Many mortgage professionals are not properly serving their clients when recommending private mortgages.

FSRA reviewed 101 private mortgage transactions between April 1, 2022 and March 31, 2023 and found that about 65% had missing, incomplete or inconsistent documentation of suitability assessment and rationale. This was an increase of 9% when compared to our first round of private mortgage examinations.[1]

The consequences of failing to properly document the suitability assessment can be severe:

You can’t demonstrate compliance because there is no documentary evidence to show the recommended mortgage is suitable for the client’s needs.

You might not get paid because your principal broker or compliance department can’t assess the transaction for compliance with regulatory requirements and/or internal brokerage policies.

You might put your licence in jeopardy because you can’t show the regulator that you met a key consumer protection requirement of the Mortgage Brokerages, Lenders and Administrators Act, 2006 and/or its regulations.

You may face legal challenges because you can’t prove to your Errors & Omissions insurer or a court that you took reasonable steps to present a suitable product (if a transaction is disputed).

Know your client

By law, mortgage professionals are required to know their client.[2]

Verifying borrowers’ identities is the first step to reasonably determine whether they are allowed to mortgage a given property.[3]

It also helps protect your practice from being used to facilitate crime such as identity theft leading to title fraud.

Of the 101 transactions we reviewed, missing or inadequate identity verification was observed nearly 20% of the time.

FSRA’s revised Interpretation Guidance for Detecting and Preventing Mortgage Fraud, which provides minimum expectations and best practice recommendations, will be published by fall of this year.

Disclosure

Clear, complete and understandable disclosure to borrowers builds trust with clients and reduces risks.

Informed clients are more confident about your advice and product recommendations. They’re also less likely to abandon a transaction due to last minute “cold feet.”

Moreover, they’re less likely to file complaints or errors and omissions insurance claims.

Nearly half of the transactions had disclosure documents which did not contain specific information. Rather, they merely indicated “see commitment.”

In some cases, borrowers were directed to review information which was absent from the commitment. It was instead in the standard charge terms, which were not provided.

If information is not being written directly in the disclosure form, best practice includes (at minimum):

  • providing a copy of the document(s) containing the required information
  • identifying the document name and section where the information can be found (standard charge terms, lender’s schedule of fees)

In addition, about 32% of transactions had missing, incomplete or unclear disclosures of terms and conditions.

Managing disclosure of multiple roles

Typically, the brokerage and its brokers and agents are intermediaries for consumers. Borrowers often assume the brokerage/broker/agent is an impartial third-party working in the borrower’s best interests. This assumption is not always correct. For example, the recommended lender may be the broker or agent’s spouse, a potential or actual conflict of interest.[4] In some cases, where the lender is the brokerage’s related mortgage investment entity, the brokerage may choose to only represent the lender in the transaction.[5]

Brokers should advise borrowers about potential and actual conflicts of interest clearly and at the earliest opportunity.[6]

This allows borrowers to decide whether they wish to proceed or engage their own representation.

Late-stage disclosure may be perceived as disingenuous or outright misrepresentation.

[1] In the first round of exams, FSRA reviewed 39 transactions, 22 of which had insufficient documentation of suitability assessment and rationale.
[2] As required by O. Reg. 188/08, s. 10, Duty to verify customer’s identity, and s. 11, Duty to verify other party’s identity.
[3] As required by O. Reg. 188/08, s. 13, Duty re borrower’s legal authority.
[4] O. Reg. 188/08, s. 26, Disclosure of brokerage’s relationships, and s. 27, Disclosure of conflicts of interest or potential conflicts of interest
[5] O. Reg. 188/08, s. 18, Disclosure re role of brokerage
[6] O. Reg. 188/08, s. 35, Deadline for disclosures to borrowers.