chapter 11 interest act 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.
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.
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.
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.
CLAUSE D: In the event the borrower sells or agrees to sell the mortgaged property, the full amount of principal and interest owing shall become due and payable immediately, at the mortgagee’s option.
Which of the following statements is TRUE?
- Clause D is a sales clause which enables a mortgagee to avoid being involved with a borrower who is an unacceptable credit risk.
- Clause D prohibits the assumption of a mortgage.
- Clause D is unenforceable because it offends against the Interest Act.
- Clause D is an enforceable collateral advantage.
Correct Answer: 1
Clause D is known as a sales clause. It prevents a mortgage from being automatically assumable. The clause gives Beauty Corp. exclusive discretion as to whether the mortgage may be assumed or not. The Interest Act only deals with rates of interest chargeable and has no relevance to whether or not a mortgage can be freely assumed. This is not a collateral advantage.
Which of the following statements regarding section 10 of the Interest Act are TRUE?
a. Section 10 gives all mortgagors the right to prepay a mortgage in specified circumstances.
b. If the mortgage is for an amount in excess of $150,000, section 10 of the Act does not apply.
c. If a tender is made under section 10 and the mortgagee does not accept it, the mortgagor is not obligated to make any further payments of interest under the mortgage.
d. The relevant date for the determination of the 5 year period under section 10 is the date of the mortgage or of the mortgage renewal.
- All of the above
- A, C, and D only
- A, B, and D only
- C and D only
Correct Answer: 4
Section 10 of the Interest Act does not apply to mortgagors who are companies. There are no restrictions on the value of mortgages to which section 10 applies.
