When working with private mortgages, particularly when representing individual private lenders, it’s critical that you verify a lender’s source of funds. Failing to do so can put the borrower, lender and brokerage at significant risk. Doing your due diligence helps protect the integrity of the Ontario mortgage market and prevent avoidable consumer harm.
Verifying the source of funds is a key safeguard for borrowers. Recommending a lender without confirming their legitimacy or liquidity exposes clients to unnecessary risk. Brokerages are responsible for ensuring that private lenders have verifiable, available funds.
Without that assurance, they cannot properly assess whether a mortgage product is suitable for the borrower. As outlined in O. Reg. 188/08, a brokerage must ensure that borrower and lender information is verified and represented accurately.
When a lender commits, but fails to fund, the consequences can be dire:
- For the borrower: losing their deposit, potential litigation from sellers and the need for emergency, high-rate financing
- For the brokerage: by law, brokerages must document the reasonable and legitimate steps taken during their due diligence. Section 43 of the Act prohibits making false or misleading statements. If a deal collapses due to unverified capital that the broker claimed was secure, the brokerage may face FSRA regulatory scrutiny, administrative penalties and Errors & Omissions claims.
Verifying the origin of capital connects three pillars of professional conduct:
- Know your borrower client: assess the client’s financial capacity and risk appetite
- Know your lender: confirm the legitimacy, liquidity, and immediate availability of the capital
- Suitability: ensure the mortgage is suitable to the individual circumstances of both parties
For more information on your conduct obligations, review our Guidance on Mortgage Product Suitability.