Archive for February, 2008

Mortgage Enforcement – When and Where

Monday, February 25th, 2008

Perhaps one of the biggest initial questions I am asked is “how long do I have to try and pay off the bank before I lose the property?”  The answer to that depends on the situation and what stage of enforcement the lender is at before I am consulted by the client or potential client.

As will be seen later in the series, loss of the property through foreclosure or judicial sale occurs after a Statement of Claim has been issued in the Ontario Superior Court.  Once the Statement of Claim has been issued, the lender has up to 6 months to serve it.  Most lenders, however, will want to effect service quickly.  Once service occurs, then the borrower has a guaranteed 20 days (more if the borrower resides outside of Ontario) to put in a defence or a request to redeem.  If a request to redeem (a form saying, in effect, I want to pay off the lender but just need a little time to do this) is filed, then the borrower can have another 60 days at least to pay the money to the lender.

Foreclosure actions and judicial sales are far less frequently used than the Power of Sale.  The power of a lender to sell the property secured by a mortgage most often exists in the terms of the mortgage itself.  However, if you have a relatively simple mortgage (often involving private lenders), the Ontario Mortgages Act also provides for a statutory power of sale.

The starting point is the determination by the lender when it will start the enforcement proceedings.  Whether the lender is relying on the Mortgages Act or the terms of the mortgage for the power to sell, the Act requires that a Notice of Sale cannot be sent until at least 15 days after the mortgage goes into default.  That is the minimum.  Beyond this it is a question of how long the lender will wait until it “pulls the plug” on the mortgage.  My experience has been that most larger financial institutions will generally wait 3 to 4 months before they start power of sale proceedings.  Private lenders are less forgiving.  That said, if a recession hits the lenders could either increase the amount of time being given (in the hopes that the real estate market would improve before they try to sell the properties) or it could cause them to act more quickly to get whatever they can get while they can get it.

Once a notice of sale has been sent, the lender will be required to give a minimum 35 day notice period of the intention to sell the property (in the case of power of sale terms in a mortgage) or 45 days notice (in the case where the mortgage is silent and the lender is relying on the power provided in the Act).  There is then a further divergence between mortgage-based powers of sale and legislation-based powers of sale.

Where the mortgage permits a power of sale, the notice of sale cannot be sent until 15 days after default and must give a minimum of 35 days notice of the intent to sell.  This gives the borrower a guaranteed minimum of 50 days after default to try and either put the mortgage into good standing or to pay off the lender.  After the expiry of the 50 days, the lender can start the sale.  However, where the mortgage does not provide for a power of sale, and so the lender has to rely on the power under the Mortgages Act, then even though we have the same 15 days before the notice can go out and then there is the 45 day notice period (for a total of sixty days – or two months), the Act further provides that the sale cannot occur until at least 3 months after the default – so that is the minimum provided for that situation.  That said, 90% + of mortgages will contain power of sale provisions, so you would most likely find yourself in the 50 day minimum situation.

In terms of “where” the enforcement will take place, this is really only an issue for foreclosure or judicial sale proceedings.  As set out above, these start with the issuance of a Statement of Claim.  Suppose you own the property in Toronto and the lender is also based in Toronto.  It would stand to reason that you would be sued in Toronto, right?  Not necessarily.  The lender can sue anywhere in Ontario that it wishes unless a Rule of Civil Procedure or the Mortgages Act prohibits this.  The Act is presently silent on the issue and Rule 64 does not restrict lenders to suing in the judicial district where the property is located (although this has been suggested several times over the years).  So, it is fairly common practice for lenders to start their lawsuits in “smaller” judicial centres.  For example, I know of one large bank that uses the Hamilton office of one of my former firms to process all of its mortgage claims.  I know another lender who uses the Brantford court office to do all of its claims for loans throughout the province.  Why would they do this?  Because the smaller judicial centres are not as busy as the larger ones (such as Toronto, Ottawa and London).  This way the claims get issued quicker and, if no defence is put in, default judgments are obtained more quickly as well.  So, if you have property in Toronto and your lender is here as well, don’t be too surprised if you suddenly find yourself being sued by the lender in the Superior Court based in Orangeville.  That said, the current mode of thinking among politicians is “how do we help out the little guy without making it too unfair for the lenders?”  A simple amendment to the Mortgages Act requiring the lenders to sue in the judicial district where the property is located may give borrowers a few extra days’ grace while the lenders send their claims out to non-centralized locations.  Who knows, that might just happen.


