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Legal Ease: The Balancing Act: Illustrating the need for lenders to be reasonable
BALANCING
BACKGROUND Your lender client has considerable money to place. You are aware of a borrower who is so desperate for mortgage funding that she will agree to any terms whatsoever proposed by a lender. The borrower faces imminent foreclosure and no other lenders have come forward. Your lender can fund the transaction quickly.
Might you be doing the lender-client a disservice by encouraging overly harsh mortgage terms? After all, what choice has the borrower but to accept any terms proposed? Could you provide a better service by suggesting that the lender charge a premium that recognizes the borrower’s circumstances (for example the urgency and the risk), but not ask for grossly excessive terms? The BC Supreme Court in Astina Mortgages Group Ltd. v Galpin, 2019 BCSC 1811 (CanLII) provides some guidance.
ISSUE The foreclosing lender obtained a court order to sell the security property to itself.
The borrower claims that: n the mortgage was unconscionable; n the lender engaged in predatory lending; n the lender’s purpose in lending the money was to collect an excessive lender’s fee, collect the interest, and to then take her property; and n the lender preyed on the inequity of power and her desperate position and breached their duty to act in good faith.
The borrower has made application to have the mortgage declared invalid and the property transferred back to her. While that application is waiting to be heard, she wants a court order: n allowing her to stay in her home; n prohibiting the lender from obtaining an order to take lawful possession of the home while the matter is waiting to be heard; and n ordering the other parties to disclose documents relevant to the application.
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The lender counters that: n there is nothing unconscionable about the mortgage; n they saved the borrower from certain foreclosure of the other two mortgages and bought her another 15 months in her house; n the interest rate of their mortgage was less than the second mortgage that was paid out with their funds; and n the borrower did have the ability to pay off the mortgage when the mortgage was taken out (she could have sold her home, paid off their mortgage and been left with the excess sale proceeds).
WHAT HAPPENED? An 89-year-old retired teacher was living on pension income totalling approximately $3,000 per month.
In 1986, she inherited the home her parents had built in 1954. She resided in that home with her daughter and two grandchildren.
In 2009, the borrower met Langenberg. He befriended her and started helping around her house and calling her “mom.”
After the borrower’s husband died in 2010, she took out a reverse mortgage to help her daughter and grandchildren. The house was pledged as security.
In about 2010, Langenberg approached the borrower about investing in a real estate development project he was starting. He promised her that if she invested money from her reverse mortgage, she would never have to worry about money again. When she agreed, Langenberg set up a company in which they each held a 50 per cent interest. The borrower had no business experience and did nothing more than provide capital. All decisions about the company were made by Langenberg. Over the following years, Langenberg convinced the borrower to take more and more money against her home to assist the company, advising her that if she did not provide more capital, she would lose all of the money she had already invested. Langenberg continually reassured the borrower that there was no risk and that she would receive a significant return. She trusted him.
By the fall of 2016, the borrower had two mortgages registered against her home, totalling over $2.6 million. Both mortgages were in default. In October 2016, Langenberg, through a mortgage broker, arranged a 15-month mortgage with a lender for $3.275 million. There was a suggestion that Langenberg was connected to the mortgage broker; that connection was however unclear. The borrower swears that Langenberg advised her that the broker was his good friend and that the broker was going to invest in the project and pay off all the debt.
The borrower swore she was never contacted by the lender or anyone connected to them about the mortgage. No inquiries were made about her income or ability to pay, nor was she asked to provide information.
The mortgage commitment was stated as being subject to: n Independent Legal Advice (ILA) confirming the borrower’s legal capacity to sign the loan documentation; and n confirmation that the existing mortgages were not in default.
