The decision in Lexfund Inc. v. Ferro illustrates the importance of complying with the cost of credit disclosure requirements of the Consumer Protection Act (Ontario) (the “Act”). In this case, the lender was found to have “flagrantly” breached the Act for failure to provide its borrowers with the disclosure statements required under the Act.
Lexfund loaned money to the defendant borrowers to fund a motor vehicle civil action. The borrowers retained Ferro & Company to represent them in the civil action. Mr. Ferro arranged for the loans to the borrowers. The loan documents were the same, other than dates, loan amounts and interest rates. The loans had a feature that provided that if the action was unsuccessful, then repayment of the loan was not required. The loans did not have a fixed term and were to be repaid upon settlement of the action. The action was settled, but the loans were not paid. The borrowers argued that they believed that Mr. Ferro was repaying the loans.
Loan application procedure
The borrowers did not have any communication with Lexfund. Mr. Ferro completed all loan documentation on behalf of the borrowers. The borrowers attended his office to sign blank loan application forms. Once the loan application forms were approved, the borrowers signed a copy of their respective loan agreement, which contained an acknowledgment by the borrower of receipt of Lexfund’s “Explanatory Notes Regarding Lexfund’s MVA Loans” and authorized the borrower’s lawyer to complete the application. When the loan application process was completed and approved, funds were transferred into Mr. Ferro’s trust account. Each client provided Mr. Ferro with an irrevocable direction that authorized him to repay the loans upon settlement of the action.
Mr. Ferro had not provided his clients with the loan disclosure statements received from Lexfund. The initial interest rate for the loans ranged between 19.5% and 24%, with interest compounding monthly. The borrowers argued that Lexfund had not complied with provisions of the Act and was therefore not entitled to any interest payments. The borrowers submitted that they had not been provided with the following information, required to be disclosed under the Act:
- Initial credit limit
- Annual interest rate
- Date interest began to accrue
- Each element of the cost of borrowing
- Default charges
The position of the borrowers was that Lexfund did not give the required disclosure within the prescribed time period under the Act and where it did give the disclosure it was not to the right persons (i.e., the borrowers) and the disclosure did not comply with the requirements of the Act.
Findings of the court
- The loan documents were signed in blank and therefore no disclosure could have been made at the time the borrowers signed.
- Completed loan documents and disclosure statements were never provided to the borrowers. Lexfund could not rely on Mr. Ferro to provide the disclosure to the borrowers.
- The borrowers were not provided with appropriate loan disclosure to calculate interest.
- Lexfund “flagrantly” did not comply with the Act, precluding Lexfund from the interest under the loans. However, the Act provides for instances where a consumer can be bound, where a court determines that it would be inequitable in the circumstances not to do so. While the court precluded Lexfund from receiving interest up to 24%, it determined that the borrowers could not have expected to receive an interest free loan. Thus the borrowers were liable to pay 5% simple interest commencing from the date each obtained their loan.
Lenders should be cognizant of the implications of this decision. It is not sufficient to rely on a third party to provide cost of credit disclosure to a borrower and, when providing the disclosure, it is important to comply with the disclosure requirements set out in the Act.