Mortgage Enforcement – Who and What

Monday, February 25th, 2008

At first blush the “who” of mortgage enforcement is simple – the lender sues the borrower.  Unfortunately, it’s not that simple.  The starting point is the mortgage documentation itself.  You should note that the “mortgage documentation” can often be more than the document entitled “Mortgage”.  Why is that?  Because it is not uncommon for third parties to be involved.  If there is a third party, then this increases the definition of “who”.

The classic example of a third party involved in mortgage enforcement is a guarantor.  This could be the principal person running an incorporated business.  It could also be the parents of a borrower who agreed to guarantee their son’s or daughter’s mortgage because without the guarantee the lender would not lend the money.

So, the first question any small business or individual should ask when the mortgage has not been paid is “who is on the hook for this mortgage?”  The answer to this question can determine how well you can sleep at night.  For example, if you have an incorporated company and have NOT given a personal guarantee, you can sleep fairly secure in the knowledge that the bank cannot take your house.  Conversely, if you have given personal guarantees this can create problems.  I currently have a file where there are several shareholders who gave personal guarantees for their company.  Suffice it to say, since they are all facing personal losses they are not too thrilled with each other right now and the problems which lead to the company’s demise are being exaccerbated by the stress of the personal exposure.

Beyond the “classic” example, though, there are other issues that can affect the “who” part of the equation.  For example, it is not uncommon for lenders to assign their rights in a mortgage or other security.  Companies can purchase entire mortgage portfolios from lenders.  Why is this done?  From the lender’s perspective it is easier to get $0.60 (or whatever discounted rate is used) for each dollar owed and to avoid the hassle of having to collect on the mortgage.  From the purchaser / assignee’s perspective, the hope is that the difference between what it paid on the mortgage and what is owed on the mortgage will be enough to allow it to make a profit.  So, if I pay a bank $50,000 for an assignment of a $100,000 mortgage that has gone into default, my hope is that either I get paid off by the customer (in which case I make a 100% profit) or the results of my enforcement efforts gets me something more than $50,000 plus my enforcement costs and gives me a profit.  This may be the explanation why you receive demand letters or are sued by XYZ Capital Corporation when your mortgage was originally with ABC Bank.

In terms of “what”, again we do not have things quite as simple as they seem.  The typical situation is, again, the lender suing the borrower for non-payment of the mortgage.  As we have seen already, there may also be the lender suing the guarantor.  There is also a third situation – where the mortgage documentation contains not only the mortgage and guarantee but also collateral obligations such as promissory notes. 

For example, in the late 1980s and early 1990s, condominium developers had potential purchasers agree to accept a proportionate share of any mortgages on the property and then either pay the balance in cash or else give the developer a promissory note.  Suppose I wanted to buy a condominium unit for $100,000.  If CMHC mortgage insurance was not available, then the maximum that could be paid by mortgage would be $75,000.  If I did not have the other $25,000 in cash, then I could pay that amount by signing a promissory note.  Suppose further that later on I make arrangements for the payment of the $75,000 mortgage (or the unit is sold and the proceeds take care of the $75,000 owing along with the lender’s legal costs).  I can still face a lawsuit from the developer or any assignee who holds the promissory note.  Thus, in the Place Concorde decision which is set out elsewhere in my web site, the investors purchased units in a Calgary condominium and lost the building to the mortgage lenders and there was a shortfall but the mortgage lenders did not go after the investors for the shortfall.  However, I represented two different financial institutions that held the promissory notes given as part of the payment for the units in addition to the mortages and my clients ultimately obtained judgment against hundreds of investors for almost $10,000,000.

“Who” and “what” are determined primarily by the mortgage documentation, so you should ensure that you keep copies of all those documents.  However, it is possible that the “who” can be modified if an assignment of the enforcement rights subsequently occurs.


Mortgage Enforcement – Start of Series

Monday, February 25th, 2008

I have started to see an increase in new clients or potential clients making inquiries about mortgage enforcement work.  At this point it is about a 3 to 1 ratio of people with private lenders threatening or commencing enforcement measures to those with financial institutional lenders (ie. big banks) making enforcement claims.  This is not particularly surprising since the private lenders (a) tend to lend to those the big banks won’t touch and are more skittish when defaults occur (although often this is with good reason); and (b) don’t have as large a portfolio as the big banks so they “feel the pinch” more quickly.

