Summary of stakeholder comments

Support for Guidance 

Most commenters (eight) indicated strong appreciation for FSRA’s development of guidance to help the sector detect and prevent mortgage fraud. 

Identity Verification and Multi-Factor Authentication

Stakeholders emphasized the importance of identity verification of clients. Some noted identity verification is an essential component of servicing clients and satisfying the anticipated Financial Transactions and Reports Analysis Centre (FINTRAC) compliance requirements. 

As identification verification procedures are quickly expanding to encompass digital, automated processes, five commenters provided recommendations for enhancing identity verification. 

These recommendations include that FSRA: 

• mandate the use of Multi-Factor Authentication (MFA) 
• recommend MFA as a best practice
• provide a plain-language description of MFA
• require that licensees satisfy all three methods of ID verification: (1) Government Issued ID Method, (2) Credit File Method, and (3) Dual Source Method to mitigate any weakness in any one method. 
• include information on the various technologies that can be used to satisfy the ID verification methods 
• introduce enhanced steps for Know-Your-Client (KYC)

The Guidance encourages the use of multiple methods to verifying identity. The guidance identifies the use of multi-factor authentication (MFA) as a best practice. 

FSRA will continue to monitor sector developments regarding the adoption of MFA. Some sector participants view the use of MFA as best practice for ID verification.      

We have included a link to the Digital Identity Authentication Council of Canada (“DIACC”) in the Reference section of the Guidance. 

It is recommended that licensees research the various technologies to determine those that are most appropriate for their business model and operations. 

A definition of MFA is provided in footnote 22 of the Guidance: “MFA is a method of identity verification that uses multiple categories of information (e.g., what the individual knows (e.g., passwords), possess (e.g., debit/credit cards), and who the individual is (e.g., fingerprints/facial recognition). MFA may be done inhouse by a brokerage/administrator or by utilizing third-party solutions.”

Pursuant to section 24(1) of O. Reg. 188/08, a brokerage must take reasonable steps to ensure that any mortgage or investment in a mortgage that it presents for the consideration of a borrower, lender or investor, as the case may be, is suitable for the borrower, lender or investor having regard to the needs and circumstances of the borrower, lender and investor. Such a suitability assessment should be based on an appropriate understanding of the client.

In addition, under the federal government’s proposed changes to the Proceeds of Crime (Money Laundering) and Terrorist Financial Act (PCMLTFA) regulations posted for consultation in February 2023, mortgage sector participants would be subject to the anti-money laundering and anti-terrorist financing obligations of the PCMLTFA and its regulations. Such obligations would include applying customer due diligence measures (e.g., re identity verification and beneficial ownership requirements). 

Steps for Fraud Detection

One commenter suggested including a requirement to search sanction and politically exposed persons (PEP) lists and to include a schedule that lists the products licensees can use to conduct these searches.

Another commenter suggested that requiring mortgage brokerages to submit audited financial statements, including the auditor’s report of any deficiencies in anti-fraud policies and procedures, would help ensure brokerages conduct proper identity and document verification. 

Searching sanction and PEP lists is not a requirement under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA) and its regulations. However, if the PCMLFTA and its regulations come into force, then these will become legal requirements and a failure to comply with such requirements would also constitute a violation of MBLAA.

Nonetheless, licensees may wish to conduct such searches to better know their clients and strengthen their mortgage fraud detection and prevention practices. 

The proposed amendments to the PCMLTFA would require mortgage lenders, brokerages, brokers and administrators to meet the set of compliance requirements prescribed in the PCMLTFA (SOR/2002-184) and FINTRAC guidance (which may include conducting the noted searches).

Section 3 of Ontario Regulation 193/08 requires mortgage administrators to file prescribed financial information with the CEO. Please refer to the following proposed Guidance for additional details, including FSRA’s interpretation of applicable requirements: Proposed Guidance: Mortgage Administrators’ Financial Filing Requirements. It is important to note that MBLAA and its regulations do not impose an obligation on mortgage brokerages to file this type of information.

