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November 3, 2008

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Law Times • November 3, 2008 Asset Review Professional Appraisal Opinions - Trusted Values Find a professional real estate appraiser www.oaaic.on.ca 416-695-9333 Focus On REAL ESTATE LAW New act may mean some mortgage loans 'illegal' A 'Time bomb' on Bay Street BY GRETCHEN DRUMMIE Law Times be a "time bomb" for some of the biggest lenders on Bay St., warns a Toronto lawyer in the field. "There's a sector of the busi- ness community doing, or think- ing about doing, mortgage loans that are technically illegal," says Jeffrey Lem, a partner at Davies Ward Phillips & Vineberg LLP, who sounded the alarm during a recent interview with Law Times. The new act, which came into effect this past summer, is designed to control the broker- ing of mortgages, and puts in place registration and licensing requirements on those who en- gage in this type of work. But, Lem says, in his opinion the act is "a little bit too broad." He says that now the lenders glitch in the new Mortgage Brokerages, Lenders and Administrators Act could themselves are required to be li- censed, and while there are exemp- tions for entities such as financial institutions, there are a host of lenders who don't fit into that cat- egory as defined in the exemption. "You have a whole class of these large institutional lenders who lend mortgages but aren't financial institutions," explains Lem, including large pension funds, private equity funds, and those that regularly make invest- ments, including in security and real estate. "The problem now is, I doubt if they're licensed, and the question is, is what they are doing technically illegal? "Unfortunately, as I read it, the act seems to catch more than what we traditionally think of as 'mortgage brokers.' If a person or entity is 'dealing in mortgages,' 'trading in mortgages,' 'carrying on a mortgage lending business,' or 'administering mortgages,' then such person must have a ents, for example, or like lenders, "even though they are sophisticated and huge, are exempted and would therefore be caught by the require- ment to obtain a licence." Lem admits "some lawyers would say there's no such thing as technically illegal, but frank- ly, technically they are illegal under this new act. "It just came into effect in July 'There's a sector of the business community doing, or thinking about doing, mortgage loans that are technically illegal,' says Jeffrey Lem. 'broker's licence,' or some valid exemption," says Lem. "Mortgage lending in turn is defined as lending 'money in On- tario on the security of real prop- erty.' This would appear to catch all secured lending transactions in which real property security is granted — arguably even if the real property is not actually located in Ontario so long as the loan was booked here," says Lem. "There does not seem to be an exemp- tion in the act or the regulations for commercial transactions or transactions above a certain size. "Financial institutions, in turn, are exempted from the re- quirement to be licensed, but 'fi- nancial institutions' seems tightly limited to banks, authorized for- eign banks — within the mean- ing of s. 2 of the Bank Act (Can- ada) — credit unions, insurers, loan and trust corporations, and retail associations, as defined under the Cooperative Credit Associations Act," he says. Lem sees the problem being that it doesn't appear that private equity funds or pension fund cli- more concern about "the con- sumer protection angle. Why broaden the exemptions, I think was the [government's] attitude." Lem has a solution: "What they should do is introduce exemptions for either large transactions like a threshold. "Anything above $5 million is not consumer protection. This legislation is designed to protect widows and orphans from un- scrupulous brokers. People bor- rowing or lending more than $5 million are not vulnerable, innocent customers." He says this "would have been so there haven't been a lot of loans out there that are illegal," he says noting that currently there isn't "a lot of lending going on." Lem notes that "Steven Pearl- stein, of Minden Gross, one of the first practitioners to rec- ognize this potential problem, made a presentation to the prov- ince on behalf of the Ontario Bar Association before the act was passed," warning that many of the "large pension funds would get swept up as the exemption doesn't cover them." He says there appeared to be the mortgage; does that become illegal?" "We're not sure what hap- pens to the mortgages," he says. "Most of us think the mortgage is probably still okay, but who- ever made the loan gets the fine." Lem thinks that once the credit crisis passes "what will happen is a lot of the larger lenders will say, 'We're not doing that deal in Canada.' And the Canadian ones will register, muttering about red tape but do it because they do business in Canada. The Canadi- ans will probably comply; it's all the offshore guys who do two or three big deals in Canada a year who will say 'it's too much hassle for this deal.'" He says "hassle" is the real prob- lem. "It costs money to get the licence and you have to appoint somebody to go and get it. And it can't be a lackey; [but] you can't get the senior cats to sit down and get the licence." Lem says it's not clear that the situation was different under the old Mortgage Brokers Act, but "it seems as though lawyers have just become sensitized to the is- sue after the passage of the new replacement legislation. This is a key point. While it is 'new' in that Bay St. lawyers are only now getting worried about the issue, it very likely has been there for some time as a potential time bomb." So, Lem says he's "sounding the alarm that when things get better [in the economy] we've got to get this fixed otherwise we have to warn our clients that there is this problem. I don't think the government intended this consequence. It's easily fix- able, but can you catch their at- tention long enough? I can do it in one sentence." Stakes are higher BY GRETCHEN DRUMMIE Law Times A a real problem" but due to the eco- nomic crisis "nobody is lending." However Lem notes, it will even- tually be an issue and the large firms are taking notice. "It affects Bay St. more than Main St. [yet] ironically it's legislation designed for a Main St. audience." Lem adds that the $64 bil- lion question is: "What happens to to lawyer who works in the field. Julie Robbins' advice: Know your obligations — it's more vital ssignment, subletting, and other transfers of commercial leases are always significant issues, but they are even more important during difficult economic times, says a Toron- than ever. "During economic downturns parties are going to find that they are dealing with these issues more frequently and the stakes may be higher. So, it's all the more important to make sure that you are aware of what your obligations and responsibilities are," said Robbins, an associate at Fraser Milner Casgrain LLP, during the firm's real estate seminar held recently before a packed house in their downtown Toronto offices. Robbins said transfer provisions are something she's been dealing with in her practice lately, and they're "important" for both landlords and tenants. "From a landlord's perspective you put a lot of time and money into choosing your tenants and you want to make sure that any suc- cessor is going to satisfy your requirements as did the original tenant," See Reserve, page 13 PAGE 9 LT Generate, search and submit documents for registration, then manage the transfer of closing funds — all from your desktop. The Conveyancer® www.doprocess.com Software Teraview® www.teraview.ca Software Closure™ www.closure.ca Service Access to and use of the services and products available are subject to terms and conditions, availability and pricing, all of which can be changed without notice. © 2008 Teranet Inc. Teranet, Teraview and the Gateway design are registered trademarks of Teranet Inc. Closure is a trademark of Teranet Enterprises Inc. The Conveyancer is a registered trademark of Do Process Software Ltd. All rights reserved. Untitled-13 1 www.lawtimesnews.com 4/16/08 4:25:13 PM 3571/04.08

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