The borrower swore she did not receive ILA and did not know the lawyer who had signed the ILA certificate. The certificate appears to be a standard form with little to no information regarding the specific advice rendered; it says nothing regarding deducted and retained by the lender ($24,562.50 a month for 12 months and $32,750 a month for three months) Langenberg advised the borrower that her home was safe as the payments toward the mortgage would be made from the proceeds of the mortgage. Further, he said that he had a relationship with the lender. The specifics of the relationship were not clear to the court at the time of this early hearing. n $147,375 deducted and retained as the lender’s fee; n $32,750 to pay the mortgage broker’s fee; n approximately $179,000 was paid to the borrower/Langenberg company; n nothing was paid to the borrower; n any balance stayed with the lender. In March 2018, the mortgage was in arrears and the lender sent demand letters to the company and to the borrower. The amount owing was claimed to be $3.4 million, increasing by over $1,000 per day. Langenberg told the borrower not to worry as he would take care of it. The borrower did not file any response in the eventual court foreclosure proceedings and so was not served with, or made aware of, any further documents in the process.
the borrower’s capacity or the status of the then-current mortgages.
The mortgage proceeded with the funds being disbursed or allocated as follows: n approximately $2.6 million to discharge the existing two mortgages; n paying for fees associated with the mortgage, including for the independent legal advice; n just over $4,000 to pay outstanding property taxes; n interest-only payments totalling $294,750 The borrower obtained a court order to conduct the sale of the property. When the borrower asked Langenberg about a real estate agent having knocked at her door, he again told her not to worry and that he would deal with the lender. Ultimately the lender obtained a court order, without the borrower’s involvement in the process, selling the property to itself.
The borrower claims she had no idea her home was in jeopardy until Langenberg told her that the lender had foreclosed on her
property and purchased it. The borrower immediately contacted a lawyer.
LEGAL REQUIREMENTS The BC Supreme Court Civil Rules provide the following test for preserving the status quo of property pending trial: n the applicant has a proprietary interest in the property at issue; n the applicant would otherwise suffer irreparable harm; n there is a serious issue to be tried; n the balance of convenience favours the granting of the injunction. The project was never approved by the local authority. In fact, the conditions required to obtain approval were never met. The project was listed as inactive. In addition, the conditions that had to be satisfied before the mortgage was approved were not met. Finally, the fact that the lender bought the borrower’s home itself after only three months on the market raises concern. The fourth part of the test is satisfied as the potential prejudice to the borrower in not having the opportunity to bring her application greatly outweighs any prejudice to the lender by the making of the order.
OUTCOME The first part of the test is satisfied as the borrower has an interest in the property.
The second part of the test is satisfied as the borrower would have, even if successful in the main case, lost the home that has been in her family for five generations. The threshold to satisfy the third branch of the test is low and is satisfied. There is some evidence upon which an argument can be advanced that this was an unconscionable mortgage that took advantage of a vulnerable elderly woman.
The mortgage was granted in circumstances that could and possibly should have raised concern that an 89-year-old woman was being taken advantage of by the company and was at risk of losing her home. Yet there was no investigation as to her ability to make the payments and no direct contact with her by the mortgage broker.
There is no evidence that the lender looked into the company either. If they had, they would have seen that it had little to no prospect of getting off the ground.
Accordingly, the Court made the following orders: n The borrower retains custody of the home until the matters are finally dealt with. n The lender is prohibited from obtaining/ executing any order to possess the home until the matters are finally dealt with. n The lender is to produce all documents relating to the mortgage [including the relationship of the petitioner to the said lawyer(s) providing ILA]. n A Certificate of Pending Litigation (CPL) is issued for registering against the property. Registering a CPL in the Land Title Office gives notice to the world that there is litigation concerning the property and a person is claiming an interest in the land. In effect, it protects the claimant by tying up the registered owner from transferring or mortgaging the property.
TAKEAWAYS While this case is in the early stages and a final decision has not yet been made, it provides guidance for brokers who are faced with borrowers who are in difficult circumstances: n The best deal available to a lender might not be the one containing the harshest terms a borrower is willing to accept. n While borrowers in difficult financial circumstances are vulnerable to lenders legitimately charging more, particularly if there are few willing lenders or above-usual risks, lenders are best protected by being reasonable in the circumstances. n A broker would be wise to document the relevant circumstances in which a loan is made, the advice provided, the reasons for the advice, and (if available) the reasons why the proposed terms were accepted by the borrower.