Examples of red flags for fraud

Two commenters provided additional examples of red flags for fraud including: 

• The profile of the borrower does not conform with the details of the transaction (e.g., a borrower with a strong credit score, good employment, and lots of equity is obtaining a private mortgage at an interest rate considerably higher than what they could qualify for at an institutional lender)
• The borrower requests that the mortgage proceeds be sent to third parties rather than to themselves
• A third party appears to be providing direction to the borrower
• The borrower is unable or unwilling to answer basic questions about the property on which the mortgage is to be registered
• The lawyer providing independent legal advice/representation is unable to speak the same language as the borrower
• Appraisal report with obvious signs of alteration
• Appraisal report with information fields that have been left blank
• Sales and listing history of the subject property that may require further scrutiny (e.g., The property has changed ownership several times over a short period of time with a price increase on each change.

We have expanded the non-exhaustive list of red flags in the Guidance to include many of the commenters suggested red flags for fraud. 

Disclosure and Codes of Conduct 

One commenter noted concern that the proposed Guidance relies heavily on codes of conduct and disclosure as the primary means for deterring mortgage fraud. Such reliance is limited as a means of consumer protection. For example, a code of conduct is typically not enforceable, and there may be inadequate consumer comprehension of disclosure statements (as outlined in the submission by FSRA’s Consumer Advisory Panel). 

Given these limitations, the commenter recommended:

• Prescribing the type of information brokers must provide prospective consumers about any incentives or commissions they receive from lenders for recommending certain loans.
• Setting out minimum standards of conduct that every broker must observe and maintain.
• Establishing a best interest standard for mortgage brokers.

Another commenter noted it would be helpful for FSRA to provide guidance on how disclosure regarding the risks of mortgage fraud could be done without making a client feel that they are in the wrong, when the broker has already taken precautions to determine that there is no misrepresentation and has followed the guidance.”

FSRA has begun incorporating lending disclosure practices (e.g., plain language, user friendly format) to enhance the effectiveness of disclosures required by the MBLAA and its regulations (e.g., proposed revised format for investor/lender disclosure form). 

Enforceable standards of practice for licenses are set out in regulations under the MBLAA:

• Ontario Regulation 188/08 outlines the standards of practice for mortgage brokerages, including the various required disclosures (e.g., role of the brokerage, brokerage relationship with lenders, material risks of the mortgage/mortgage investment, conflicts of interest and fees payable and receivable). 
• Ontario Regulation 189/08 outlines standards of practice for mortgage administrators.
• Ontario Regulation 187/08 outlines the standards of practice for brokers and agents. 

In its supervisory reviews, FSRA highlights non-compliance with all aspects of the Mortgage Broker Regulators’ Council of Canada (MBRCC) Code of Conduct for the Mortgage Brokering Sector and may enforce against those that align with requirements in the MBLAA.

As per section 25(1) of O. Reg. 188/08, brokerages must disclose, in writing, to a borrower, lender or investor, as the case may be, the material risks of each mortgage or investment in a mortgage that the brokerage presents for the consideration of the borrower, lender or investor. Brokers and agents may consider discussing the risks of mortgage fraud in general as part of this disclosure. 

The MBLAA and its regulations, FSRA Guidance and/or Rules are intended to help ensure the fair treatment of consumers. 

The three areas noted (and bulleted in the left column) by the commenter are out of the scope of this consultation. 

Education/Training

Three commenters noted the importance of education and training. They recommended: mandatory training on enhanced client ID rules and identifying suspicious transactions as part of licensing and continuing education. 

Fraud is a key topic in the licensing and continuing education (CE) courses:

• Fraud is a topic in the base mortgage agent licencing courses. See the Mortgage Broker Regulators’ Council of Canada (MBRCC’s) Competency 5: Detect and Prevent Mortgage Fraud. 
• Fraud was a topic in the 2018 and 2020 CE cycles and is expected to be included for the 2026 CE cycle.
• Fraud and ethics are topics in the new Private Mortgages licensing courses required for agents level 2 and brokers. 
• FSRA will consider how education modules/videos on the specific topics recommended by the commenters (i.e., re enhanced client ID rules and identifying suspicious transactions) can be provided for the sector and consumers.  

Role of Principal Broker 

One commenter noted that the role of principal brokers at brokerages and principal representatives at administrators in preventing and detecting fraud should be included in the public consultation on Guideline B-20: Residential Mortgage Underwriting Practices and Procedures by the Office of the Superintendent of Financial Institutions (OSFI). 

An alternative is to make them reporting entities to the Financial Transactions and Reports Analysis Centre (FINTRAC), which will require mortgage brokerage to review clients for Anti-money Laundering.

