Section C: Realization and Claim Submission
The amount of loss is calculated as follows:
Outstanding loan amount: Unpaid principal amount of the CSBF loan at the expiration of the period specified in the notice of default;
- proceeds of security realization, payments by guarantors or sureties, recoveries from the borrower,
- insurance proceeds and all other proceeds;
- taxes that may be reimbursed to the lender;
- any inadvertent overcharges of interest, fees or other charges;
- uncollected taxed legal costs;
- legal fees and disbursements;
- any other third party costs incurred by the lender (excluding lender's employees) while trying to recover the loan or realize on security;
- interest on the outstanding principal amount of the loan, at the rate specified in the loan document, from the date to which the borrower paid interest to the date of the next scheduled payment, plus
- interest at the loan rate above, for a further 12 months or until the claim is paid, whichever is earlier, plus
- interest at one-half the loan rate above, for an additional 12 months or until the claim is paid, whichever is earlier
If a lender inadvertently claims less (or more) than that to which it is entitled, the claim will be adjusted upwards (or downwards).
6.2 Determining the Eligible Loan Amount for Claims
The calculation of the claim payment is based on the eligible loan amount. For each loan class (equipment, real property, leasehold improvements), the eligible cost and proof of payment are calculated as follows in order to determine the eligible amount of the loan:
Bulletin – July 2006
Step 1 — Eligible cost of assets purchased: The eligible cost represents 90% of the total amount (less refundable taxes) in the invoice/purchase contract and for which there is proof of payment. Any invoice/purchase without proof of payment is excluded.
Note: For those loans that require an appraisal, the eligible cost is the lesser of the cost of the eligible assets in the invoice/purchase contract (less refundable taxes) and the appraised value of the eligible assets.
Step 2 — Eligible proof of payment: The eligible proof of payment is the lesser of:
- the amount of the payment that equals the amount of the invoice/purchase contract (less refundable taxes), and
- the amount of the payment if it is less than the amount of the invoice/purchase contract (less refundable taxes) .
Step 3 — Eligible amount of the loan: The eligible amount of the loan is the lesser of:
- Step 1: the eligible cost of assets purchased, and
- Step 2: the eligible proof of payment
The following example illustrates these calculations:
|Class of loan||Amount of the cost of asset purchased less refundable taxes||Proof of payment||Step 1
Eligible cost of asset purchased (90% of cost less refundable taxes)
Eligible proof of payment
Lesser of Step 1 and 2 Eligible amount of loan
|Total Eligible Equipment||$7,490.00||$5,780.00||$6,255.00||$5,710.00||$5,339.00|
|Total Eligible Leasehold Improvements||$6,620.00||$8,600.00||$5,958.00||$6,220.00||$5,958.00|
|Eligible amount of loan||$11,297.00|
Prorating: Legal fees, disbursements, and costs and realization proceeds are applied in a manner that is fair and equitable to all parties (See Section C, Item 3). Where only part of the loan has been determined to be eligible, the pro rata calculation will also take into account the eligible percentage of the loan.
Where legal fees, disbursements, and costs and realization proceeds can be directly attributed to the eligible (or ineligible) part of a loan, they will be applied 100% to that part of the loan.
Costs: Since collection procedures are normally undertaken after default, generally only costs incurred after default are eligible for repayment. However, there may be instances where the costs incurred before default are eligible. The following are the details:
- Costs incurred before default:
- Utilities: Payment of utilities to help a borrower continue its operation is not an eligible cost.
- Municipal taxes: Payment of a borrower's taxes on a secured property while the loan is in good standing (well before it goes into default) would be considered a loan to the borrower and not related to recovering the loan. To be eligible, the lender would have to demonstrate it made efforts to recover the taxes from the borrower prior to default. For taxes paid shortly before default, the lender would be required to show that they were paid only for the purposes of protecting its security.
- Suppliers: Payment of a supplier's invoice, billed to the borrower, is not an eligible cost
- Insurance: Arrears paid to help the borrower continue its operation are not an eligible cost.
- Salaries: Payment of salaries to the borrower's employees is not an eligible cost.
- Rent: If a landlord seizes financed assets or if the assets are included in a negotiated settlement, payment of rent in arrears is an eligible cost only if the premises contain realizable assets that secure the loan, and the appraised value of the assets is greater than the rent arrears.
- Costs incurred after default:
- Utilities: Arrears that form a lien on property, taken over by a lender, are eligible costs. Costs incurred after the lender takes over the property are eligible.
- Municipal taxes: Tax arrears, as well as taxes incurred after a lender has taken over a property, are eligible costs.
- Suppliers: Payment of a supplier's invoice, billed to the borrower, is an eligible cost if a secured asset is being held by a supplier, or a supplier has attached a lien on the asset, or if the work invoiced is necessary to maintain the value of the asset or to maximize its value upon realization.
- Insurance: A lien cannot be placed on a property for insurance arrears, therefore, arrears paid when a lender takes over a property are not an eligible cost. Insurance premiums paid by a lender after it takes over a property, and until the property is sold, are an eligible cost.
- Salaries: Payment of employees' salaries, to operate a business in order to maximize realization of the security, is an eligible cost.
- Rent: If assets must be kept on rented premises to maximize realization, the rent is an eligible cost, provided it is not more than the appraised value of the assets.
Environmental risk/costs: A lender that suspects an actual or potential environmental problem during the administration or the realization process of a CSBF loan should apply the remedial policies and procedures used in their normal course of business.
Legal Fees and Disbursements: Only fees and disbursements directly related to loan recovery are eligible costs.
- Legal Fees and Disbursements incurred before default:
- Costs not related to recovering the loan, such as costs to correct loan or security documents, or to obtain financial information in order to assess risk, are not eligible costs.
- Costs incurred for an action against the borrower or the guarantor or surety in order to realize on asset security or on the guarantee are eligible costs.
- Legal Fees and Disbursements incurred after default:
- Costs incurred to take action against the borrower or the guarantor or surety in order to recover the loan, are eligible.
- Costs paid by the lender on behalf of the borrower, such as the costs for incorporation or services not related to recovering or attempting to recover from the borrower or the guarantor or surety, are not eligible.
Input Tax Credits: In some jurisdictions, lenders can claim an Input Tax Credit (i.e. a tax refund), such as PST and HST paid on costs and legal fees and disbursements paid to third parties in the loan recovery process. Refundable taxes are not eligible for reimbursement on the claim for loss submission.
Interest: Even though the time limit for claim submission may be extended beyond 36 months, the Regulations do not provide for payment of interest beyond the 24-month period as described in 6.1 above. In the case of an interim claim, when a final claim is submitted, interest is based on the holdback amount and calculated as follows (whichever comes first):
- from the date the interim claim is paid until the date the final claim is paid, or;
- until the expiry of the 24-month period.
Application of Proceeds: Where a lender has realized on security collected under guarantees or suretyships, or recovered funds from a borrower, the proceeds will be applied to the principal outstanding on the date these proceeds were received by the lender.
Note: Reversal of a principal and/or interest payment more than 5 working days after it has been applied to a CSBF loan will be disallowed for the purpose of establishing a lender's loss, unless a subsequent payment, for the same or a higher amount, is made by the borrower. If a subsequent payment smaller than the amount reversed is made, the difference between the amount reversed and the amount applied will be disallowed.
Note: The loss sharing ratio between the government and the lender is 85% and 15% respectively. A lender cannot avoid absorbing its 15% share of the loss by taking compensatory security of any kind or by making a claim against the borrower/guarantor after payment of the claim. Act s.8
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