Chapter 1: Introduction to Private Mortgages
1. What is the difference between a private lender and an institutional lender?
Simply stated, a private lender, as defined by the Financial Services Regulatory Authority of Ontario (FSRA), is any lender that is NOT:
- a financial institution, as defined in section 1 of the MBLAA; or
- approved by Canada Mortgage and Housing Corporation (“CMHC”) under the National Housing Act (“NHA”)
Therefore, lenders such as individuals, mortgage brokerages, mortgage brokers, mortgage administrators, MIC’s, etc. classified as private lenders.
2. Is it possible to get default insurance on a private mortgage?
No, only National Housing Act approved lenders are qualified to offer mortgage default insurance through CMHC. Neither of the private default insurers, Sagen and Canada Guaranty, offer default insurance for privately funded mortgages either.
3. List and describe at least 5 characteristics of a private mortgage.
You can choose any 5 of the following 10:
The majority of privately funded mortgages are seconds. A first mortgage simply means that the mortgage was registered first, or before any other mortgages on the property. A mortgage registered after the first mortgage is called a second mortgage. A mortgage registered after the second mortgage would be considered a third mortgage, and so on. If a borrower who has a first and second mortgage pays off that first mortgage, the second mortgage would now become the first mortgage.
Privately funded mortgages do not qualify for default insurance. Rather, only National Housing Act approved lenders are qualified to offer mortgage default insurance through CMHC. Neither of the private default insurers, Sagen and Canada Guaranty, offer default insurance for privately funded mortgages either.
The majority of privately funded mortgages are used to access built up equity in the borrower’s property.
Higher interest rates
The majority of privately funded mortgages will have interest rates significantly higher than their institutional counterparts. This is due to the increased risk associated with this type of mortgage. Rate often range from 11% to 14% on second mortgages, and up to 9% on first mortgages.
There is a reason that borrowers require private mortgages, and that reason is typically that they don’t qualify with prime or sub-prime lenders. This is because these borrowers tend to have one or more issues that disqualify them from those lenders. We’ll have a look at these risk in greater detail later in this manual.
Non-amortized (interest only)
An amortized mortgage is one that has periodic repayments of both principal and interest, referred to as blended payments. The purpose of these blended payments is to repay part of the amount borrowed (principal) as well as pay the lender interest for the use of the outstanding amount. Over time, referred to as the amortization period, the amount owing will be zero. In privately funded mortgages, the periodic repayments typically only consist of interest, resulting in the same amount owing at the end of the term as at the beginning.
Unlike institutional mortgages that offer a variety of different terms, privately funded mortgages typically have a one-year term. In conjunction with interest only, this means that the borrower will owe the same amount of principal at the end of the term as at the beginning. This is beneficial for the private lender to minimize risk. This is because market fluctuations, such as rate increases and property value decreases, can generally be seen coming in the months ahead.
By having a one-year term the private lender has the ability to view the upcoming twelve months and decide if they feel that the market is steady enough, or too volatile to invest in. In a longer term, the private lender wouldn’t be as likely to accurately gauge the market. Of course, interest rates can rise dramatically over a short period of time, and property prices can decrease quickly, so there is no way to entirely remove these risks, but a one-year term can greatly minimize the risks. In more volatile markets, the private lender may decide to go with an even shorter term, such as six months.
Smaller loan amounts compared to institutional lenders
According to CMHC’s 2021 housing data, the average loan size for chartered banks was $326,180, compared to $276,980 for Mortgage Investment Entities (MIEs).
Security based lending
Private lenders tend to be more focused on the security of the loan instead of the borrower’s covenant. This tends to be the case as the private lender will seize control of and sell the security if the borrower defaults. Therefore, the security is of great importance. This means that an accurate appraisal and understand of market influences in real estate pricing is vital to assessing the overall risk of the investment.
Due to higher risks, private mortgages tend to charge higher fees as well as higher interest rates. For example, lender’s fees are typically higher, as well as fees like NSF charges.
