The dollar value of reverse mortgages has increased in Ontario. FSRA data show the total dollar value of reverse mortgages grew from $243.2 million to $268.2 million between 2019 and 2021. That’s a 10.2% increase.
Reverse mortgages carry product-specific risks and may not be suitable for everyone. Consumers should have all the information they need before deciding if they want to get this product
FSRA sought to ensure that financially vulnerable consumers receive adequate support from the brokerage, broker, or agent they are working with to prevent potential misconduct in the brokering of their reverse mortgages.
In 2022, FSRA announced it would supervise brokers and agents who recommend this type of product. FSRA then embarked on a compliance review. The goal was to better understand brokering of reverse mortgages, including suitability assessment and consumer disclosures. Mortgage brokerages must enhance their policies and procedures and ensure compliance with the specific requirements for reverse mortgages.
What we did and how we did it
FSRA conducted targeted examinations on mortgage brokerages in two phases. The purpose was to understand the mortgage brokerages’ reverse mortgage business and practices.
FSRA examined 35 mortgage brokerages that reported arranging reverse mortgages in their 2021 AIR in phase one. Of those brokerages, FSRA selected two to examine further in phase two.
What we learned and how we addressed it
Key findings from both phases were:
- 54% of the brokerages (19 of 35) indicated an increase in consumer demand for reverse mortgages as a suitable financing option.
- Top 3 motivating factors for reverse mortgage borrowers were:
- Staying in their home longer,
- Supplementing retirement income,
- and debt consolidation.
- 37% of the brokerages (13 of 35) reported having policies and procedures regarding arranging reverse mortgages.
- 46% of the brokerages (16 of 35) indicated that they did not obtain a written statement signed by the lawyer to confirm that the borrower had received independent legal advice (ILA)) about the proposed reverse mortgage as required under O. Reg. 188/08, s. 29 (1).
The above findings outline the need for the sector in general to design and effectively implement fulsome policies and procedures. This ensures the reverse mortgage presented to a borrower for consideration is suitable.
In addition, FSRA also observed that some brokerages did the following:
- Took extra steps to ensure the borrower fully understood the key nuances of the product and how fees, interest and diminishing equity will impact them as time goes on.
- Confirmed that the lawyer selected by the borrower, to complete ILA and closing the mortgage, had experience in real estate transactions and reverse mortgages.
- Made use of lender resources or other digital tools/calculators to illustrate the compounding nature of reverse mortgages and provided estimates or scenarios of how the equity in the home would be impacted over time.
- Made sure that the borrower had taken into consideration family dynamics and the impact that diminished equity would have on inheritance.
- Developed an exit strategy with the borrower in case the borrower decided to move or sell before the mortgage matured. This also involved steps to ensure the borrower understood all the charges and fees associated with breaking the mortgage before term.
The above due diligence steps taken by some industry participants can further ensure that the reverse mortgage offered to a prospective borrower is suitable to them.
FSRA reviewed 10 reverse mortgage transactions of the two selected brokerages, covering the traditional and new lenders entering the reverse mortgage market segment. The key findings were:
- Absence or incomplete policies and procedures related to arrangement of reverse mortgages,
- The Cost of Borrowing documents reviewed were inaccurate due to the exclusion of required fees or costs such as legal costs and appraisal costs,
- Half of the files reviewed were missing confirmation that the borrower had received ILA about the proposed reverse mortgage as required under O. Reg. 188/08, s. 29(1).
The brokerages were required to take appropriate steps to address the noted findings.
What this means for you
Mortgage brokerages should ensure ongoing familiarity and compliance with MBLAA, specifically with the requirements under Ontario Regulation 188/08 which discuss the standards of practice for mortgage brokerages. Section 29 of this regulation outlines the specific requirements that must be met when brokering reverse mortgages. Mortgage brokerages should review, update, and implement changes to their policies and procedures manuals to reflect periodic changes to legislation, new FSRA Guidance and Rules. It is important that the policies and procedures manual of a mortgage brokerage accurately represents and details its unique business model and activities.