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New Consumer Protection Rules

September 5, 2017

Get involved – have your say about Consumer Protection

The Ontario government is in the process of developing consumer protection rules that will govern the fees and to some extent the operations of Credit Counselling, Debt Consulting and Debt Settlement Companies.   Consumers and other interested parties are invited to have input into the development and implementation of these new rules.

Nonetheless, as we review the information, one must wonder if the semantics of the new rules will go far enough in curtailing or controlling excessive fees.  For example most agencies in the not-for profit credit counselling sector have been licensed under the Collections Agencies Act for many years and will be subject to the rules.  In addition to charging monthly administrative fees they have relied heavily on funding from the Canadian Bankers Association and other institutional creditors who pay a commission (percentage of funds collected) for collections.  The “commission”, however, is called a “donation” and in all likelihood the semantics of the regulations will allow the not-for-profit to cotinue ths practie.  In all likelihood they are also possitioned to issue a “tax deductible receipt” to the banks fr the donation.  This type of fee is not discussed in the paper and will likely be continued.  Unfortunately, if semantics are helpful in the not-for-profit sector similar semantics may be used in the for-profit-sector.   After all it is the for-profit sector that is the main target of these new rules.

One for-profit company actually advertises on the front page of its website that a Consumer Proposal is the best solution for consumer debt problems.  It doesn’t say that ONLY a Licensed Insolvency Trustee can file a proposal.   After a debtor has contacted the Company for assistance they are charged large sums of money, sometimes as much as $5-6,000.00, with promises of reduced debt payments.  The company suggests that they will be able to reduce the client’s debt by as much as 70% or more in some cases.  But it is not until they have collected fees that they explain they can only do so by making a referral to a licensed trustee in bankruptcy who will file a Consumer Proposal.  Even when introducing the debtor to the trustee the Company avoids the term “Licensed Insolvency Trustee” and will refer to the trustee as an “officer of the court”.

Under the proposed rules a debtor will have a very brief window of opportunity,15 days, to cancel the agreement with the Debt Consultant/Settlement Company and get their initial deposit money refunded.  The good news is that there will be restrictions on the amounts that can be charged as fees.  The bad news is that Debt Consulting Companies are also looking to other sources of revenue that may not be covered under the new rules.   One revenue source for example is selling “proposal insurance”  – oh, and as you read the linked article keep in mind that only 48% of people who apply for EI actually qualify for benefits.

A more recent development is what has been touted as the “Advantage Loan”.  How it works is that the debtor, even before filing a proposal, is pre-qualified, by the Debt Consultant, for a loan to pay out their proposal.  Once the proposal is accepted by the creditors, typically for somewhere around 25% of the outstanding debt, the proposal administrator (or trustee in bankruptcy) will refer the debtor back to the Debt Consultant.  The Debt Consultant proceeds to negotiate a pre-qualified loan to pay out the proposal in full.  The debtor is told that loan payments will be reported to the credit bureau and the proposal will be erased from the bureau in three years instead of waiting for the completion of the proposal (usually a five year term) and then waiting a further three years for the bureau to remove or purge the proposal record.

There are some serious issues with this loan program for the debtor as well as for the new consumer protection Rules.

1. The debtor will be charged a $1,000.00 administrative fee by the Debt Consulting Company, which may not be subject to the rules;

2. The debtor will also have to pay a fee of 5% of the total amount borrowed (the value of the loan plus the administrative fee) to the loan company (which may or may not be related to the Debt Consulting Company) likely not subject to the rules;

3. The interest rate on the Loan will be 29.99% – outside of the purview of the rules;

4.  The loan will be reported on the credit bureau as outstanding for the full term of repayments – let’s assume 5 years – if successfully paid out the credit bureau will continue to report for a further ten years;

5.  The debtor will find that having such a large outstanding loan on his/her bureau will be an impediment to future credit;

6.  The debtor will be obligated to a massive payment of interest – if the original proposal had been to pay 25% of a $80,000.00 debt load, without interest, and the trustee had arranged for monthly payments of $333.00 over a term of 60 months (5 years)  after negotiating the Advantage Loan the debtor will now find him/herself paying a loan of $42,445.00 over the same term with monthly payments of about $715.00;

7.  The fact that the debtor could afford to have paid more to his/her creditors seems to call into question the integrity of the insolvency process and may expose the debtor to the possibility of litigation by his/her creditors;

8.  Since, as we have seen above, the semantics of the situation appear to put these fees outside of the purview of the proposed new rules it is still very much a case of matter of caveat emptor (buyer beware) for the consumer/debtor;  and finally

9.  The “advantage” of the loan appears to be for the Debt Consulting Company to be able to charge more fees, the Loan Company to be paid interest and the Trustee to get his/her fees paid earlier in the administration.

Remember all trustees are required by the Bankruptcy & Insolvency Act to be “honest and impartial“.  Trustees are administrators of a complicated piece of legislation that is designed and intended to help people solve their debt problems.  Trustees will usually provide a free consultation – Locke Consulting Inc. always does.