A lender would be well served to ensure an ILA certificate covers the substance of the reason for the ILA having been required.
POINT TO PONDER Even if the lender’s argument is correct and the borrower, by entering into the new mortgage, created time to sell her property, the new mortgage could nevertheless be predatory by virtue of very substantially reducing the equity that would have otherwise been available to the borrower. The Court will need to consider all the circumstances in which the mortgage was granted to determine whether the terms of the mortgage and fees were acceptable, or at least not predatory.
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FINANCIAL SERVICES REGULATION: toward integrated consumer protection initiatives
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Current regulatory trends mean that best practices in market conduct and consumer protection compliance are not industry-specific but can and should be derived from a broad range of sources on an enterprise-wide basis
BY LAWRENCE E. RITCHIE, VICTORIA GRAHAM AND ELIZABETH SALE
In the decade that immediately followed the financial crisis, financial services regulatory reform largely focused on solvency and capital adequacy. Over the past few years, there has been a notable shift in focus as market conduct and consumer protection has become a point of regulatory convergence across the financial services sector.
At the same time, policy makers have been actively promoting not just changes in law, but significant reform in the regulatory framework and approach to regulation. Regulators (perhaps at long last) seem to be becoming more modern, nimble, responsive and collaborative.
Consequently, we are seeing a trend towards regulatory harmonization among jurisdictions, financial service providers and financial services and products. This means that best practices in market conduct and consumer protection compliance are not necessarily industry-specific but can and should be derived from a broad range of sources on an enterprise-wide basis across the sector.
Below we highlight in more detail notable recent developments in the market conduct and consumer protection space that reflect these themes of regulatory harmonization and collaboration. These developments highlight the need for integrated compliance measures.
NEW REGULATORY AUTHORITIES IN ONTARIO AND BRITISH COLUMBIA In 2019, two new regulators, the Financial Services Regulatory Authority of Ontario (FSRA) and the British Columbia Financial Services Authority (BCFSA), commenced operations and assumed the regulatory duties of their provincial predecessors. The mandates of the two new regulators are similar and include fostering effective and consistent regulation across Canada, promoting the adoption of industry codes of market conduct and enhancing regulation of insurance intermediaries and mortgage brokers.
FSRA launches its business plan
FSRA assumed the regulatory responsibilities of the Financial Services Commission of Ontario (FSCO) and the Deposit Insurance Corporation of Ontario on June 8, 2019. These bodies formerly oversaw insurance products and provincially regulated insurers, credit unions, loan and trust corporations, pension plans, mortgage brokers and certain auto insurance service providers.
Based on FSRA’s published statements and remarks to the industry, as well as our experience with FSRA to date, stakeholders can expect a more collaborative, flexible, principles-based approach to
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FSRA’s 2019-2022 business plan, as approved by the Ontario Ministry of Finance, has two over-arching priorities: n Burden reduction: FSRA will review all 1,100 pieces of regulation and guidance inherited from its predecessors and streamline or remove unnecessary material where possible. This is consistent with the Ontario government’s 2018 plan to cut regulatory red tape by 25 per cent by 2020. n Regulatory effectiveness: FSRA will aim to achieve legislative objectives and protect the public interest through enhanced consumer, industry and regulatory expertise; through collaboration, transparency and efficient processes; and by using technology and enabling innovation.
In addition to its general mandate, FSRA’s business plan sets out regulatory initiatives with respect to specific sectors. Credit unions: FSRA intends to integrate prudential conduct supervision, modernize the regulatory framework and adopt an industry code of conduct, which could be identical to or based on the Market Conduct Code recently released by the Canadian Credit Union Association. FSRA further intends to ensure an appropriate resolution and deposit insurance reserve fund (DIRF) framework for credit unions. Insurance: FSRA’s goal in this sector is to adopt effective conduct standards and improve licensing effectiveness and
efficiency. A further goal is to harmonize the Treating Financial Services Consumers Fairly Guideline with national direction such as the guidance document from the Canadian Council of Insurance Regulators and the Canadian Insurance Services Regulatory Organizations, Conduct of Insurance Business and Fair Treatment of Customers.
