Mortgage Broker

Spring 2014

Mortgage Broker is the magazine of the Canadian Mortgage Brokers Association and showcases the multi-billion dollar mortgage-broking industry to all levels of government, associated organizations and other interested individuals.

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Page 35 of 47

36 | spring 2014 MortgageBroker A purchAser of reAl estAte commonly receives financial contribution from a family member or friend to be used toward the purchase. e contribution may have been made for any number of reasons including: • Paying part of the purchase price on behalf of the purchaser (i.e., a gi to the purchaser); • Making a loan to the purchaser; • Making a bridge loan to the purchaser to, for example, give the purchaser time to sell assets (e.g., other real estate) sufficient to pay the full purchase price; and • Making an investment whereby the purchaser will go on title but will hold part of the title for the benefit of the contributor. e reason for the contribution may not be clear. e parties may not have discussed the reason in advance of the contribution and neither party may have even thought about determining the reason. Any differences in understanding as to the reason for the contribution may not come to light until a later date when the contributor asks for repayment, the contributor suggests the real estate be sold and each take their share of the proceeds, or otherwise. If the relationship has, by then, changed for the worse, at least one of them may change their understanding, deliberately or not, as to the intention behind the contribution having been made. Having clearly documented the transaction in the form of a gi, loan, or trust agreement would assist all parties in minimizing misunderstandings. Knowing the details of the transaction would also benefit the mortgage broker and possible lenders who might be involved in financing the balance of the purchase price. e mortgage broker and lender could then properly take the contribution into consideration in structuring the other needed financing. For example: • If the contribution is a loan, the borrower's ability to service the mortgage may be reduced and this may change the terms (e.g., interest rate) of the mortgage to be offered; • If the contribution is an investment, the lender may want a covenant to pay from the contributor. Alternatively, the lender will want to consider whether the reduced equity holding of the borrower will make it more likely the borrower will walk away from the property if future financial difficulties arise; • If the financial contribution is a gi, the lender may want it documented. is would make the gi better enforceable and would reduce the likelihood of a loan or investment falsely being presented to the lender as a gi so as to improperly qualify the borrower for the mortgage. Of course the lender will want to in any case allow for the possibility that the borrower may choose to pay off the "gi" in priority to meeting the obligations under the mortgage. If the purchaser does not disclose the true transaction, any financing provided in reliance on the incomplete or inaccurate information might provide a basis for the mortgage to be called due and might constitute mortgage fraud. ese key principles should be kept in mind: 1. To constitute a gi the contributor must have provided the funds to the recipient gratuitously and without any expectation of them being returned. Any contributor willing to mislead a mortgage broker by falsely portraying a loan or investment as a gi should take note that they may thus be providing the recipient with evidence to prove a gi. 2. e contributor must have had the mental capacity to form the intention to make a gi. Some cases have used the language that the contributor must have had the "capacity to understand substantially the nature and effect of the transaction." 3. e contributor must not have been unduly influenced to make the gi. e court in determining whether there has been undue influence will look to factors such as any relationship of dependency, a fiduciary relationship, independent advice, and the magnitude of the disadvantage or benefit. 4. Sometimes it is difficult to determine the intentions of the contributor. e Court, as a starting position, uses the following presumptions: a. Presumption of advancement (i.e. a gi) – a gi is presumed where the contributor is a parent and the recipient is a dependent child of the contributor b. Presumption of resulting trust (i.e. an investment) Gift Guidelines Ray Basi Director of Policy & Education Documenting gis avoids the potential for mortgage brokers to become involved in court proceedings p36-37_LegalEase.indd 36 14-05-08 2:29 PM

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