Licensed mortgage brokerages and related administrators have shown deficiencies in their business practices pertaining to private mortgage investments. These are the findings from a FSRA review focused on private mortgage transactions to better protect mortgage investors.

Why conduct a review?

Growing numbers of Ontario borrowers and investors are opting for private mortgages. As a result, many brokerages have entered the mortgage administration business to provide full service to their mortgage lenders/investors.

Given the current economic environment, mortgage investments have become riskier, and lenders/investors have higher expectations for brokerages and administrators to act in their interests. That’s why we made the brokering and administration of mortgage investments a supervision priority for 2024-2025.

The review

Last fall, we examined nine licenced entities: four brokerages, their related administrators (four) and one additional administrator which had a relationship with one of the brokerages.

We assessed business practices relating to mortgage investments over the life cycle of an investment; and supervision processes, as designed and implemented by principal brokers and principal contacts, within the brokerages and administrators.

Brokerage practices re:

  • marketing
  • product suitability assessment
  • disclosure of investment features and risks to investors at point of sale
  • disclosure of conflicts of interest
  • confirmation of registration of mortgage investments

Administrator practices re:

  • marketing
  • handling of investment funds, including the disposition of mortgage payments made by the borrower
  • monitoring of mortgage performance and notifications of such to investors
  • exercise of decision-making authority delegated by investors
  • disclosure of conflicts of interest

In addition, we also examined supervision processes, as designed and implemented by principal brokers and principal contacts, within the brokerages and administrators.

The review covered 40 mortgage investments from the point of sale by the brokerages to administration by their related administrators, plus an additional 5 mortgage investments administered by an independent administrator.

Findings

Most common findings for brokerages:

  • failure to document product suitability process
  • non-existent disclosure for renewals
  • inadequate disclosure of relationships and conflicts of interest
  • inadequate disclosure of material risks

Most common findings for administrators:

  • non-existent or incomplete mortgage administration agreements (MBLAA requirement)
  • failure to appropriately manage deemed trust funds
  • insufficient monitoring of investments with due and prompt notifications to investors
  • trust account not reconciled monthly

Less common but more egregious deficiencies included:

  • a brokerage placing non-permitted clients (retail investors) in a Non-Qualified Syndicated Mortgage Investment and not reporting it to the Ontario Securities Commission (OSC)
  • an administrator making payments to investors before receiving deposits from borrowers

Implications

Lenders/investors have a right to information that is material to their investment decision, therefore adequate disclosure at the point of sale by brokerages and throughout the term of the mortgage by its administrator is essential. Brokerages should also conduct sufficient due diligence (e.g., know their client) and be able to demonstrate why a mortgage investment they recommend to a client is suitable based on their specific needs and circumstances.

Administrators and their principal contacts are expected to have appropriate internal processes and controls in place to adequately manage deemed trust funds, monitor investments’ performance and giving lenders/investors prompt notifications of any significant changes or events that could affect their investment.

Our supervision focus on the provision and administration of mortgage investments will continue for 2024-2025. In a future newsletter, we will share details about the actions taken to address the deficiencies described above.