B-20 Residential Mortgage Underwriting Practices and Procedures is an OSFI guideline and outside of FSRA’s jurisdiction.

The proposed amendments to the PCMLTFA would require mortgage lenders, brokerages, brokers and administrators to meet the set of compliance requirements prescribed in the PCMLTFA (SOR/2002-184) and FINTRAC guidance (which would include requirements for reporting to FINTRAC).

FSRA relies on principal brokers to effectively supervise the brokerage and its brokers and agents. FSRA’s Fraud Detection and Prevention Guidance highlights the role of the principal broker in detecting and preventing mortgage fraud.

Appraisals

One commenter noted the following regarding appraisals: 

• An appraisal should not be older than 3-6 months, especially during periods of real estate market volatility.
• All high ratio or non-conforming real estate transactions must have an appraisal. Other situations may also warrant one. If there is no appraisal for the property, then the broker/agents must explain why there is no appraisal.
   

Clause (3) of s. 31(1) of O. Reg. 188/08 provides that if an appraisal has been done in the preceding 12 months and is available to the brokerage, then a brokerage must, with respect to a mortgage or a trade in a mortgage that the brokerage presents for the consideration of the lender or investor, give each lender or investor a copy of the appraisal of an applicable property.

Nonetheless, during periods of market volatility, it is prudent to obtain more recently completed appraisals as stated in the guidance (i.e., not older than three to six months). 

It is especially important for brokerages arranging mortgages with non-traditional lenders to obtain a copy of the appraisal. This includes all private mortgages, regardless of LTV, and is critical when the lender is an individual private investor. 

Forms and Consequences of Mortgage Fraud

One commenter noted the heading “Forms of mortgage fraud” and “Motivators for mortgage fraud” should be amended to clarify that these sections articulate the consequences that these frauds can have on third-party victims who are not FSRA licensees or involved in the transaction.

Another commenter recommended that the Guidance should expand on the mention of title fraud, one of the costliest forms of fraud, as the mortgage brokering sector is often the conduit for the commission of this type of fraud. We suggest language such as: criminals stealing the identity of a property owner in order to fraudulently obtain mortgage financing resulting in an invalid and unenforceable mortgage for the lender.

We have expanded the number of examples of the consequences of mortgage fraud in the Guidance.

Title fraud usually starts with identity theft and may be perpetrated by any party. Several requirements under the MBLAA and its regulations help guard against identity theft and its harmful consequences and must be met by mortgage brokering licensees. 

As noted in the Detection and Prevention of Mortgage Fraud guidance: 

• In order for policies and procedures to be reasonably designed to ensure compliance with MBLAA, including the prohibition against providing false or deceptive information, FSRA’s view is that they must, at a minimum, include: (i) fraud detection and prevention, and (ii) the duty to conduct identity verification, 
• Brokerages must take reasonable steps to verify a borrower’s legal authority to mortgage a property; and 
• FSRA interprets applicable prohibitions against facilitating fraud, dishonesty, crime or illegal conduct as requiring licensees to ensure the accuracy and truthfulness of documents in a mortgage, renewal or investment transaction.

Further, MBLAA prohibits brokerages and administrators from giving, assisting in giving, inducing or counselling others to give or assist in giving false or deceptive information or documents when dealing or trading in mortgages, acting as a mortgage lender or administering mortgages.  Brokers and agents are prohibited from giving, assisting in giving, inducing or counselling another person or entity to give or assist in giving any false or deceptive information or documents when dealing or trading in mortgages.

FSRA has authority to enforce against contraventions of the MBLAA and its regulations. As FSRA does not have authority to regulate other conduct which is ancillary to mortgage fraud but not prohibited by MBLAA, FSRA assists relevant authorities with potential fraud issues to the extent possible, and refers suspected cases of fraud to law enforcement, as appropriate. 

Fraud Notification

One commenter noted that in addition to notifying potential lenders of applications that may contain false information, brokers and agents should also notify mortgage default insurers. 

This is a particularly valuable step to take, as an applicant who fails to complete a fraudulent transaction with one broker or lender, may try again with another. By making mortgage insurers aware of the potential fraud, they will be better positioned to detect any re-attempts that come through other channels.”

Given that fraud can be committed at different point(s) during a real estate and mortgage transaction, collaboration, and information sharing, as appropriate, among stakeholders and regulators is important in combating fraud.