The real cost of credit.

Cash transactions are now the exception rather than the rule. More and more businesses and consumers depend on credit, whether buying or selling goods.

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Although the use of credit has been increasing for years, few business owners are familiar with the rules and legislation that governs credit agreements. There are several Acts that can apply, depending upon the jurisdiction. These statutes are generally known as cost of credit legislation.

In the past, not all creditors were on the same footing when extending credit. Some lenders were regulated by federal legislation (such as banks), and others provincially (such as local co-ops). In an effort to align provincial and federal legislation, all Canadian jurisdictions agreed to harmonize their cost of credit legislation.

The Cost of Credit Disclosure Act, 2002 ("Act") was passed in the spring 2002 session of the Saskatchewan legislature. Despite their intentions to harmonize the cost of credit rules, however, some inconsistencies with federal legislation still existed. In response, Bill 24, The Cost of Credit Disclosure Amendment Act, 2005 was recently introduced to remove discrepancies between federal and provincial legislation. The new Act, along with amendments and regulations, is set to come into force on October 1, 2006.

The Act covers the general cost of borrowing, but also provides specific rules regarding financing fees and other hidden borrowing charges. The basic purpose of the Act is to provide a framework for credit agreements. This requires specific terms and disclosure respecting interest rates, the calculation of interest, advertising of credit rates and other cost of borrowing items.

For example, one of the areas the Act covers is variable credit, or floating interest rates. The Act regulates the interest disclosure process for floating credit. For instance, variable credit lending agreements must clearly detail in writing the cost of borrowing as an annual percentage expressed in dollars and cents, inclusive of corresponding charges and the cost of borrowing. There are a number of other requirements.

Also with respect to variable credit, a lender is obligated to send out, not less frequently than every three months, a statement detailing the outstanding balance in the account at the beginning of the period. The statements must also include the total sum credited to the borrower for the period along with the cost of borrowing during that time frame.

Advertising requirements are another area covered by the Act. The rules preclude sellers from advertising 0% interest if there are administration fees. Similarly, advertising "no interest" might be prohibited in situations where the seller will sell the item at a lower price for cash. It is essential to note that this Act applies to more than just consumer loans; it covers things like mortgages, lending by retailers and also leases.

In Saskatchewan, it is always important to consider the effects of the Act on agriculture. Regulations accompanying the Act will extend the rules to sellers who offer credit to various agricultural operations. The Act, amendments and regulations contain exact definitions which should be consulted, because not all transactions or borrowers are included.

These are just a few of the rules enacted by the legislation. The Act and regulations contain definitions of many of the terms used in this article. It is highly recommended that all invoices, statements and similar credit documents be reviewed by a lawyer to ensure they comply with the new legislation. Failure to comply with the rules will, at the very least, interfere with the ability to collect outstanding credit.

If you or your business operate with the help of credit, and you have questions or are merely interested in the rules, the Act, amendments and regulations can be viewed at the Queen's Printer Web site at http://publications.gov.sk.ca.

Doc is a lawyer with Wallace Meschishnick Clackson Zawada in Saskatoon. Questions and comments on this article can be sent to him at [e-mail].