What is a “private” mortgage?
A “private” mortgage is any mortgage not excepted by section 24(2) of By-Law 9. These are funds, which are advanced usually from an individual, a corporate client or group of clients, rather than funds advanced by a financial institution.
The following questions can help you determine if the transaction is classified as a “private” mortgage:
- Do you act for private lenders?
- Do you receive money from private lenders?
- Do you act on mortgages arranged through mortgage brokers or other third parties?
- Do you act for lenders on mortgages where the lender is not a financial institution?
Note: Mortgage loans through RRSPs are not loans provided by a financial institution; the lender is the plan holder.
I am confused as to what is considered to be acting for clients on a private mortgage transaction and what is arranging a mortgage transaction?
Acting is the preparation and registration of documents pursuant to client instructions, certifying title, reporting, charging a legal fee, etc. Arranging (not necessarily a business) is being involved in the negotiations between the lender and borrower. A brokerage or arranging fee may be charged. Merely giving the name, address and telephone number of a lender to a borrower by itself does not constitute arranging a mortgage.
When are Forms 9D and 9E required?
The Forms are required whenever a lawyer "acts for or receives money from a lender" (section 24(1) of By-Law 9). A lender is defined in section 1(1) of By-Law 9 as "a person who is making a loan that is secured or to be secured by a charge, including a charge to be held in trust directly or indirectly through a related person or corporation."
However, section 24(2) sets out the transactions in which the Forms are not required. The exceptions are, where:
a) the lender,
i. is a bank listed in Schedule I or II to the Bank Act (Canada), a licensed insurer, a registered loan or trust corporation, a subsidiary of any of them, a pension fund, or any other entity that lends money in the ordinary course of its business;
ii. has entered a loan agreement with the borrower and has signed a written
commitment setting out the terms of the prospective charge, and,
iii. has given the licensee a copy of the written commitment before the advance
of money to or on behalf of the borrower;
(Note: all three conditions must apply)
b) the lender and borrower are not at arm's length; [Note: "arm's length" is defined in sec.1(1) of By-Law 9 as having the same meaning as in the Income Tax Act (Canada)]
c) the borrower is an employee of the lender or of a corporate entity related to the lender;
d) the lender has executed the Investor/Lender Disclosure Statement For Brokered Transactions approved by the Superintendent under subsection 54 (1) of the Mortgage Brokerages, Lenders and Administrators Act, 2006, and has given the lawyer written instructions, relating to the particular transaction, to accept the executed form as proof of the loan agreement;
e) the total amount advanced by the lender does not exceed $6,000; or
f) the lender is selling real property to the borrower and the charge represents part of the purchase price.
See the Appendices for samples of completed Forms 9D and 9E.
What is the purpose of Forms 9D and 9E?
The Forms were developed to ensure documented communication between lawyers and their clients. Written instructions reduce allegations of miscommunication and failure to follow client instructions. The Law Society's goal is to ensure that the public is protected and to reduce claims and complaints by lender/clients to the Lawyers' Professional Indemnity Company and the Lawyers Fund for Client Compensation.
Form 9D contains the written instructions from the lender. It crystallizes the transaction and is available for confirmation purposes in the event of an Errors & Omissions claim. Form 9D is a prescribed form and may not be changed. Every point on the form must be completed, with “N/A” being noted only if the point is not applicable, for example: Form 9D paragraphs 8a, 8b, and 8c are always applicable and should not be answered “N/A”; the legal fees paid are to be specified and to whom paid in paragraph 14 of Form 9D and paragraph 15 of form 9E, and the investor’s answer to question B2a must be initialed by the investor. Form 9D must be signed and dated by the lender before the first advance of money to or on behalf of the borrower.
Form 9E, or a reporting letter that answers all of the questions in Form 9E, is your report to the lender and should be fully completed and dated after the mortgage registration and sent to each lender within 60 days of the mortgage registration.
What if the mortgage is arranged through a mortgage broker?
While Forms 9D and 9E would normally be applicable, the transaction may be exempt provided that the lender:
a) has executed the Investor/Lender Disclosure Statement for Brokered Transactions, approved by the Superintendent under subsection 54(1) of the Mortgage Brokerages, Lenders and Administrators Act, 2006,
b) has given the licensee written instructions, relating to the particular transaction, to accept the executed form as proof of the loan agreement. Section 24(2)(d) 7(2)(d).
May I act for both lender and borrower in a mortgage transaction?
Rule 2.04(11) of the Rules of Professional Conduct which came into effect November 1, 2000 prohibits a lawyer, or two or more lawyers practising in partnership or association, from acting for, or otherwise representing, both lender and borrower in a mortgage or loan transaction unless the transaction falls under one of the exceptions in Rule 2.04(12). The exceptions are:
a) the lawyer practices in a remote location where there are no other lawyers that either party could conveniently retain for the mortgage or loan transaction,
b) the lender is selling real property to the borrower and the mortgage represents part of the purchase price,
c) the lender is a bank, trust company, insurance company, credit union or finance company that lends money in the course of its business,
d) the consideration for the mortgage or loan does not exceed $50,000, or, the lender and borrower are not at "arm's length" as defined in the Income Tax Act (Canada).
Please note that Independent Legal Advice does not meet the requirements of Independent Legal Representation. If a mortgage transaction does not meet the requirements of subsection 2.04(12) the other party must either be legally represented throughout the transaction by another lawyer, in which case subrule 6.03(7) applies or the other party is unrepresented, in which case subrule 2.04(14) applies.
When reviewing the Rules of Professional Conduct to determine whether you could be considered to be representing both lender and borrower, keep in mind the following points:
When you act for a lender, there are essentially three situations with respect to the borrower:
i. The Borrower is Represented (ILR) - subrule 6.03(7)
- You communicate only with the borrower’s lawyer throughout the transaction
ii. The Borrower is Unrepresented - subrule 2.04(14)
- You urge the borrower to obtain independent legal representation i.e.retain his or her own lawyer
- You ensure that the borrower does not believe you are looking after his or her interests, and
- You make clear to the borrower that you are acting solely in the interests of the lender and therefore your comments may be biased.
You should convey the above three points to the unrepresented borrower in writing at the first opportunity.
iii. You represent the Borrower - subrules 2.04(6), (7), and (8)
- Where permitted by subrule 2.04(12), you may also represent the borrower if you have obtained the written consent of both the lender and borrower before you begin to act for the borrower: Depending on the circumstances, you may or may not refer the borrower for independent legal advice (ILA); e.g. if the lender is one of your regular clients.
If you are unable to produce documentation establishing either situation i) or ii) exists, it will be assumed that situation iii) applies, and depending on the circumstances, i.e. prohibited transaction [subrule 2.04(11)] or no consents [subrule 2.04(6)], it could result in a finding that you are not in compliance with the Rules of Professional Conduct.