The Ontario Consumer Protection Act, SO 2002, c 30, Sched A (the "CPA") contains provisions requiring lenders to provide extensive financial disclosure to consumers. Although the consequences of a lender's non-compliance can be severe, including punitive or exemplary damages payable to the consumer, case law on the disclosure provisions of the CPA is relatively sparse. Accordingly, the Ontario Superior Court's recent decision in Lexfund v Ferro et al, 2016 ONSC 4113 ("Ferro") is particularly valuable for illustrating the lender disclosure requirements and the court's interpretation thereof.
The Plaintiff in Ferro, Lexfund Inc., is a corporation that loaned money to various personal injury claimants to assist them in financing their litigation, medical and living expenses, and other disbursements pending a resolution of their motor vehicle accident claims. The claimant borrowers had all retained the law firm of Ferro & Company to represent them and it was Mr. Ferro himself who arranged Lexfund loans for each of his clients. All communications were made directly between Mr. Ferro and Lexfund and all loan documentation was sent from Lexfund, directly to Mr. Ferro, who was to forward it onto his various clients. The loan documents, which were completed by Mr. Ferro on behalf of his clients, set out the amount being borrowed, the underwriting fees, and the interest rate. Each of the client borrowers also executed an irrevocable direction authorizing Mr. Ferro to pay the loans upon settlement of their various court actions.
All of the borrowers' actions ultimately settled and the clients believed that Mr. Ferro had repaid the Lexfund loans with the funds received. Unfortunately, Mr. Ferro failed or otherwise refused to repay the loans owing to Lexfund and, unbeknownst to his clients, the loans had continued to accrue interest and accumulate in quantum. When Mr. Ferro subsequently declared bankruptcy and passed away, Lexfund brought an action against the client borrowers for repayment of their various loans and argued, among other things, that since disclosure was made to Mr. Ferro as lawyer for the claimant borrowers, it was his responsibility to provide the information to his clients. The borrowers defended by asserting that Lexfund was not entitled to claim any interest on its loans, as it had breached the disclosure obligations under the CPA.
The Court examined the CPA and the regulations thereto with respect to disclosure requirements and observed that the main objectives of the CPA are to protect consumers and to restore the balance in contractual relationships. Accordingly, any failure by the lender to fulfill an obligation imposed by the CPA gives rise to a presumption of prejudice to the consumer.
The Court found that Lexfund had not met several of its obligations. Lexfund's main breach, however, was in respect of its disclosure obligations to the borrowers. The CPA mandates lenders to provide both initial disclosure, before the borrower enters into a loan agreement, and subsequent disclosure, which accounts for changing circumstances as time passes after the loan agreement has taken effect. As explained by the Court, the initial loan documents must include clear, accurate and timely information respecting the amount being borrowed, the interest rate and the current loan balance. Subsequent disclosure is required to show a borrower how the amount owing is changing month by month. This is essential to show borrowers how much of their future settlement they would have to pay out, as it will affect the instructions they give their counsel and enable them to make informed decisions about how to proceed in their claim. Despite these requirements, the Court noted that Lexfund had failed to forward any disclosure whatsoever to the individual borrowers.
Consequently, the Court held that the defendants were "prejudiced by the severe lack of disclosure which prohibited them from making the best decisions they could make with respect to the subject credit facility." In failing to provide completed loan documents, monthly statements or any other loan details directly to the individual borrowers, Lexfund was found to have flagrantly breached its obligations under the CPA. To put it another way, Lexfund could not rely on Mr. Ferro to supply documentation to the borrowers, as the CPA clearly mandates that a lender must provide disclosure to the borrower, and not their agent or representative. Due to Mr. Ferro's actions, the borrowers were unknowingly paying a high rate of compound interest on the full amount of their loan, despite not having access to it.
Ultimately, the Court held that Lexfund's breach of the CPA precluded it from claiming any compounded interest of up to 24% on its loans as stipulated in the loan agreements. However, the Court found that the borrowers could not have expected to acquire an interest-free loan, and it therefore found the individual borrowers were liable to pay Lexfund a greatly reduced amount that incorporated an interest rate of only 5% per annum. Especially in light of this significant penalty to Lexfund, lenders should consider the Court's reasons in Ferro as essential guidance concerning the full extent of their obligations pursuant to the CPA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
