Mortgage Broker

36 | fall 2015 mbabc.ca MORTGAGEBROKER criminalrate e group completed their borrowing and in turn did lend all but a very small portion of the $2.5 million dollars to the person. e person disappeared from sight (it was believed she went to Hong Kong or China), the group did not service their mortgage debt, and the lender began foreclosure proceedings. WAS THERE A CRIMINAL RATE OF INTEREST? e Court concluded that there was a criminal rate of interest (the rate being something in excess of 96 per cent per annum). WHAT IS THE APPROPRIATE REMEDY? e Court said at least four factors must be considered to determine the appropriate remedy where a criminal rate of interest has been charged. First, would removing the excessive interest and enforcing the rest of the agreement defeat the purpose of prohibiting people from charging a criminal rate of interest? In this case the transaction was not tainted in its entirety as it did not involve loan sharking or an illegal purpose. Second, did the parties enter into the agreement for an illegal purpose or with an evil intention? ere was no illegal purpose or evil intention. ere was no coercion or intimidation by the lender. e lender did however intend to charge a criminal rate of interest and so it would not be appropriate to just disallow the illegal interest. ird, what are the relative bargaining positions of the parties and what was their conduct in reaching the agreement? e borrowers were, in their minds, under pressure to close the transaction so they could help their own debtor pay the debt she owed to them. ey were naïve in making investment decisions. e lender knew the borrowers had not received legal or other professional advice and charged a criminal rate of interest even though the loan was well secured. Fourth, would the debtor be given an unjustified windfall? e borrowers did not end up with the loan money as it was given to the person who then disappeared. However, if the entire loan was set aside, the borrowers would benefit by transferring their victimization by the fraudster to the lender. is would not be fair to the lender. e Court decided that in these circumstances it was appropriate to remove all interest provisions in the agreement and require the borrowers to repay only the principal. e Court made this decision based largely on its belief that the lender's object for making the loan was to earn a criminal rate of interest. Regulatory Consequences ere is no intention to here enter into a full review of possible regulatory consequences facing a registrant under the Mortgage Brokers Act for charging a criminal rate of interest. It should be noted however that if the Registrar forms the opinion that the registrant is a party to a mortgage transaction that is harsh and unconscionable or otherwise inequitable, the Registrar may suspend or cancel the registration or order the registrant to carry out specified actions to remedy the situation. e Registrar has the same options upon forming the opinion the broker has conducted or is conducting business in a manner that it prejudicial to the public interest. ese regulatory consequences are possible aside from any criminal or civil consequences. e Takeaway In addition to risking serious criminal and regulatory consequences, a lender charging a criminal rate of interest should bear in mind that in civil law they could: . lose the amount of the interest which exceeds the non-criminal portion of the interest; . lose all interest; and . lose the principal. It could for the lender end up being a matter of something ventured, nothing gained or something ventured, everything lost. Of particular interest to a mortgage broker is whether by assisting the lender in putting together the deal, the broker can be said to have aided, abetted or counselled the lender to make a loan at a criminal rate of interest. If so, the broker may find himself or herself being convicted and sentenced as a party to the offence. Of course, each case would have to be determined on its own facts and the degree of involvement by the mortgage broker would be a key factor. Beyond the criminal consequences, charging an exor- bitant rate can lead to the loss of part or all of the interest owed, and in some cases, forfeiture of the principal investment.

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