assignment 11 intro to mortgage law Flashcards
A borrower has agreed to accept a loan from a lender in the amount of $200. In one year, the borrower will need to repay this loan, along with $130 in interest. Which piece of legislation or statutory provision would automatically render this loan illegal?
- The Criminal Code
- Section 10 of the Interest Act
- Section 3 of the Interest Act
- The British Columbia Mortgage Brokers Act
correct Answer: 1
The Criminal Code makes it an offence to agree to charge interest at a criminal rate, which is defined as an effective annual rate that exceeds 60%. This applies to all types of loans. Section 10 of the Interest Act deals with the right of prepayment of mortgages. Section 3 of the Interest Act states that if a document does not mention interest, no interest may be charged. Finally, the Mortgage Brokers Act deals with the regulation of persons who deal with mortgages.
Fanny granted a mortgage to Fly by Night Finance Co. with a term of five years and no right of prepayment until the expiration of five years. At the end of the five year term, she accepts a three year extension of the term, also without a right of prepayment. According to the extension agreement, the date of the mortgage is deemed to be changed to the date of the extension agreement. Which of the following is TRUE?
- Because Fanny is an individual mortgagor (i.e., not a corporation), she has an automatic right to pay out her mortgage, so the provisions against prepayment are not enforceable.
- Because Fanny is an individual mortgagor with a mortgage having (now) an eight year term during which prepayment is prohibited, she may tender the full amount owing plus three months’ interest to Fly by Night, and no further interest is chargeable.
- Regardless of how long the mortgage term is, Fly by Night may refuse prepayment to Fanny, and Fanny has no rights in this regard unless the restriction on prepayment lasts so long that it constitutes a clog.
- The prepayment privilege in the Interest Act does not apply in these circumstances and therefore Fanny cannot prepay her mortgage until the new three year term expires.
Correct Answer: 4
Option (4) is the correct answer because it is a true statement. Section 10 of the Interest Act provides a right of prepayment where the mortgagor is an individual, and where a mortgage prohibits prepayment for a period exceeding 5 years. In calculating this 5-year period, the courts will add together the original term with the terms of all extensions unless the renewal agreement (also known as an extension agreement) deems the date of the original mortgage to be changed to the date of the renewal. When this happens, the renewal will have to exceed five years for section 10 of the Interest Act to apply. Options (1), (2), and (3) are incorrect for this reason.
Elliot, a representative for City Wide Realty, entered a listing agreement with Belinda to sell her house for $450,000. Within a month, he found a purchaser, Lorraine, who was willing to buy the house for the list price. After Lorraine arranged a mortgage with National Bank for $275,000, she told Elliot that she was still short on funds. Elliot suggested a vendor take back mortgage, to which Belinda agreed, and proceeded to prepare an offer which provided for a vendor take back mortgage in the amount of $220,000, which mortgage would rank behind National Bank’s mortgage. Which of the following statements are TRUE?
a. Elliot has a duty to ensure that Belinda receives adequate security for the loan extended to Lorraine.
b. If accepted, this offer would leave Belinda under-secured.
c. The federal Interest Act would not impose a limit on the rate of interest which Belinda could charge Lorraine with respect to the mortgage transaction.
d. Under the Mortgage Brokers Act, Belinda would be regarded as a mortgage broker.
- All of the above
- A, B, and C only
- A and B only
- C and D only
Correct Answer: 2
Elliot, as a licensee, has a general duty to protect the best interests of Belinda C this includes ensuring that the vendor receives a fair price for her property and that she receives adequate security for the loan. Statement A is therefore correct. Statement B is also correct because this arrangement would result in a situation where the total of the first and second mortgages would exceed the total purchase price of the property. Statement C is correct because the Interest Act does not limit the rate of interest which can be charged in a mortgage transaction, although provincial legislation or the Criminal Code may apply. Statement D is incorrect because under the Mortgage Brokers Act, a person must make at least ten mortgage loans in a year in order to be defined as a mortgage broker.
Homer owns Simpsonacre, and decides to transfer ownership of his property to his friend Flanders for $50,000 to raise capital to open a beer parlour. The transfer documents allow Homer to remain in his house rent-free for the duration of the agreement. Homer also has the option of having the property transferred back to him if, within 5 years, he repays Flanders the $50,000. The main purpose of this transaction was for Homer to offer land as security for a loan from Flanders. Which of the following is TRUE?
- This is a transfer agreement which will be fully carried out if Homer does not repay Flanders the $50,000 within 5 years.
- The transaction is a mortgage. After 5 years, Homer cannot regain title to the property.
- This is a transfer agreement. However, because Homer has an equity of redemption, Flanders can recover his $50,000 upon demand.
- The agreement is a disguised mortgage and Homer will have the right to redeem Simpsonacre free and clear upon repaying Flanders the $50,000.
