Mortgage Broker

34 | fall 2015 mbabc.ca MORTGAGEBROKER criminalrate Criminal Code Conviction Your conduct may put you at risk of being convicted under the Criminal Code. e Code prohibits: . entering into an agreement or arrangement to receive interest at a criminal rate; or . receiving a payment or partial payment of interest at a criminal rate. A conviction carries a sentence of either: . up to five years imprisonment or; . a fine of up to $25,000, plus up to six months imprisonment. What is a criminal rate of interest? If the effective annual rate of interest on the credit advanced exceeds 60 per cent, it is considered criminal. e effective annual rate of interest is to be calculated in accordance with generally accepted actuarial practices and principles. What payments and costs are to be included in the calculations as interest? Courts look to the true costs to the borrower (that is all charges and expenses paid by or on behalf of the borrower) for obtaining the actual benefit. In doing this, little regard is given to whom the charges and expenses are paid and whether the parties call them something other than interest. Courts have in the past considered the following as being interest: commitment fees, initial fees, loan fees, loan advance fees, facility fees, finance charges, bonuses, legal fees, extension fees, capitalized interest, bonus interest, compensation for interest lost on money advanced on short notice, lender's costs, an increase in the outstanding balance of the purchase price if the borrower does not pay the original balance within a set time, amounts the borrower is to pay in addition to repaying principal, and the borrower's estimated share of the profit on resale of the property concerned. Not to be included in the calculation as interest is any repayment of principal or any insurance charge, official fee, overdra charge, required deposit balance, or property taxes in a mortgage transaction. e rate of interest is to be determined in relation to the credit advanced. What does "credit advanced" mean? Credit advanced means the total monetary value of goods, services and benefits actually advanced or to be advanced minus the total of any required deposit balance and any fee, fine, penalty, commission and other similar charge or expense incurred. What if the lender did not know about the criminal rate of interest law? Ignorance of the criminal rate of interest law will not likely assist the lender. A person is considered to have knowledge of the nature of the payment and that it was received at a criminal rate, unless there is evidence to the contrary. e risk – charge more than a 60 per cent effective annual rate of interest on credit advanced and you might find yourself facing a Criminal Code conviction and sentence. Civil Liability Aside from a Criminal Code conviction, if a loan provides for a criminal rate of interest, the loan is an illegal contract. Courts do not help enforce illegal contracts. Where does that leave the lender, in the case of a default, in collecting any or all of the monies owed? Once a court concludes an agreement provides for a criminal rate of interest, the court must decide whether to: . strike down the entire agreement and not require any money to be paid or repaid to the lender; . reduce the interest provided in the contract to the maximum rate permitted (60 per cent per year); or . do something in between these two choices. e British Columbia Supreme Court in May 2015 faced just such a situation. THE FACTS Two individuals brought together a group of borrowers who put up equity in eight real estate properties as security for a mortgage advance of $2.5 million. e lender felt the borrowers had $4-4.5 million equity in the eight properties. e rate of interest was four per cent per month but would be waived if the stated (as opposed to the real) mortgage principal sum of $3.1 million was repaid within three months. e borrowers had told the lender the purpose of the loan was to bridge finance a business deal; the borrowers were going to in turn loan the money to another person to whom members of the group had previously lent considerable money. is additional loan was understood by the group to be what that person needed to make a sizeable deal come together and put her in a position to repay all of the monies owed to the group. Charging more than a 60% effective annual rate of interest on credit advanced is a Criminal Code violation.

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