Predatory Lending: Borrowers Beware

By Mirjana (Mira) Markovic

Law Society of Ontario v. Harrison, 2023

On June 2, 2023, the Law Society of Ontario (“Society”) temporarily suspended the licence of a Mississauga lawyer for allegedly facilitating a predatory mortgage loan scheme involving vulnerable senior citizens.^[1] The Society obtained and reviewed approximately thirty files from the lawyer’s office which all suggested that the lawyer did not take appropriate steps to caution her elderly clients about the onerous terms and high cost of borrowing for such loans. The lawyer further failed to disclose that she was also acting for the lenders in these transactions, which was a clear conflict of interest pursuant to the Law Society Rules and Regulations. With this in mind, let us take a closer look at the concept of predatory lending.

For the full case commentary, please click on the following link: https://www.lawtimesnews.com/practice-areas/real-estate/tribunal-suspends-licence-of-mississauga-lawyer-for-allegedly-taking-part-in-predatory-loan-scheme/376682

What is Predatory Lending?

Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. Some unfair or abusive loan terms include excessively high-interest rates and hidden fees. Such practice convinces a borrower to accept unfair terms through deceptive, coercive, exploitative, or unscrupulous actions. It typically benefits the lender while hindering the borrower’s ability to repay the loan by exploiting a borrower’s desperate circumstances, lack of knowledge of loans and their terms, and finances in general.

Applicable Laws

In Canada, regulations pertaining to predatory lending are governed at provincial, federal, and municipal levels.

Payday Loans, which are considered a type of predatory loan, are regulated at the provincial level. As a result, factors such as how much you can borrow, how long you have to repay the loan, and how much it will cost depends from province to province. The following regulation applies to Ontario under the Payday Loans Act^[2]: $15.00 at maximum cost per $100.00 borrowed; maximum loan amount $1,500.00 (up to 50% of your net income); and the maximum loan term is sixty-two (62) days. Borrowers have a cooling-off period of two (2) business days to cancel such a loan. If a borrower is unable to repay the loan on time, lenders can charge a maximum interest rate of 2.5% per month (non-compounding) on the outstanding amount.

Under section 347.1 of the Criminal Code^[3], charging an annual percentage rate (“APR”) of more than 60% on a loan is a criminal offence. The federal government has recently announced its intention to lower this rate to 35% APR however, this has not been implemented yet.^[4]

Municipalities are also combatting predatory practices by limiting the number of payday loan locations within their respective municipality.^[5]

Beyond government intervention, potential borrowers can also protect themselves through property research and education on this scheme.

Common Types of Predatory Lending

Below is a list of some of the common types of predatory lending schemes that potential borrowers should be aware of:

• Asset-Based Lending: When purchasing and taking out a mortgage for a home, the home itself is typically used as security for the loan. However, a lender may request additional collateral such as the borrower’s car or secondary property, and this may be indicative of a predatory loan;
• Bait and Switch: When the loan agreement is different from what the borrower was promised or expected after discussing with the lender, such as discrepancies in the type of loan or interest rate;
• Equity Stripping/Skimming: A lender offering to buy the property of a borrower facing foreclosure, and agreeing that the borrower can rent and live in the property as a tenant with the intent of reducing the property’s real estate value and making it less attractive to creditors;
• Excessive Fees: A lender charges fees that were never discussed or that are in excess of those charged by reputable lenders;
• False Appraisals: A lender inflates the appraised value of the asset to make the borrower’s loan amount higher, and thus more profitable for the lender;
• Hidden Balloon Payments: A lender offers the borrower terms calling for small monthly payments but also includes the requirement that the borrower makes a large balloon payment at the end of the loan period. These balloon payments can be excessively large, to the extent that when they are due the borrower may need to refinance their mortgage or lose the property due to foreclosure;
• Loan Flipping: A lender requests the borrower to repeatedly refinance their loan, wherein the lender takes fees for each refinancing;
• Loan Packing: A lender adds unnecessary products or services to a loan agreement (commonly credit insurance purchased through the lender) without properly informing the borrower of them, leading to higher costs;
• Negative Amortization: When the monthly payment is so small that it does not even cover the interest the borrower owes on the loan, resulting in an unpaid balance that exceeds the amount originally owed by the borrower;
• Predatory Mortgage Servicing: A lender fails to adequately manage the mortgage, including not sending a payment schedule within 60 days of closing. This can result in the borrower missing payments and being charged excess fees; and
• Reverse Redlining: Lenders target neighbourhoods with low-income borrowers who have few other lending options, resulting in the interest rate the borrower pays is a reflection of their region rather than their credit score, income, or ability to repay.

Further red flags to be mindful of include the lender approving the loan without requiring a credit check, the lender having a history of customer complaints, the loan being too good to be true, and any loan offers received through the mail, telephone, or via door-to-door sales.

Concluding Remarks

Lawyers in Ontario are self-regulated. Like other self-regulated professions, lawyers have onerous obligations to protect the public.^[6] Further, real estate lawyers must protect all parties in a transaction against fraud by ensuring that each transaction is bona fide.^[7] Lawyers who fail to do so risk harming the public and the public interest in the administration of justice. Such lawyers further risk a licence suspension.

Potential borrowers should always be alert to any red flags that signal a lender may be acting unethically or fraudulently. By only borrowing what you need, obtaining secondary quotes, and working with legal counsel that has your best interests in mind, you too can avoid falling victim to predatory lenders.

I hope that this article has provided you with some helpful information. If you have any questions, please do not hesitate to contact me at mira@sorbaralaw.com.