Correct Answer: 4
Option (4) is correct because if it is demonstrated that the main purpose of the transaction was to offer land as security for a loan, the court will find the arrangement to be a mortgage, and will recognize the equity of redemption. Options (1) and (3) are incorrect because the main purpose of the transaction was to offer land as security for a loan, and so it is a mortgage, not a transfer agreement. Option (2) is incorrect because since the transaction is a mortgage, Homer can regain title to the property through the equity of redemption.
mortgage is NOT:
- a tool that allows parties to purchase an interest in land while financing a portion of the purchase price.
- a loan.
- security for a loan.
- an interest in land.
Correct Answer: 2
A mortgage is not a loan. Legally, it is an interest in land created by contract as security for a loan.
In September of 1994, Hilary borrowed money from Big Bucks Bank to finance the launching of her new health food store. As security for the loan, Hilary mortgaged her house. In 1997, Christine bought the house and assumed the mortgage. One year later she stopped making payments on the mortgage. Which of the following statements is TRUE?
- Big Bucks Bank cannot sue Christine because she was not a party to the original mortgage agreement.
- If Big Bucks Bank fails to demand the outstanding payment from Hilary by December 1999, her liability will be extinguished by virtue of the Property Law Act provisions.
- After an order absolute, Hilary would only be liable for any amount still outstanding after foreclosure on the property.
- None of the above
Correct Answer: 4
Only option (4) is correct. The Property Law Act provides a means of circumventing the privity of contract principle, and allows a lender to take direct action against a current owner. The provisions of the Property Law Act which limit a vendor’s liability in the case of default in an assumed mortgage are not applicable if the loan was not initially for a residential purpose. Finally, if the lender elects to pursue an action in foreclosure, following the order absolute the lender will no longer be entitled to pursue the borrower on the borrower’s personal covenant to pay.
Beasely owns a house subject to a 5 year mortgage granted to Mah’s Finance Co. The mortgage provides that it can be assumed with the permission of the lender. Willy wants to buy Beasely’s house and assume the mortgage which still has three years left to run. Mah’s agrees to the assumption but informs Beasely that it still intends to hold Beasely liable if Willy defaults. Which of the following statements about the Property Law Act is TRUE?
(1) The Property Law Act does not apply on these facts since the mortgage involved is a residential mortgage.
(2) If Beasely telephones Mah’s and Mah’s give oral consent to the assumption of the mortgage, then Beasely is free from all liability under the mortgage.
(3) Mah’s may not refuse unreasonably to grant the assumption, and if Beasely satisfies the requirements of the Act then Mah’s will not be able to continue to hold Beasely responsible for Willy’s performance of the mortgage obligations.
Both (2) and (3) are true.
Correct Answer: 3
The Property Law Act provisions regarding an original borrower’s release from liability upon assumption of the mortgage apply only to residential mortgages. To release the original borrower from liability, the lender’s approval of the new purchaser must be in writing.
An equitable mortgage can be created in each of the following ways EXCEPT:
- by registration in the land title office of the duplicate certificate of title.
- by mortgage of the equity of redemption.
- by an agreement to give a mortgage.
- by disguising a mortgage as a transfer.
Correct Answer: 1
In British Columbia, mortgages are generally registered as charges against the land and the first registered mortgage is treated like a legal mortgage. Any subsequently registered mortgage will be an equitable mortgage charging the borrower’s equity of redemption. To properly create an equitable mortgage with a duplicate certificate of title, it is necessary to acquire the certificate from the land title office and to then deposit it with the lender.
Because she has been transferred, Velma lists her home for sale at a price of $100,000. She bought the house only 6 months ago, and at that time financed the purchase by means of an $80,000 mortgage with a 3 year term. She receives an offer from ABC Ltd. for the full purchase price, payable by $20,000 cash, and the balance by ABC Ltd. assuming the $80,000 mortgage. The president and sole shareholder of ABC Ltd. is a very wealthy real estate developer easily able to afford the payments. Which of the following statements is TRUE?
- The financial profile of ABC Ltd. is crucial because the company, not its president, is assuming the mortgage.
- If house prices are clearly going to remain stable over the balance of the term of the mortgage, Velma need not worry about the assumption of the mortgage.
- The financial profile of ABC Ltd. is irrelevant if the rent it can collect on the house will cover the mortgage payment.
- All of the above
Correct Answer: 1
Unless the president of ABC Ltd. is guaranteeing the loan, only the company’s finances are relevant. Stable house prices will not offset the accrual of interest if default occurs; further, if ABC Ltd. renegotiates with the same bank, Velma’s liability on the personal covenant may not necessarily end at the expiration of the term. Relying on rent as the means to make payments is very risky for a vendor, because it does not take into account what will happen if the property remains vacant.