With all the warning signs of a recession on the horizon, it is likely that mortgage enforcement matters will increase even if a full-blown recession does not hit and will definitely increase if a recession does occur.  So, I have decided to start a series of posts to provide some basic information regarding mortgage enforcement matters.  This will affect both individuals as well as small business owners where the businesses own their offices/factory/working areas.

I will focus primarily on mortgage enforcement but will make mention on occasion of related types of litigation.  The series will be set out as follows:

1. Who and What types of enforcement;

2. When and Where can the enforcement occur;

3. How does enforcement happen – with separate posts on powers of sale, judicial sale and foreclosure actions; and

4. The aftermath from the loss and sale of the property.

I hope you find this series to be helpful.


Lawyers & Families – Rant

Thursday, February 21st, 2008

The Toronto Star is reporting today that one of the Law Society of Upper Canada’s working groups will be recommending that a “pilot project” will call for firms with over 25 lawyers to develop maternity leave and flexible work policies for associate lawyers.  Good luck.

Let’s suppose for a moment that the firms actually agree to this.  The Law Society wouldn’t be able to impose the project on the firms, but I can see them following it out of a desire to avoid the embarrassment of being a “non-conformist”.  The problem is that this project is likely to fail.

Problem #1: These programs simply do not work.  Over a decade ago a female colleague convinced our firm to allow her to work “part time” so that she could spend more time with her kids.  What did “part time” mean?  In the end, she was physically in the office 3 days a week, but still worked almost as many hours as if she was working full time.  Why is that?  Because her clients didn’t care if it was her day off – if an emergency came up or they needed advice right away they needed to speak to her.  More importantly, if they couldn’t speak to her, there was a wide variety of other lawyers out there who could be called for that advice.  Despite the desire of lawyers to think we’re still in a guild, it is a service profession with plenty of competitors.  If my client cannot reach me today, she’ll call someone else and that person may end up eating my lunch.  That was the reality 10 years ago and it’s even more the reality today in the age of Blackberries and Treos.

Problem #2:  The pilot project is focusing on the plight of female lawyers.  I have absolutely no quarrel with the obvious fact that female lawyers have it worse than male lawyers because in most families the majority of the child-raising responsibilities fall to women.  The problem, though, is that this issue doesn’t just affect female associates.  To give an interesting example, I left the big law firms to start up my firm so that I could spend more time with my family.  I was in court the other day on an injunction matter and the male lawyer on the other side had done roughly the same thing – he left another big firm to go to a two-person firm.  Male associates are feeling the same pressures – granted, not as acutely, but this is not just a “female lawyer” situation.  Moreover, if “relief” is given to female associates, then someone has to pick up the slack and that’s going to be childless female associates and male associates.  You can expect to see more male associates start to “vote with their feet”.  When that happens, the large firms will decide that the pilot project should be scrapped.

Problem #3: Supply and demand.  For every large law firm associate there are several associates at smaller firms wishing they could be at the large law firms getting the higher pay and higher profile files to work on.  When I left, the large firm simply had others take over the work that I was doing and life went on.  If associates are leaving because they cannot, or will not, work the hours required, AND if there is an easy supply of replacement lawyers, life at the big firms will simply go on.

Is life at the big firms bad?  No.  It’s simply one of life’s trade-offs.  You get paid large amounts of money and are required to work long hours.  If you are willing to make that trade-off then good for you.  If you are not, then away you go to a smaller firm or a different profession.  It is no different from investment bankers, stock brokers or any other professionals (accountants, engineers, etc.).

In the end, I wish the Law Society good luck in trying to implement the pilot project.  But I won’t hold my breath waiting for it to succeed.  It seems to me, though, that the better approach would be that of a female lawyer in the U.S. I recently read about who is giving lectures to those interested in going to law school to tell them that (a) only a few will make the really big bucks; (b) after law school the student loan debts can be crushing; and (c) work and life are not very balanced in the profession.  If life as a lawyer is going to be a trade-off, at least let people know what they’re going to have to compromise before they start.  If they make that choice, they cannot later complain about it because they knew what they were getting themselves into.  Similarly, while not named in the article, the Catalyst Consulting report which quantified the loss per associate to the law firms at $315,000 has been around for a couple of years now.  If the large law firms have done nothing to retain associates, they similarly cannot complain at associate attrition.


Class Action Reduction?

