Mortgage Broker

bestinterest 24 | summer 2017 cmba-achc.ca CmB magazine Senator Ringuette, in her address to the Senate, provided a refresher on the history of the criminal interest rate, explaining that: "It goes back to 1906. It was the Money-Lenders Act, with 12 per cent on loans of $500 or less. Jump to 1939, 33 years later, and it was replaced with the Small Loans Act, with loans of $500 or more. en it was increased to $1,500, where limited, with an interest rate of one per cent a month. If they wanted to charge more than that, they had to apply to the federal government for a licence for each loan. Jump again to 1981, the year that section 347 was enshrined in the Criminal Code with a rate of 60 per cent, and this has stood as the law for 36 years. So it's long overdue to be reviewed." ere are no records relating to how the specific criminal rate of 60 per cent was determined back in 1981. However, in the 1980s, the Bank of Canada rate was about 21 per cent, which makes the 60 per cent criminal rate roughly three times that percentage. Today, the Bank of Canada rate is at a record-low 0.5 per cent, which obviously signifies a vastly different economic environment today than three-and-a-half decades ago. Using the same formula to set today's criminal rate would only result in a percentage of 1.5 per cent, which would be completely untenable for mortgage lenders as a criminal rate. However, Senator Ringuette does argue that it is time to revisit the amount of the rate. In her view, a floating rate of 20 per cent over the Bank of Canada rate is reasonable – this would result in a current criminal interest rate of 20.5 per cent. Justifying the proposed change, Senator Ringuette points to a case that came to the attention of the Financial Consumer Agency of Canada involving loans offered by credit repair companies. She explains that, "ey call your house. ey say, 'If you have credit card debt, we can help you.' I know. I got the call at my house. ese are offered under the guise of rebuilding credit, but according to a Global news report, fees and interest reached 50 per cent. is case falls under the current limit of 60 per cent." And she further points out that, "Even if we're outraged about that 50 per cent interest rate, we can't do anything because the Criminal Code says it's OK up to 60 per cent. But at 60 per cent, then it becomes criminal; so you can charge 59.999. Should someone who has to rebuild their credit have to pay a 50 per cent interest rate? By lowering the criminal interest rate, we can send a strong message that profiteering off the financially vulnerable of our society will not be tolerated." ere appears to be little opposition to the bill. However, the mortgage industry may want to take a closer look at the proposal to determine if it works for mortgage lending. What Senator Ringuette may not understand is that the courts have interpreted the concept of "interest" in very broad terms, which makes the Criminal Code prohibition somewhat ambiguous. Prosecuting criminal interest cases requires the expert services of an actuary to add to the contract interest rate, up- front or commitment fees, fines, and expenses (including legal expenses), and then to apply these costs over the term of the loan. A lender cannot simply rely on the contract interest rate in evaluating whether the interest rate is prohibited by the Criminal Code. ere is also ambiguity with the concept of residential, household and business purposes, which trigger whether or not the criminal rate of interest prohibition applies. For example, an equity take out mortgage on commercial property for the purposes of purchasing a family home is actually a mortgage for residential or household purposes, thereby triggering the criminal interest rate prohibition, even though the mortgage industry would consider this a commercial mortgage. Likewise, taking out a second mortgage on a residence to invest "We should also keep in mind that the purpose of the Criminal Code is to prohibit criminal conduct, not to interfere with the capacity of parties to make sound contracts based on reasonable factors. It is reasonable for lenders to charge higher costs to borrowers who are higher-risk."

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