Which of the following statements about section 10 of the Interest Act are TRUE?
a. Section 10 only applies to residential mortgages of $150,000 or less.
b. Section 10 provides an absolute right to prepay a mortgage after 5 years from the date of the mortgage.
c. Section 10 does not provide corporate mortgagors with the right to tender prepayment of a mortgage.
d. After the mortgagor has made a tender in accordance with section 10 the mortgagee may not claim any additional interest.
e. An individual mortgagor will be able to make a tender under section 10 after 5 years have elapsed from the date of the mortgage.
f. If, at the end of the term, the parties renew the mortgage for an additional 5 years and move the date of the mortgage forward, the mortgagor will not be eligible to prepay their mortgage in accordance with section 10., until another 5 years has elapsed.
- C, D, E, and F only
- A, C, and D only
- B and D only
- A, B, and D only
Correct Answer: 1
There is no distinction drawn between residential and commercial mortgages under section 10 of the Interest Act. The only distinction is between individual and corporate mortgagors, the latter may not prepay under section 10. The right to prepay is not absolute. Firstly, it does not apply to a corporate mortgagor, and secondly, the mortgagee is not obliged to accept the tender, it is simply precluded from charging any further interest after a tender.
Vendor “take back” mortgages:
- may be used when the purchaser cannot obtain a loan through a bank.
- are limited to a maximum loan value of 75% of each subject property’s value.
- are ranked lower in priority than mortgages held by institutional lenders.
- are secured both by the land and by the vendor’s guarantee of the lending institution’s loan.
Correct Answer: 1
Vendor take-back mortgages may be used when the purchaser cannot obtain a loan through a bank. Vendor take-back mortgages are not limited to a certain value. Like other mortgages, their priority is a function of contract and of time of registration. There is no lending institution involved in a vendor take-back.
The Interest Act provides that:
- if a document does not mention interest, then only 5% per annum is chargeable.
- if a document mentions interest, but does not specify the rate of interest chargeable, then the rate prevailing in the community is chargeable.
- if a mortgage document does not mention interest, then no interest is chargeable.
- if a mortgage does not require interest at a set rate after maturity or default, the lender can only collect interest at the rate of 5%.
Correct Answer: 3
Option (3) is correct because section 6 of the Interest Act provides that if the mortgage document does not contain a statement of the interest rate calculated either “yearly or half-yearly not in advance,” then no interest can be charged. Option (1) is incorrect because if a document does not mention interest, then no interest is chargeable. Option (2) is incorrect because if a document mentions interest but does not specify the rate of interest chargeable, then the rate allowed by law is 5% per annum. Option (4) is incorrect because if a mortgage does not require interest at a set rate, then no interest can be charged.
When an order absolute is obtained by a petitioner who is in the position of a second mortgagee:
- the petitioner may sell the property after taking title to it and the petitioner does not have to account to the mortgagor for any profit made.
- the petitioner will be entitled to recover the mortgage debt upon sale of the property, but must account to the borrower for any surplus amount.
- in the case of a shortfall between the sale proceeds and the mortgage debt, the petitioner can sue the borrower on the borrower’s personal covenant to pay.
- in order to sell the property, the petitioner must obtain the approval of the court.
Correct Answer: 1
Once a petitioner has been granted an order absolute, the petitioner can transfer title into their name and deal with the property as their own. If the petitioner later sells the land, there is no requirement to account for any profit; however, if there is a shortfall, the petitioner cannot later sue on the personal covenant. The granting of the order absolute is the court’s authority to the petitioner to deal with the property as their own, no further approval for any action is required.
The Interest Act provides a number of rules relating to the charging of interest. Which of the following is not one of them?
- Where a mortgage calls for blended payments of principal and interest, a statement must appear in the mortgage showing the principal amount and the rate of interest calculated annually or semi-annually not in advance.
- Where a mortgage term provides for the payment of interest on default, unless the term specifies the rate of interest payable, the lender will be limited to 5%.
- The interest rate on arrears may not exceed the rate payable on the principal not in arrears.
- Where interest is not mentioned in a mortgage, only a rate of 5% can be charged.
Correct Answer: 4
While the first three options are all in the Interest Act, Option (4) is not. Where no interest is stipulated in a mortgage, none may be charged. However, if an indication of some interest exists, but the actual rate does not appear, a rate of 5% may be charged.
CLAUSE A: In case the borrower defaults and the mortgagee has to take legal action to recover the mortgage monies, the mortgagee may retain an amount equal to three months at the specified rate of interest by way of indemnity.
Which of the following statements is TRUE?
- Clause A is an enforceable clause designed to protect a mortgagee from bearing expenses related to recovering its money where a borrower defaults.
- Clause A is a clog on the equity of redemption and for that reason is unenforceable.
- Clause A is a collateral advantage which is unenforceable under the Consumer Protection Act.
- Clause A is an indemnity clause which is unenforceable because it offends against the Interest Act.
Correct Answer: 4
The Interest Act prohibits the interest to be charged when the loan is in arrears from exceeding the rate chargeable when the loan is in good standing. The penalty amount provided for in an indemnity clause has the effect of raising the interest rate in arrears above the rate payable when not in arrears, thus offending the Interest Act. For this reason, it is unenforceable.
