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Breakdown on Fees That Can be Claimed by a Lender.
As a lender, it is important to understand what fees you can legally charge borrowers. While there are many types of fees that lenders may want to charge, not all fees are allowable under the law. It is important to understand what fees are permissible to avoid any legal issues or challenges from borrowers.
The governing law with respect to fees that are allowable is Section 8 of the Interest Act.
Section 8 prohibits mortgagees from charging fines, penalties, or rates of interest on any arrears of principal or interest that have the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.
This section states that no fines, penalties, or increases in interest rates can be charged if they are triggered by a default by the borrower. The purpose of this section was to protect borrowers from interest or other charges that would make it impossible for owners to redeem their property or protect their equity.
The reason for this is that if a borrower is already in default of payment under the interest rate charged on amounts, not in arrears, a higher rate or greater charge on the arrears will render the loss of the property essentially inevitable.
Default fees are a common type of fee that lenders may want to charge. However, they must be careful to ensure that these fees do not offend Section 8 of the Act.
In the case of P.A.R.C.E.L. Inc. v Acquaviva, the Court of Appeal found that default fees and late payment charges offend Section 8 of the Act, absent any evidence that the charges in question reflect real costs incurred by the lender. The only reason for the charges was to impose an additional penalty or fine, thereby increasing the burden on the appellants beyond the rate of interest agreed upon in the mortgage.
Non-Sufficient Funds (NSF) fees:
NSF fees, on the other hand, are permissible if they represent real costs, such as costs incurred by an NSF cheque. In the case of Nesci v. Ramrattan, the court found that no evidence showing costs incurred as a result of missed payments means that it is a penalty.
Rate of Interest:
The rate of interest is another area where lenders must be careful. In the case of Krayzel Corp. v. Equitable Trust Co., the court found that a rate increase from the passage of time alone does not offend Section 8. However, a rate increase triggered by default does infringe Section 8, irrespective of whether the mortgage terms impose a higher rate penalizing default or a lower rate by way of reward.
Renewal fees are also a type of fee that lenders may want to charge. However, they must be careful to ensure that these fees are not a type of penalty and are controlled entirely by the lender. In the case of Cheung v. Moskowitz Capital Mortgage, the court found that an automatic renewal clause that allows the lender to charge a fee for a renewal period is a type of penalty and is in contravention of Section 8.
In conclusion, lenders must be careful to ensure that any fees they charge borrowers are permissible under the law. Section 8 of the Interest Act provides guidance on what fees are allowable, and lenders must be mindful of this section when structuring their mortgages and loan agreements. Any fees that offend Section 8 are not enforceable and can lead to legal challenges and disputes with borrowers. If you have any legal questions or concerns, contact Nava Wilson to schedule a consultation.