4. In your opinion, what legislative change has had the most significant impact on the need for private mortgages?
Refer to section 1.6.1 Legislative Changes to institutional lending programs
5. What are the top reasons for using a private mortgage?
6. List 2 benefits of a private mortgage for a borrower.
- Mortgage is declined by another lender
- Flexibility in private lending
7. List 2 benefits of a private mortgage for an investor.
- Rate of return
8. What are some of the risks associated with investing in mutual funds?
- Capital depreciation risk
- Credit risk
- Corporate class return of capital risk
- Derivatives risk
- Equity risk
- Interest rate risk
- International market risk
- Foreign currency risk
- Fund-of-funds risk
- Large investor risk
- Liquidity risk
- Multi-class risk
- Regulatory risk
- Securities lending risk
- Purchase and reverse repurchase agreements risk
- Series risk
- Specialization risk
- Tracking risk
- Short selling risk
- Small company risk
9. What are the two main sources of investment funds for private mortgages?
- Non-registered funds
- Registered funds
10. What is the main difference between registered funds and non-registered funds?
Registered funds are held in accounts registered with the government and receive unique tax advantages, while non-registered funds do not.
Chapter 2: Role of the Brokerage
1. What mortgage activities require a license in Ontario?
The MBLAA regulates the following activities:
- dealing in mortgages in Ontario
- trading in mortgages in Ontario
- carrying on business as a lender in Ontario, and
- carrying on the business of administering mortgages in Ontario
2. What does dealing in mortgages mean?
The MBLAA states that a person or entity is dealing in mortgages in Ontario when he, she or it engages in any of the following activities in Ontario:
- Soliciting another person or entity to borrow or lend money on the security of real property.
- Providing information about a prospective borrower to a prospective mortgage lender, whether or not the Act governs the lender.
- Assessing a prospective borrower on behalf of a prospective mortgage lender, whether or not the Act governs the lender.
- Negotiating or arranging a mortgage on behalf of another person or entity or attempting to do so.
3. What does trading in mortgages mean?
The MBLAA states that a person or entity is trading in mortgages in Ontario when he, she or it engages in any of the following activities in Ontario, or holds themselves out as doing so:
- Soliciting another person or entity to buy, sell or exchange mortgages.
- Buying, selling or exchanging mortgages on behalf of another person or entity.
- Buying, selling or exchanging mortgages on the person’s or entity’s own behalf.
4. Who requires a license to lend private money in Ontario?
If you are advertising to the public as having money to lend, you must be licensed as a mortgage brokerage, mortgage agent or mortgage broker, or be exempt from licensing. If you are strictly using mortgage brokerages to find borrowers and not advertising to the public, you do not have to be licensed.
5. When do you have to include your licensed title in public relations materials?
If you use your name in public relations materials, you must include your licensed title (such as broker, mortgage agent level 1 or mortgage agent level 2).
6. Does a brokerage have to disclose on whose behalf it is working if the lender is the mortgage brokerage?
No, the requirement to disclose the role in which the brokerage is acting does not apply when the mortgage brokerage is the lender.
7. When must a brokerage disclose in writing the name of the lender, if any, with whom the Brokerage arranged more than 50 per cent of the total number of mortgages and mortgage renewals during the previous fiscal year?
Upon request by the borrower. Otherwise, this information does not have to be disclosed.
8. Does a brokerage have to disclose if it is receiving referral fees for referring a borrower to another investor?
Yes, it must disclose in writing to the borrower whether the Mortgage Brokerage is receiving, directly or indirectly, a fee for referring a borrower, lender or investor to another person/entity for a fee or other remuneration. Include a description of the Brokerage’s relationship with the other person/entity.
9. When must a brokerage verify the identity of a borrower or investor?
Before the borrower enters into the mortgage agreement, submitting the borrower’s mortgage application to a lender, or the trade completion date of a mortgage investment.
10. Under what circumstances can a brokerage accept funds from an investor for investment in a mortgage?
The Mortgage Brokerage cannot receive funds from an investor unless an existing mortgage is available, or from a lender unless a mortgage application has been made on a specific property.
Chapter 3: Role of the Regulators
1. Lenders are regulated in Ontario by three bodies. What are they?
- Office of the Superintendent of Financial Institutions (OSFI)
- Financial Services Regulatory Authority of Ontario (FSRA)
- Ontario Securities Commission (OSC)
2. Is it possible for a mortgage agent level 1 to work on a private mortgage under the supervision of a mortgage agent level 2 for training purposes?
