The clients of the big banks in Canada are not being well served in the current pandemic — either by these banks themselves, or by the federal regulators charged with guarding the public interest.
When the Financial Post published a caveat that Canada’s big banks needed to watch their public relations flank on April 23 — early on in the coronavirus pandemic — inadvertently exposing the banks’ velvet-glove treatment by federal regulators, reader response was overwhelmingly condemnatory and harsh. One compared Canada’s chartered banks to “loan sharks hiding in fancy buildings and fancy suits” and another described how much better European banks have done in serving the public interest, including a complete suspension of interest payments on credit cards and a shift to zero per cent interest rates during the COVID emergency.
There has been no such contribution to the public good here in Canada by the banking industry. Canadian banks and their powerful lobbying arm, the Canadian Bankers Association, have for too long enjoyed a cosy, almost incestuous, relationship with their federal regulators and with the federal cabinet. The current insipid response of the big banks to the financial distress of unemployed Canadians is a shameful reminder of how much leeway these corporate actors enjoy in the face of weak federal regulation. It’s the “SNC-Lavalin syndrome” of special treatment for the rich and powerful. Déjà vu.
Canadians need real structural change in the regulation of the Canadian banking oligopoly.
At present, current regulations allow too much leeway to those being regulated. This phenomenon, known as “regulatory capture” was first brought to public attention by consumer advocate Ralph Nader. The term refers to the “capture” of the regulating authority by the powerful commercial influence of the parties supposedly being regulated.
Here in Nova Scotia, the dangers of regulatory capture are also manifest in the cosy relationship between Nova Scotia Power and its government regulator, the provincial Utility and Review Board.
As many jurisprudents, including the Law Reform Commission of Canada, have pointed out, such administrative leeway usually works in the favour of the rich and powerful rather than toward leveling the playing field for ordinary Canadians.
The ordinary citizen struggling to pay a mortgage, or other bank debt, receives no such generous consideration. Under the aegis of the Canadian Bankers Association, Canada’s chartered banks have made the miserly decision to allow borrowers to defer mortgage payments — but only at the cost of paying additional interest due over the normal term of their mortgage. This actually increases the total amount to be paid back!
The much fairer alternative form of loan, a “visgage,” where payments directly reduce the principal (because the principal is alive or “vis”) has been almost completely hidden from consumers by the banks.
Here, Common Law legal history provides rare illumination, revealing the quasi-usurious nature of the conventional mortgage contract. For the preface “mort” in the word “mortgage” contains the source of great consumer grief: “mort” indicates that the principal of the loan is dead until the lender gets the majority of the interest due in advance.
And, in the latest example of this widespread, usually unquestioned, banking practice, homeowners’ deferred payments are to be added to the principal amount outstanding, rather than simply being made due as extra payments at the end of the loan term. Thus, the “dead” principal portion of their mortgage grows larger, causing even more interest to be due over the full term of the mortgage.
While “legal,” this is unjust. It offends the expectations of fairness and equity which underpin consumers’ respect for the rule of law.
The difference between a “mortgage” and a “visgage” for the average homeowner carrying a loan against their home would be enormous.
At the 10-year historically average mortgage rate of 5.07 per cent, a prospective homeowner would pay $93,635.78 in interest on a 30-year mortgage loan of $100,000. This means that the interest due is almost equal to the amount borrowed! And the total amount paid back over the life of the mortgage ($193,635.78) is almost double the amount borrowed! No wonder some Financial Post correspondents used terms like “loan sharkers.”
Consumers have been led by the banks — and even by the federal government’s Financial Consumer Agency of Canada (FCAC) — to believe this is the only way to structure a home purchase loan.
But compare the five-year interest costs of a $100,000 car loan vs. the first five years of the above 30-year mortgage. If you borrowed $100,000 for a car loan at the same interest rate of 5.07 per cent, you’d pay $13,396.02 in total interest, compared to five-year interest charges of $24,113.82 in the first five years of the mortgage. (During that first five-year period, the principal of the $100,000 mortgage would be reduced by only $8,148.80, despite paying the bank a total of $32,272.62.)
Yes, Virginia, there is such a thing as too much profit — and not enough customer service and attention to the public good!
When economists at the Library of Parliament ranked all North American banks for profitability, using both return on equity (ROE) and return on assets (ROA), Canada’s chartered banks captured all the top positions. Much of this profit is gained at the expense of mortgage borrowers in Canada.
We see this same problem in long-term, for-profit, seniors' care homes across Canada: the profit motive, insufficiently regulated to protect the public interest, leading to great harm being done to vulnerable persons, and in this case, sadly, to much avoidable loss of life.
To add further insult to injury, mortgage interest payments in Canada are not tax-deductible for homeowners, as they are in the United States. This critical difference in tax regulations is unknown to many Canadian homeowners. Consider, for average families, the benefit of having access to tax deductions worth almost $100,000 over the life of a mortgage!
In a glaring example of legal favouritism for the wealthy, such deductions are available to Canadian businesses that are building structures for landlords to rent, but these same deductions are normally not available to families building or buying a home for their own use. In this light, the failure of Canada’s extremely profitable chartered banks to give greater relief to Canadians in this pandemic emergency is an injustice that ill serves the reputation of the banking industry in Canada, as the Financial Post earlier warned.
Perhaps it will take the threat of class-action lawsuits to abrogate mortgage agreements and other unfair contracts under “force majeure” (act of God) — legal provisions that can be used to nullify existing contracts under emergency conditions — to compel Canadian banks and their normally compliant government regulators to step up. A class-action lawsuit against the banks, using force majeure legal provisions, would be an enormous contribution to levelling the playing field for Canadian borrowers.
In the post-COVID-19 world, credit unions in Atlantic Canada and elsewhere in Canada, with their greater orientation towards public service and their closer community ties, might consider offering a hybrid “VISgage,” wherein at least half of each payment goes directly to reducing the principal amount owed on a home purchase loan right from Day 1. What they lose in profit from a conventional “MORTgage,” they might gain on an increased volume of business — especially when they show banking customers the huge savings in interest payments to be had by avoiding a conventional mortgage.
The federal government of the day, including the newly named head of the central bank, Tiff MacKlem, has a moral obligation to insist that the big chartered banks fulfil the requirements of good corporate citizenship beyond the strict letter of the law, by giving Canadians real and substantial assistance in this global emergency, as opposed to the window-dressing currently on display in slick and somewhat misleading bank advertising campaigns.
In the months and years ahead, post COVID-19, Canadians from coast to coast to coast deserve better service from Canada's big banks and better care of the public interest by federal bank regulators.
Brian Richard Joseph lives in North Sydney. He served two terms on the Law Reform Commission of Nova Scotia. A former Sidney Smith Scholar at the University of Toronto, he studied legal history at Harvard Law School and economics under John Kenneth Galbraith at Harvard.