Wednesday, February 20th, 2008

I have written a couple of times now on criminal interest rates.  Those posts have looked at complaints against financial institutions or larger companies that charged late fees or something similar.  In each case, the complaint took the form of a class action.  For example, in Markson the complaint was that MBNA was charging a fee of around $7 or $8 for cash advances.  Even if you were constantly taking cash advances against your credit card, the total of the fees would not be sufficient in most instances to justify the costs of litigation.  Enter the class action.  $7 alone for me is not worth suing over.  But take that $7 and multiply it by a million cash advances for all customers and suddenly this is money worth fighting over.

Markson and similar cases derive their strength from a couple of decisions out of the Supreme Court of Canada involving a similar dispute between Gordon Garland and Enbridge (back then, Consumers Gas).  After two rounds of litigation going all the way to the Supreme Court and losing both times, Enbridge settled the class action suit against it.

What is interesting, though, is that after the settlement, Enbridge applied to the Ontario Energy Board for permission to pass the costs of the settlement on to its gas customers.  The National Post has reported that the OEB has agreed to the request.  Moreover, similar requests will be made by other utilities if and when they have to settle or pay on class action litigation.

Part of the justification for class action lawsuits is that they can act as controls on corporate actions.  However, if the results of the lawsuits are simply passed on to consumers (and in the case of utilities to some of the very people who “win” the lawsuits), it makes me wonder if this objective will be achieved.  As such, it also makes me wonder if there will continue to be class action lawsuits – at least against utility companies.  I’m not saying whether this is a good or bad result.  It just makes me wonder if we didn’t end up spinning our wheels (at least partially).


Company Cell Phones

Wednesday, February 20th, 2008

A few years ago when I was still at one of the big law firms an e-mail was sent around to all the lawyers detailing a lawsuit in the U.S. against a large law firm.  A lawyer at the firm was busy talking on her cell phone for business purposes and was too engaged in the conversation to notice a pedestrian.  The lawyer’s car hit the pedestrian and killed him and the family sued not only the lawyer, but also the law firm.  The argument was that the law firm was charging out the lawyer’s time and was making money from the lawyer being on the phone, so it should be responsible for the results that occurred.  The e-mail that went around strongly recommended that the lawyers should refrain from using their cell phones while driving.  Beyond the e-mail, though, I never heard anything more about the case until recently.

I was reading the latest issue of Canadian Lawyer magazine yesterday and there is an article on the issue of cell phone use in the car by employees.  It mentioned the case against the law firm and I learned that the law firm, not surprisingly in the circumstances, settled the case.  However, the article went on to discuss a few other U.S. cases that have gone to trial and the employers have been found liable for damage caused by their employees while they were doing business on their cell phones and driving their cars at the same time.  To date no Canadian judgments have been given on this issue, but it appears to be only a matter of time.

Small businesses may want to take this potential liability into account – especially when they are being bombarded with promotions such as the recent one by Bell Canada where a new subscriber to Bell’s Blackberry service will get four additional Blackberrys (I’m sure they’re older models) for free to give to their staff and they can all share on the same voice/data plan.  It sounds like a good promotion and I’m sure it’s worthwhile from a general business perspective.  But it may come with a very large hidden price if the employer does nothing to ensure that the Blackberrys’ use is restricted when the employee is driving.  Something to think about.


Sale of Goods Contracts / Jurisdiction Clauses

Wednesday, February 20th, 2008

The English House of Lords released a decision today involving the shipment of cider from England to Cyprus.  The key question was where were the goods “delivered” and therefore which court should have jurisdiction over the lawsuit.  The contract itself stated that the law of England would govern the contract, and it also specified that the “place of delivery” was a location in Cyprus.  When the Cypriot company did not pay for the goods, the English company sued in the English courts.  The Cypriot company (based upon wording in the European Union legislation) argued that the courts of Cyprus ought to hear the case, and not the English courts, since delivery (and thus contractual performance) was to occur in Cyprus.  The clear use of this tactic was to force the English company to go all the way to Cyprus to obtain judgment at, I am sure, considerable expense – which would have either forced a settlement or caused the English company to drop the litigation.

The House of Lords (and all courts below) disagreed with the Cypriot company’s position.  The Court reviewed section 61 of the English Sale of Goods Act, which is similar to Section 31 of Ontario’s Sale of Goods Act, that provides that unless there is some indication to the contrary in the contract, the delivery of goods by a seller to a carrier shall be considered delivery to the buyer.  For the House of Lords, delivery by the English company to a shipping company in Liverpool was “delivery” (and therefore contractual performance) in England and the English courts had jurisdiction to hear the case. 

