WHAT CAN LEAD TO A CRIMINAL INTEREST RATE?
Section 347(2) of the Criminal Code defines a criminal rate of interest as an effective annual rate of interest, calculated in accordance with generally accepted actuarial practices and principles, exceeding 60% of the credit advanced.
Interest is defined to include all charges and expenses paid or payable for the advancing of credit under an agreement or arrangement by or on behalf of the borrower, regardless of to whom such charges and expenses are or are to be paid or payable. There are specific exceptions to this inclusive definition. Credit advanced is defined as the total value of the benefits actually advanced or to be advanced under an agreement or arrangement, less specified amounts.
The courts have held that section 347 is to cover situations where the agreement or arrangement at the outset requires the borrower to pay interest at a criminal rate. A borrower cannot by its own later act make the interest rate criminal.
The following article written by the Vancouver lawyer Stephen Antle in 1994 gives a great overview of applicable case laws related to criminal interest rate proceedings:
As per the previous article, costs which have been considered interest include the following:
- commitment fees;
- initial fees;
- loan fees;
- loan advance fees;
- facility fees;
- finance charges;
- legal fees;
- extension fees;
- capitalized interest;
- bonus interest;
- compensation for interest lost on money advanced on short notice;
- lender’s costs;
- an increase in the outstanding balance of the purchase price if the borrower does not pay the original balance within a set time;
- amounts the borrower is to pay in addition to repaying principal, for example where the lender advanced $150,000 and the borrower agreed to repay $232,500, plus interest and other charges, in 90 days; and
- the borrower’s estimated share of the profit on resale of the property concerned, which the borrower agreed to pay to the lender in addition to repaying the amount advanced.
Once the amount of credit advanced and the interest payments are determined, actuaries calculate the effective rate of interest by determining mathematically the rate which makes the discounted value of the payments due from the borrower to the lender equal to the amount advanced. This calculates the cost to the borrower, which is the courts’ concern.
The courts have disapproved of determining the effective rate of interest by accumulating both sides of the equation to the maturity date, using a re-investment rate for the money received by the lender from the borrower, because this calculates the return to the lender. This may differ from the cost to the borrower, and is thus irrelevant.
If the effective annual rate of interest calculated by the actuary when accounting for the amount and timing of all interest payments and credit advances is greater than 60%, we have a case involving a criminal interest rate.