Yes. Level 2 mortgage agents and brokers may engage level 1 mortgage agents in private mortgage transactions for training purposes. In these circumstances, the mortgage agent level 1 must not hold out or represent to clients that they are qualified to complete private mortgage transactions. The mortgage agent level 2 and/or the mortgage broker are accountable to clients for these transactions.
3. Can a mortgage agent level 1 conduct suitability assessments for private lenders?
No. A mortgage agent level 1 can only conduct suitability assessments of mortgages for lenders who are financial institutions or approved lenders under the NHA. A mortgage agent level 2 and broker can conduct suitability assessments of mortgages / mortgage investments for all mortgage lenders, including private lenders.
4. Amari is referring a potential borrower to a potential lender. Amari is advising the borrower, in writing, that a fee will be received for the referral, the nature of his relationship between the borrower and lender, and is providing the name, address, telephone number, email address of the borrower to the lender. In this scenario, must Amari be licensed?
No, this is considered a simple referral as per Regulation 407/07
5. What constitutes public relations materials as defined by the MBLAA?
Regulation 187/08 defines the term “public relations materials” as:
- (a) any advertisement by the broker or agent in connection with his or her status as a licensee or his or her dealing or trading in mortgages that is published, circulated or broadcast by any means, or
- (b) any material that a broker or agent makes available to the public in connection with his or her status as a licensee or his or her dealing or trading in mortgages. O. Reg. 187/08, s. 1 (2).
6. Kateryna, a licensed mortgage agent level 2, is unsure of exactly what she must include in the advertisement she is designing for her local newspaper. What must Kateryna include?
Use of name, etc., in public relations materials:
- (1) A mortgage broker or agent shall clearly and prominently disclose, in all of the broker’s or agent’s public relations materials, the following information:
The broker’s or agent’s licensee name.
Whether the individual has a Mortgage Agent Level 1 licence or a Mortgage Agent Level 2 licence.
The authorized name and licence number of the brokerage on whose behalf the individual is authorized to deal or trade in mortgages. O. Reg. 392/22, s. 1 (1).
- (2) If the authorized name of the brokerage is, or includes, a franchise name that the brokerage is permitted to use under a franchise agreement, the public relations materials must clearly indicate that the brokerage is independently owned and operated. O. Reg. 187/08, s. 8 (2).
- (3) In the public relations materials, at least one reference to the broker or agent must include one of the following titles and the materials may also include an equivalent title in another language:
- When referring to a broker, the title “mortgage broker”, “broker”, “courtier en hypothèques” or “courtier” or an abbreviation of any of those titles.
When referring to an agent, the title “Mortgage Agent Level 1”, “Mortgage Agent Level 2”, “agent en hypothèques de niveau 1”, “agent en hypothèques de niveau 2” or an abbreviation of any of those titles.
- When referring to a broker, the title “mortgage broker”, “broker”, “courtier en hypothèques” or “courtier” or an abbreviation of any of those titles.
7. FSRA has several enforcement tools that can be used to address non-compliance. List three of them.
FSRA has several enforcement tools that can be used to address non-compliance including:
- Warning or cautionary letters
- Compliance order: FSRA may order the regulated individual or company to take or to cease an action.
- Administrative monetary penalty (AMP): FSRA can impose financial penalties on regulated individuals or companies.
- Licence suspension or revocation: FSRA may suspend, revoke or refuse the individual’s or company’s licence due to misconduct.
- Registration refusal or revocation: FSRA may refuse to register a new pension plan or amendment, or may revoke registration of an existing plan or amendment
Prosecution in the courts
8. What is the maximum administrative penalty that can be imposed by FSRA?
Section 41 of the MBLAA empowers FSRA to impose administrative penalties to promote compliance with the MBLAA. As of February 1, 2022, there are three separate penalties that may be imposed.
- Mortgage Brokerage or Administrator, up to a maximum of $500,000
- Broker or agent, up to a maximum of $100,000, and
- Anyone else not licensed, up to a maximum of $500,000
9. What is the maximum penalty that can be imposed by FSRA for an offence under the legislation?
As of February 1, 2022, there are two separate penalties that may be imposed.