Mortgage brokering: In this sector, FSRA intends to provide oversight of syndicated mortgage investments, but will transfer oversight responsibility for non-qualified syndicated mortgages to the Ontario Securities Commission (OSC). FSRA will also work to improve licensing effectiveness and efficiency, and to adopt an industry code of conduct.
Further to these goals, the Ontario government noted in its fall economic statement, released November 6, 2019, that it will conduct a legislative review of the Credit Unions and Caisses Populaires Act, 1994, the
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Mortgage Brokerages, Lenders and Administrators Act, 2006 and the Co-operative Corporations Act.
Review of the credit union legislative framework is already underway, as comments on the consultation document, A Modern Framework for Credit Unions in Ontario: Reducing Red Tape and Increasing Investment, were due by August 16, 2019. Among other things, the consultation asked for input on: how to make it easier for credit unions to do business and compete in Ontario; dispute resolution processes and the need for an ombudsperson; regulatory treatment for centrals and leagues, noting that most Ontario credit unions are members of Central 1, a British Columbia central; a securitization and funding framework; business and investment powers, particularly in respect of investments in FinTechs; access to capital; improving the consumer experience and consumer protection; unclaimed deposit framework; corporate governance; and enabling innovation.
Review of the mortgage broker legislation is also underway. The Report on Legislative Review of the Mortgage Brokerages, Lenders and Administrators Act, 2006 (Report), which is the outcome of the five-year statutory review of the Act, was released on September 30, 2019. The Report notes that the creation of FSRA represents an opportunity to “right-size” regulation for the sectors it oversees. The Report included a recommendation to require specialized licensing education for brokers who deal and trade in areas of practice that demand added knowledge and skills.
We expect to see themes emerge across the credit union, insurance and mortgage broker industries as FSRA works to modernize legislation, harmonize and consolidate its guidance, and develop or adopt industry codes that reflect the common issues that arise in regulating all of these sectors.
BCFSA assumes responsibilities On November 1, 2019, the BCFSA started operations and assumed the responsibilities of the Financial Institutions Commission of British Columbia (FICOM), including overseeing credit unions, trust companies, insurance providers and intermediaries, and mortgage brokers, and administering the Credit Union Deposit Insurance Corporation.
Like FSRA, the BCFSA is also tasked with taking a more modern approach to regulation and ensuring consistency with other regulators. The creation of the BCFSA resulted from a 2017 independent review which followed the B.C. auditor general’s report of deficiencies at FICOM, including a failure to keep up with international industry standards. As a result, we expect to see the BCFSA undertake similar modernization and harmonization initiatives to those announced by FSRA. that are incidental to their business activities (e.g. credit insurance). This regime may be similar to the restricted agent licensing regimes in Alberta, Manitoba and Saskatchewan. The rules and requirements of this regime will be established by the Insurance Council of British Columbia.
NOTABLE DEVELOPMENTS IN CONSUMER PROTECTION LAWS Customer suitability – which has traditionally been the focus of insurance intermediary and securities advisor regulation – has been more broadly adopted within the financial
Also on the horizon are changes proposed by The Financial Institutions Amendment Act, 2019 (Bill 37), which received Royal Assent on November 28, 2019. These include: n new rules for the online sale of insurance in B.C. that will be set out in the regulations (not yet released), as well as in additional rules adopted by the BCFSA; n a requirement for insurance companies to adopt and comply with a code of market conduct that will be established by the BCFSA; n a requirement for credit unions to adopt a code of market conduct, which, as in Ontario, may be derived from the Canadian Credit Union Association’s Market Conduct Code, that must be filed with the BCFSA; n a requirement for credit unions to establish complaints resolution procedures, which must be published on the credit union’s website and made available upon request; n the introduction of a regime for restricted insurance agent licensing for parties such as lenders that sell specific types of insurance services sector. A particular focus has been on enhanced regulation to protect vulnerable consumers such as seniors and high cost of credit borrowers. We discuss four developments on trend below.