The Court then went on to discuss whether the presumption that delivery had occurred in England had been rebutted.  Ultimately, the Court determined that the presumption had not been rebutted – after a lengthy discussion of the differences between FOB (“free on board”) and CFR (“cost and freight”) forms of shipping goods and the legal effects of both. 

The key issues for small businesses to take from this decision are:

(1) The fact that this dispute could have been avoided in a relatively easy fashion by adding to their contract a jurisdiction clause which specified that the courts of a certain place had exclusive jurisdiction to hear any disputes arising from the contract and that all parties agreed to attorn (or go) to only that place’s courts to determine the disputes.  If a seller in Ontario is selling goods to a buyer in New York, it would be easiest (and less costly) for the Ontario seller to sue in Ontario and then to have the Ontario judgment recognized in New York; and

(2) Care should be given in conducting inter-provincial or international contracts.  If the law of Ontario, for example, is stated to apply (or determined by the courts to apply) then provisions such as Section 31 of the Sale of Goods Act can prove costly for buyers.  Why?  Because if delivery is deemed to have been made to the buyer when the seller takes the goods to the carrier, then the buyer can be found to bear the risk of any loss.  So, if I sell my widgets to a customer in New York and the widgets are damaged or lost while in transit, the New York customer could be out not only the widgets but also the money owed to me for the purchase price – and unless the buyer had insurance on the goods, that double whammy could be a very hard lesson to learn.  How can you avoid this result if you are the buyer?  A couple of ways: (a) as already suggested, obtain insurance on the goods; (b) ensure that the contract specifies that the law of your province / state will apply (assuming your legal regime is friendlier to your situation); and (c) ensure that the contract terms provide that the risk of loss lies with the seller until delivery at your place of business is made and you have approved the goods as shipped.


Offers to Lease

Friday, February 15th, 2008

I have yet to see an Offer to Lease for commercial property that does not include a provision that the tenant will agree to sign, within a certain number of days after executing the Offer to Lease, a lease with the landlord using the landlord’s standard form of lease.  Where landlords are more generous, the provision will include the ability for the tenant to make amendments to the standard form lease – although usually only for minor non-financial terms.  The Offer to Lease will also provide that the terms of the Offer to Lease will supercede any terms in the standard form lease to the extent that there is a conflict.

When I am advising my tenant clients, I always tell them that they should either get a copy of the landlord’s standard form lease before they sign the Offer to Lease, or else get the Offer to Lease revised to give them a certain number of days (usually 5) to permit them to take the Offer to Lease and, more importantly, the standard form lease to their lawyer to let him/her review it and that the Offer to Lease is conditional upon the lawyer’s approval.  The main reason is that if a tenant signs an Offer to Lease and it has the usual clause in there that the tenant agrees to sign the landlord’s standard form lease AND if it turns out that there is something in the standard form lease that is very problematic and taking it out would not be a “minor non-financial amendment” (assuming that you have a generous landlord) THEN the tenant is stuck.

In most instances, review of the Offer to Lease and review of the standard form lease and ensuring that there is nothing in the latter document that should be changed or addressed in the former document is an issue of primary importance for only the tenant.  However, the Court of Appeal for Ontario yesterday dealt with the situation in 365 Bay New Holdings Ltd where the landlord should have ensured that the Offer and the standard form lease were not inconsistent.  In that case, the landlord and the tenant had agreed on the Offer to Lease but then entered into negotiations with respect to the standard form lease.  The negotiations soured and the landlord put forward its standard form lease for signing with additional clauses that were not reflected in, or conflicted with, the Offer to Lease (and thus for which the tenant had not agreed).  The Court of Appeal held that if the landlord had put forward its standard form lease as modified to comply with the Offer to Lease it would have been upheld as a binding agreement.  Unfortunately for the landlord, since the lease did not comply, the Court of Appeal held that the landlord could not sue the tenant for its refusal to move into the building.

This case helps to show why it is important for both sides in lease negotiations to focus on the terms and conditions set out in the Offer to Lease and to ensure that the subsequent lease properly reflects those terms and conditions.


Re-Litigating Issues

Thursday, February 14th, 2008

The New York Court of Appeals handed down its decision in ICSP two days ago.  The case dealt with a bankrupt tobacco merchant that was required to pay State taxes.  As security for the payment of taxes, ICSP gave a bond to secure payment.  When the merchant went bankrupt, the State called on ICSP to pay on the bond (which it did) and ICSP was then able to step into the place of the State and request payment of the tax amount.  ICSP sued the secured creditor, a bank, for the funds its received from the bankruptcy claiming that the funds were held in trust to pay taxes.  The bank brought a motion to strike the claim on the basis that ICSP and the State could have made this argument in the bankruptcy proceeding and chose not to do so at their own peril and it was too late to make this argument now.  The Court of Appeals has agreed.

