.
Chambre des notaires du Québec, Submission of the Chambre des notaires du Québec on Bill n°134 titled Loi visant principalement à moderniser des règles relatives au crédit à la consommation et à encadrer les contrats de service de règlement de dettes, les contrats de crédit à coût élevé et les programmes de fidélisation, presented in October 2017 for the special consultations and public hearings on Bill 134 of the Committee on Citizen Relations, online: http://www.assnat.qc.ca/fr/travaux-parlementaires/commissions/CRC/mandats/Mandat-38403/memoires-deposes.html.
- 49.
Sec. 1(i) CPA; Act Respecting the Ministère de l’Immigration et des Communautés Culturelles, CQLR, c. M-16.1, s. 48.
- 50.
Supra note 14 and accompanying text.
- 51.
There could be as many as 18 million Americans suffering from the compulsive buying disorder. See: Workman and Paper (2010).
- 52.
This point of view is shared among monetarists. See, e.g., Salin (2010).
- 53.
Members of the Basel Committee on banking supervision originate from various countries’ central banks. See: Basel Committee on Banking Supervision (2013).
- 54.
The Bank of International Settlement is working along with the Financial Stability Board. Dated from 2009, and succeeding to the Financial Stability Forum (1999), the Financial Stability Board aims at coordinating national financial entities and at fostering prudential measures. It is chaired by Mark Carney, governor of the Bank of England and former governor of the Bank of Canada. The Board reports to the Group of Twenty (G20). For more information, see: Financial Stability Board, online: http://www.financialstabilityboard.org/about/overview.htm.
- 55.
Near banks include financial institutions other than banks, such as insurance entities, trust and loan companies, and credit union: Insurance Companies Act, S.C. 1991, c. 47; Trust and Loan Companies Act, S.C. 1991, c. 45; Cooperative Credit Associations, S.C. 1991, c. 48; Act Respecting Financial Services Cooperatives, CQLR, c. C-73.3 (Quebec). OSFI also supervises federal pension funds to comply with the statute: Pension Benefits Standards Act, 1985, R.S.C. 1985, c. 32 (2nd supp.), s. 4(2). OSFI’s activities deal with two issues: regulation and supervision.
- 56.
R.S.C. (1985), c. 18 (3rd supp.), s. 6(4), 38.
- 57.
Canadian Bankers Association, Review of the Federal Financial Sector Framework, Submission to the Department of Finance Canada, November 15, 2016, online: https://www.cba.ca/Assets/CBA/Files/Article%20Category/PDF/sub-20161115-review-federal-financial-sector-framework-en.pdf.
- 58.
- 59.
Supra note 5; Rolland (2011).
- 60.
Financial Stability Board (2012).
- 61.
Reifner (2009).
- 62.
Supra note 5.
- 63.
AMF (2013).
- 64.
It is also the case for the AMF’s Residential Hypothecary Lending Guideline (Ibid.)
- 65.
Supra note 26.
- 66.
Supra note 25.
- 67.
Act Respecting the Autorité des marchés financiers, CQLR, c. A-33.2, s. 8.
- 68.
AMF (2013), p. 3.
- 69.
Ibid.
- 70.
Supra note 5, p. 3.
- 71.
Ibid. p. 5.
- 72.
BSIF (2013).
- 73.
BSIF (2010).
- 74.
Supra note 5.
- 75.
Ibid. p. 5.
- 76.
Ibid.
- 77.
Ibid. p. 6.
- 78.
Ibid, principle n° 3. The following documents are required: ‘A description of the purpose of the loan; employment status and verification of income (see Principle 3); debt service ratio calculations, including verification documentation for key inputs (e.g., heating, taxes, and other debt obligations); LTV ratio, property valuation and appraisal documentation (see Principle 4); credit bureau reports and any other credit enquiries; documentation verifying the source of the down payment; purchase and sale agreements and other collateral supporting documents; an explanation of any mitigating criteria or other elements (e.g., ‘soft’ information) for higher credit risk factors; property insurance agreements; a clearly stated rationale for the decision (including exceptions); and a record from the mortgage insurer validating commitment to insure the mortgage, where applicable’: ibid., principle no 2.
- 79.
OSFI (2008).
- 80.
S.C. 2000, c. 17, sec. 5, 7.
- 81.
Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, SOR/2002-184, art. 11.2; Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations, SOR/2001-317.
- 82.
Supra note 80.
- 83.
Supra note 5, p. 8.
- 84.
Ibid.
- 85.
CMHC, supra note 21.
- 86.
CMHC (2018b), p. 1.
- 87.
Sec. 5(1)(h) of regulations: Insurance Housing Loan Regulations, supra note 26; Eligible Mortgage Loan Regulations, supra note 25.
- 88.
Supra note 5, p. 9.
- 89.
Ibid.
- 90.
Supra note 33 and accompanying text.
- 91.
Supra note 5, p. 10.
- 92.
Ibid, p. 11.
- 93.
Ibid, p. 13. This must be read in parallel with principle n° 2, supra notes 76–83 and accompanying text.
- 94.
It must be added that these are called ‘home equity lines of credit’ in Guideline B-20: supra note 5, p. 14.
- 95.
Ibid.
- 96.
Supra note 6 and accompanying text.
- 97.
Supra note 5, p. 15.
- 98.
OSFI (2014).
- 99.
Supra note 5, p. 3–5.
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Lacoursière, M. (2020). Reasonable Credit in Canada: An Attempt to Avoid Over-Indebtedness. In: Amaral Junior, A.d., Almeida, L.d., Klein Vieira, L. (eds) Sustainable Consumption. Springer, Cham. https://doi.org/10.1007/978-3-030-16985-5_21
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