One man’s cautionary tale of debt gone amok
Family home at risk after fees, penalties over missed payments send second mortgage ballooning
O’Neil McLean is a tenacious entrepreneur who thought a second mortgage would give him some breathing room to catch up on bills after he depleted his own savings to bootstrap a business venture.
Instead, that loan has ballooned to three times what he originally borrowed, has dragged him through a costly court battle and put his family in danger of losing their Scarborough home.
McLean fell behind on payments to his two mortgage lenders last spring when he and his wife faced an unexpected financial stress: paying U.S. medical bills for her father, who had prostate cancer.
Amid the mountain of medical bills, McLean received legal notice last July that the mortgage lenders planned to sell his condo to recoup their money.
He has spent the past year trying to stop his lenders from repossessing the home he bought as an investment for his 5-yearold daughter’s post-secondary education.
But his determination has been costly: His second mortgage debt has grown from the $25,500 he originally borrowed to nearly $75,000. The difference is composed of fees and penalties.
About half of those fees are for bills for lawyers — even though he can’t afford his own — because he’s paying the tab for the lawyers hired to sue him.
McLean chose to share his story because he believes the system is stacked against financially vulnerable Canadians like him, allowing lenders and lawyers to take advantage of a disparity between his resources and theirs.
“It literally can happen to anybody and it’s probably happened to someone you know. They just feel ashamed,” he said. “How many people miss two or three months of their loan and then basically have to walk away from their home? Not because they can’t pay their mortgage but because the legal fees that are tacked on are way too excessive?”
Debtors who don’t defend themselves against a legal action are hit with an automatic default judgment against them. Meanwhile, debtors like McLean who choose to fight back in court can rack up thousands of dollars in legal bills and still lose.
“They love it when people fight,” said Ron Alphonso, a feisty mortgage broker who has carved out a niche by offering mortgages to borrowers in default and negotiating with the lawyers suing them.
“There’s a massive power imbalance, the power all resides with the lender and the law firm — it’s like 99 per cent to 1 per cent and the intimidation factor is unbelievable.”
While there are many real estate litigation enforcement firms that act on behalf of lenders, there are few firms that specialize in defending debtors, he said.
“The reason is, there’s lots of money in enforcing it and no money in stopping it. To get anyone to help you to stop it is virtually impossible,” he said.
McLean’s second-mortgage troubles began when he stepped into a CitiFinancial Canada branch in October 2014. Rejected by the major banks, he turned to the loosely regulated alternative, or “shadow lending” market, where companies dole out high-interest loans to high-risk clients.
CitiFinancial offered McLean a loan with an interest rate of 20 per cent — more than five times what majors would charge.
He signed on the spot to the terms: the total repayment of interest and principal would be $57,600 at the end of the loan agreement in 2024.
The contract also included a clause stating he would be on the hook for any costs the lender incurred when trying to collect on the agreement — including outsourcing enforcement to law firms.
CitiFinancial, a Canadian arm of American financial giant Citigroup, says requiring borrowers to pay the legal costs of the lenders is standard industry practice. It added that it is not “at liberty to discuss specific accounts,” but is aware of McLean’s complaint.
CitiFinancial said it provides a high level of transparency to customers, rigorous reviews of its lending practices and sets high standards for its employees. It also has borrowers sign a document acknowledging they had the opportunity to have a lawyer review the loan terms.
McLean admits that he signed without fully understanding the consequences, but added that he feels the documents were confusing and unclear.
“They present it as something you can repay within a reasonable time, but, no, it’s 10 years and you’re paying double what you borrowed,” he said.
Just six months into the loan term, McLean fell behind on mortgage payments to both CitiFinancial and the company that held his original mortgage, MCAP Corp., Canada’s second-largest mortgage finance company. MCAP declined the opportunity to comment.
Combined, McLean estimates he owed the two lenders back-payments totalling about $5,000 at the time.
“I was behind $5,000 and they managed to turn it into $75,000,” he said.
“That alone would make you want to pull out your hair.”
His tab skyrocketed once his accounts were turned over to the lenders’ lawyers, which tacked on thousands of dollars in billable hours.
Last fall, CitiFinancial lawyers at Rigobon Carli took the lead on McLean’s case. The firm said it could not comment on the specifics of McLean’s case, but partner Walter Rigobon said legal fees can accumulate in drawn-out cases “if the client does not meet his or her obligations and new payment agreements need to be drafted or additional legal proceedings are required.”
McLean said his attempts to negotiate a repayment plan were rejected by the lenders, who have no obligation to accept repayment schemes once a debtor defaults.
He rented out his condo to tenants, hoping that income would help his situation. He collected documents and went to legal aid for help. He tried several times to negotiate repayment settlements.
But fed up with being in the middle of legal proceedings, the tenants moved out earlier this month, he said, adding to his distress. In May — when he owed about $30,000 in legal and other fees — McLean persuaded a judge to set aside a court-ordered judgment for possession until the end of July, arguing that he needed more time to file his statement of defence because he was drowning in paperwork, process and particulars.
Almost $20,000 has been added to that tab since May.
McLean’s belief that the mortgage terms were unfair “may raise issues of unconscionability and inequality of bargaining power,” Justice Carole Brown of the Superior Court of Justice said in her decision to stay the proceedings.
“It appeared from his presentation that he did not understand the procedures of the court and was attempting, but struggling, to understand,” she said.
McLean has since been under pressure to make a decision: cut his losses or keep fighting. The lenders offered him a settlement that would see them sell the condo and take what they’re owed.
His bill for two mortgages plus fees and penalties totals $252,000. His condo is worth about $271,000.
If anything is left over after real estate fees, it would go to McLean.
McLean filed a statement of defence Thursday — meaning the clock is still ticking on his legal fees.
He remains convinced a judge will agree that he was the victim of predatory lending, that he has been charged excessive fees and that his repayment plans were unfairly dismissed.
“I’d rather lose the entire equity than tell these people, ‘Hey, you won,’ ” he said.
“I’d rather be the voice of change even if I lost everything while doing it.”