The concept of “res judicata” means that once a lawsuit is done and all appeals are finished, that is the end of the matter.  Just like “double jeopardy” prohibits a person from being tried for the same criminal offence more than once, res judicata prohibits a civil litigant from getting “two kicks at the can”.  While some people will know this rule, they will not know that the rule has two parts, known as “issue estoppel” and “cause of action estoppel”.

Issue estoppel is the typical example.  If A sues B for $100 and obtains a judgment for only $50, A cannot try again later to sue B for the other $50 (unless there is a very good reason why A could not have put forward the evidence at the first trial – for example, B covered up his story with lies and fraud that A couldn’t rebut at the time).  Cause of action estoppel, however, involves situations where what is not at stake is not the direct issue but any related issues.  So, let’s suppose that A and B enter into a contract for B to supply A with 1,000 widgets.  B only supplies 500 widgets.  A sues B for $100 for the failure to supply all of the goods and he wins $100.  Let’s suppose as well that A never paid B for the 500 widgets that were delivered.  B could have sued A, in a counterclaim, for payment on the 500 widgets.  Both the failure to deliver and the failure to pay arise out of the same contract and the same transaction.  If B subsequently sues A for the failure to pay, B may face a ruling from the court that B could have and should have raised this issue in the first lawsuit.

In the case of ICSP, the Court of Appeals held that both ICSP and the State could have brought it to the attention of the bankruptcy court that the funds were trust funds for payment of taxes and their failure to do so precluded them from subsequently suing to get those funds.

If you are sued for any reason, you should consider whether you have any claims against the person suing you.  If you do, you should seriously consider whether to assert those claims as, if you do not, you might be denied later on.  The courts will not look kindly to someone who “lies in the weeds and waits”.  Forewarned is forearmed.


Peer to Peer Loans

Wednesday, February 13th, 2008

Ah, the Internet.  If something becomes a problem in the real world there’s now a way to deal with the issue in cyberspace.  For today’s post, the problem is the credit crunch and the response is “peer-to-peer lending.”

What is p2p lending?  Private and/or communal lending.  As one of the new operations in Canada describes its service, a potential borrower provides financial information, credit scores are given and the borrower says how much he/she needs and the maximum interest rate he/she is willing to pay.  The information is then made available to potential lenders who then advise how much they are willing to lend and the lowest interest rate they are willing to accept.  The p2p service then matches up the borrower with the lender(s) at the lowest rate.  It could be a one borrower to one lender ratio or, for example, if a borrower wants $15,000 and there are three lenders willing to loan a maximum of $5,000 at the lowest interest rate then the p2p service will “pool” that money together and arrange for the loan and maintain it by automatically withdrawing the funds from the borrower’s account each month and depositing the funds (or each lender’s share) into the lender(s) accounts (less a service fee).

I am not against such services since there are clear instances where the financial institutions have declined to make loans to worthy candidates.  For example, in the early 1990s loans to restaurants were rarely made since money was tight and restaurants had high failure rates.  Another example, I remember going to a bank to obtain a small loan years ago and I was told that they did not give out loans smaller than $5,000.  I did not need that much so the discussion ended then and there.  That said, there are several potential problems with these p2p services.

Firstly, care should be exercised since the borrowers are usually going to these services after being rejected by the “big banks” and also likely by the smaller banks or credit unions.  The loans will tend to be riskier loans.  Secondly, most loans will be between $1,000 and $25,000.  The smaller the loan the less likely it will be, from an economic standpoint, for you to sue to recoup your money under the belief of “why throw good money after bad”.  Thirdly, there may well be concerns regarding situations where the loan funds are “pooled”.  If a default occurs, who calls the shots in recouping the money?  The one who loaned the most money?  That’s no help in my example above where everyone paid the same amount.  Similarly, who pays the costs of recouping the money?  In my experience, where you have more than one person involved in the litigation, one person almost always pays more than his/her fair share of the costs.

In the end, p2p loan services may be worthwhile.  From a borrower’s perspective it is likely to be very beneficial since it can give another avenue for obtaining personal or small business financing.  From a lender’s perspective, though, there are some significant risks and it will be interesting to see how these new p2p services address the risks.