Why Does the Royal Bank Vote NO on Consumer Proposals More Than all Other Creditors Combined?
Royal Bank Votes No on Consumer Proposals Often – Here’s Why
A consumer proposal is a legal tool to reduce the total debt you owe without filing for bankruptcy.
Here, you strike a deal with creditors to slash your overall bill so that they can get some of their money back, and you escape unsustainable payments.
In most cases, it makes sense for lenders to agree to a consumer proposal.
Getting some money back through a consumer proposal is better than getting nothing in a bankruptcy.
Royal Bank, though, doesn’t follow this logic.
Research shows that Canada’s largest lender votes NO on consumer proposals more than all other creditors combined.
To see how bizarre this is, consider the following example.
To keep things simple, we will assume that you don’t have any tax credits or assets that creditors can seize as part of legal bankruptcy proceedings.
Suppose that you earn $2,180 per month and owe Royal Bank $18,000.
Let’s also suppose that you’re living alone, implying a surplus income of $200 above the threshold.
In a first bankruptcy, you would pay surplus income payments to your creditors of $100 per month (50 percent of your income over the $1980 threshold) for nine months.
In this case, creditors would get $900 if you go bankrupt or 5 percent of the total $18,000 you owe.
Logically, therefore, it would make sense for creditors to accept a consumer proposal over $900 since that would allow them to recoup more of their losses.
On this basis, most creditors would take a consumer proposal worth, say, $10,000, but not Royal Bank.
It has a habit of rejecting deals like these.
What’s going on?
Making sense of Royal Bank’s decisions on this issue isn’t easy.
Let’s say that you agree to pay back Royal Bank $300 per month for 36 months under a consumer proposal.
Here, they get $10,800 in total – $9,900 more than they would get under bankruptcy.
And you get to pay off your debts with a note on your credit report that lasts three years (instead of six years under bankruptcy).
It seems like a good deal for everyone.
However, data show that the bank rejects a higher percentage of consumer proposals than any other, even if it gets more money than under bankruptcy.
On the face of it, this approach doesn’t make any sense.
Royal Bank seems to be missing a trick.
It would be better off if it allowed more customers to negotiate consumer proposals.
Picking apart the reasons for this decision by Royal Bank is not easy.
One reason could be that the financial institution outsources the processing of consumer proposals to a third-party company.
Licensed trustees never actually deal with the bank itself.
Instead, they must communicate with this agency, which then sends correspondence to and from the bank.
If Royal Bank shareholders aren’t properly overseeing the actions of this third-party firm, then that might explain some of the lender’s strange consumer proposal decisions.
Alternatively, what we see could be a deliberate policy.
Royal Bank might reject consumer proposals at a higher rate than other lenders as a ploy to discourage borrowers from taking out loans that they can’t afford.
In other words, it could be an attempt by the lender to avoid what economists call moral hazard.
“Moral hazard” is a bizarre phrase, but the concept is quite simple.
Let’s go back to the above example.
Suppose that you borrow $18,000 from Royal Bank to pay for a bunch of stuff you can’t afford, like a cruise or a bunch of spa treatments.
Going into debt for luxuries like this is usually a bad idea.
But let’s assume that you’re due a significant pay rise and you’re taking advantage of your future income now.
In a world without consumer proposals, you would have a stark choice.
Either pay back the loan in full, according to the original terms or face bankruptcy.
The costs of bankruptcy can be high, especially if you plan on using credit in the future (to start a business, for instance).
So there is a big incentive for you to repay the original loan.
Under a consumer proposal, however, the personal costs of failing to pay back the loan are much lower.
Yes, you still get a note on your credit report, but the ramifications of filing an agreement with your creditors aren’t as far-reaching.
Knowing that you have recourse to the consumer proposal when you take out a loan is a worry for creditors, like Royal Bank.
They know that it could affect your decision-making.
For instance, you might be willing to take on more debt than you would in a world without consumer proposals because you know that you can always go to a trustee and reduce the amount you owe if you get into financial trouble.
In the above example, a consumer proposal slashes the total owed by $7,200.
And, in reality, the borrower would likely pay back much less than this.
So you can see why Royal Bank might be worried.
It knows that if borrowers always have the option of filing a consumer proposal, they might be tempted to take out more than they can afford.
And ultimately, the bank winds up picking up the bill.
We should, therefore, consider the possibility that Royal Bank is playing a complicated, strategic game.
By publicly rejecting more consumer proposals than any other creditor, it is protecting itself from the small subset of borrowers who might take liberties.
If this explanation is correct, then you can understand the high rate of rejection.
The bank is trying to discourage the type of borrower who sees consumer proposals as a way to game the system.
If it isn’t, then the bank’s actions really don’t make a lot of sense economically.
It is losing out and it needn’t.
If you owe money to Royal Bank, getting them to agree to a consumer proposal can be challenging.
Your best option is to speak with experienced licensed trustees and get them to take your case forward.
Get in touch with our professionals today to find out more about the process.