Code of Conduct for the Delivery of Banking Services to Seniors After numerous consultations, the Canadian Bankers Association released the Code of Conduct for the Delivery of Banking Services to Seniors. This voluntary code of conduct applies to banks when delivering banking products and services to Canada’s seniors and is overseen by the FCAC. The term ‘seniors’ is defined in the code as an individual in Canada who is 60 years of age or older and who is transacting for a non-business purpose.
While some aspects of the code will not come into effect until January 1, 2020 or January 1, 2021, as of July 25, 2019, banks should: take into account market demographics and the needs of seniors when proceeding with branch closures (Principle 6);
and endeavour to mitigate potential financial harm to seniors (Principle 5). Principle 5 may be challenging, as it requires front line staff to balance security with autonomy and many providers report difficulties in convincing seniors of the reality of romance scams and other types of financial scams and abuse aimed at seniors.
New high-cost credit regimes Alberta followed Manitoba’s lead and implemented a high-cost credit regime on January 1, 2019, while Québec’s regime came into force on August 1, 2019. were the new requirements regarding credit cards. Controversial changes include higher mandatory minimum payments, a subject which was widely covered by the Québec media. Credit grantors and lessors are also required to assess the consumer’s capacity to repay a loan or make their lease payments, which is not required under any other provincial lending legislation.
Bill C-86 Industry consultations regarding the regulations under the new federal consumer protection framework introduced in October
We are still waiting for regulations to be published that will implement the proposed high-cost credit regime in British Colombia (set out in Bill 7 – 2019: Business Practices and Consumer Protection Amendment Act, 2019). This regime will impact lenders and lessors in British Columbia who charge rates that meet or exceed the “high-cost” threshold. If British Columbia follows Alberta and Manitoba’s lead, this threshold will be an effective rate of 32 per cent or above per year.
Implementation of Bill 134 in Québec Financial services providers operating in Québec were extremely busy in the first half of 2019 as they worked to implement the numerous changes set out in Bill 134, an Act mainly to modernize rules relating to consumer credit and to regulate debt settlement service contracts, high-cost credit and loyalty programs and the accompanying regulations.
The most significant changes set out in Bill 134 came into force on August 1, 2019. Among the most challenging to implement
2018 (Budget Implementation Act, 2018, No. 2) took place over the course of 2019. Federally regulated financial institutions continue to grapple with the wide-ranging implications of the Bill, including the enhanced sales practices provisions.
FINAL THOUGHTS With so many developments in progress, 2020 will be a busy year. In addition to following these developments closely, we are also interested to see if and how governance and compensation frameworks will converge across the sector to align with these market conduct objectives and themes.
This article was first published by Osler (osler. com). The authors are partners at Osler, a leading business law firm practising internationally from offices across Canada and in New York. Lawrence E. Ritchie is partner, Litigation; Victoria Graham is partner, Corporate; and Elizabeth Sale is partner, Banking and Financial Services. Osler retains all rights to the article that was originally published on legalyearinreview.com
Judith Robertson, appointed commissioner of the Financial Consumer Agency of Canada in 2019.
A NEW FCAC COMMISSIONER Lucie Tedesco stepped down as commissioner on June 3, 2019 after 11 years with the Financial Consumer Agency of Canada (FCAC). After a brief interim period, Ms. Judith Robertson was appointed commissioner effective August 19, 2019 for a five-year term.
At the time of her appointment, Ms. Robertson sat on the FSRA Board as one of its founding Board members and was previously a commissioner of the Ontario Securities Commission (OSC) from 2011 to 2017. Prior to that, she had extensive experience as an executive in the capital markets and financial services industry.
As of November 2019, the FCAC had not posted any new decisions for the period following former commissioner Tedesco’s final Decision #134, posted on June 4, 2019. Consequently, we do not have any published evidence as to how the FCAC may approach decisions differently under Ms. Robertson. Given the breadth of the new commissioner’s experience, and in particular her experience with the OSC, it will be interesting to see how the FCAC evolves under her tenure.
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