- Individuals charged with an offence, a fine up to $500,000 and imprisonment for up to one year, or both
- Corporations charged with an offence, a fine of up to $1,000,000
10. If a person is convicted of an offence, what additional action can a court take?
If a person is convicted of an offence under this Act, the court may order the person convicted to pay compensation or make restitution in such amount and on such conditions as the court considers just, in addition to any other penalty imposed by the court.
Chapter 4: Lenders
1. Lenders are broken down into several main classifications based on their type. Name them.
- Chartered Banks
- Credit Unions
- Mortgage Finance Companies (MFCs)
- Mortgage Investment Entities (MIEs), which include MICs and private lenders
2. This classification of mortgage lender includes lenders that provide products characterized by short-term loans (between 6 to 24 months) and higher interest rates. They include mortgage investment corporations (MICs) and other private lenders.
Mortgage investment entity (MIE)
3. In order to sell its shares, a MIC must provide potential investors with this document. Name it and explain its purpose?
Offering Memorandum – while companies that wish to sell shares to the general public must file a prospectus, a private company may sell shares to eligible investors using an Offering Memorandum (OM). This document provides less information to potential investors than a prospectus because only various company insiders and their family members, and accredited investors may invest in the private corporation. The law assumes that accredited investors do not need the protections offered by a prospectus because they can: (a) get and analyze the information needed to assess an investment without a prospectus; and (b) handle the loss of their entire investment, if things go wrong .
4. When investing in a MIC, what security does the investor get?
Security for the investment – while the MIC invests in mortgages, the investor buys shares in the MIC and does not directly invest in the mortgage. This is an important factor because in a corporate bankruptcy a shareholder is typically the last one in line in the bankruptcy process. This means that unless there is money left over after paying the trustee, lawyers, secured creditors and unsecured creditors, shareholders may be left with nothing.
5. Can an investor redeem their shares any time, or are there restrictions? Explain your answer.
Redemption – depending on the MIC, an investor may be able to redeem his or her shares by selling them back to the corporation, thereby getting his or her initial invest back. However, most MICs do not guarantee this, nor do they guarantee the time that it will take for the share redemption. This is typically because of the rules imposed by the Income Tax Act that require a minimum number of investors and no specified shareholders. In addition, there may be penalties for early redemption, if early redemption is allowed.
6. What determines if a person or entity is a member of a designated class of investors?(2.2.2)
The designated class of lenders and investors is defined in O. Reg. 188/08: MORTGAGE BROKERAGES: STANDARDS OF PRACTICE. This regulation exempts members of this class from having to receive disclosure of material risks (section 25.(2)), and the borrower disclosure and investor/lender disclosure (section 31.(2)) forms. Members of this class are described in section 2.(1) of this regulation.
For the purposes of this Regulation, a person or entity is a member of a designated class of lenders and investors if the person or entity is a member of any of the following classes:
- The Crown in right of Ontario, Canada or any province or territory of Canada
- A brokerage acting on its own behalf
- A financial institution
- A corporation that is a subsidiary of a person or entity described in paragraph 1, 2 or 3
- A corporation that is an approved lender under the National Housing Act (Canada)
- An administrator or trustee of a registered pension plan within the meaning of subsection 248 (1) of the Income Tax Act (Canada)
- A person or entity who is registered as an adviser or dealer under the Securities Act when the person or entity is acting as a principal or as an agent or trustee for accounts that are fully managed by the person or entity.
- A person or entity who is registered under securities legislation in another province or territory of Canada with a status comparable to that described in paragraph 7 when the person or entity is acting as a principal or as an agent or trustee for accounts that are fully managed by the person or entity
- A person or entity, other than an individual, who has net assets of at least $5 million as reflected in its most recently-prepared financial statements and who provides written confirmation of this to the brokerage
- An individual who, alone or together with his or her spouse, has net assets of at least $5 million and who provides written confirmation of this to the brokerage
- An individual who, alone or together with his or her spouse, beneficially owns financial assets (being cash, securities within the meaning of the Securities Act, the cash surrender value of a life insurance contract, a deposit or evidence of a deposit) that have an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1 million and who provides written confirmation of this to the brokerage
- An individual whose net income before taxes in each of the two most recent years exceeded $200,000 or whose net income before taxes in each of those years combined with that of his or her spouse in each of those years exceeded $300,000, who has a reasonable expectation of exceeding the same net income or combined net income, as the case may be, in the current year and who provides written confirmation of this to the brokerage
- A person or entity in respect of which all of the owners of interests, other than the owners of voting securities required by law to be owned by directors, are persons or entities described in paragraphs 1 to 12. O. Reg. 188/08, s. 2 (1).
7. Knowing your investor is extremely important to be able to provide accurate advice and recommendations. What is a good way to get to know your investor?
FSRA’s Form 3.0 – Information about Investor/Lender in a Non-Qualified Syndicated Mortgage, is a great choice for a Know Your Client form (shown in the following figure). This form’s primary use is in non-qualified syndicated mortgages but contains all of the information required to meet the needs of a KYC form for non-syndicated private mortgage transactions.
8. As of July 1, 2018, syndicated mortgages have been subdivided into two classifications. Name them.
- Qualified syndicated mortgage
- Non-Qualified Syndicated mortgage
9. What are the five requirements needed to deem an investment a qualified syndicated mortgage?(2.2.2)
- It is arranged through a mortgage brokerage.
- It secures a debt obligation on property that,
- is used primarily for residential purposes,
- includes no more than a total of four units, and
- if used for both commercial and residential purposes, includes no more than one unit that is used for commercial purposes.
- At the time the syndicated mortgage is arranged, the amount of the debt it secures, together with all other debt secured by mortgages on the property that have priority over, or the same priority as, the syndicated mortgage, does not exceed 90 per cent of the fair market value of the property relating to the mortgage, excluding any value that may be attributed to proposed or pending development of the property.
- It is limited to one debt obligation whose term is the same as the term of the syndicated mortgage.
- The rate of interest payable under it is equal to the rate of interest payable under the debt obligation.
10. Define the term “permitted client.”
FSRA’s definition of Permitted Clients are entities and individuals that are presumed to have significant experience and knowledge regarding financial matters, including investments, and robust financial means. For more information, visit www.remic.ca/permitted-clients.
11. Name and explain at least three risks associated with syndicated mortgages.
- No guaranteed high return. Although some companies or individuals offering syndicated mortgage investments may say they offer ‘guaranteed’ high returns, it is actually against the law to do so. In general, the higher the rate of return, the higher the risk of the investment.
- A lineup for repayment. Often, at minimum, you are second in line to be paid, behind any bank that provides a loan for the project. If the project fails, there may not be any money left over to pay you. You may even be further back in line behind other investors.
- ‘Secured’ does NOT mean guaranteed. Some advertisements promote SMIs as ‘safe’ or ‘fully secured’. It is true that your investment will be used to create a mortgage that is registered and secured directly with the land or building associated with that mortgage. But remember, if something goes wrong with the project – and the value of the security is limited to the value of the land – you may rank behind other lenders and investors and may not get your money back. This is because the value of the land may be only enough to pay these prior-ranking lenders.
- No investor protection fund. Syndicated mortgage investments are not backed by the Government of Ontario or any other investor protection fund; there is no way to guarantee you will get your money back.
- Lack of liquidity. If you want to withdraw your money before the end of the term, there is no assurance that there will be a market for the resale or transfer of the mortgage.
12. What is the maximum amount that may be invested in a NQSMI over a 12-month period?
For more complex SMIs as of July 1, 2018, (deemed to be NQSMIs) some investors and lenders may not be able to invest more than $60,000 over a 12-month period. This is for investors or lenders who are not part of a ‘designated’ class of investors and lenders that have already met higher income and asset tests.
Chapter 5: Transaction Process
1. In your opinion, what is one of the most important steps in the transaction process for the borrower?
Generally speaking, the process can be broken down into a few main categories that can be broken down as follows:
- Attracting a client
- Lender submission
- Meeting conditions
The step that is most important depends on your personal perspective. From a compliance point of view, steps 2 to 4 are very important. Of course, without step 1 you won’t get to any of the other steps.
2. What are the main steps in the initial consultation?
- confirms identity by physically or virtually meeting with the borrower. If not possible to meet the client, it’s necessary to document the steps taken to confirm identity
- completes the borrower’s application, either in paper format or using their origination software
- determines the needs of the borrower by completing a borrower needs’ analysis – while the needs may change based on obtaining additional information during the process, this provides the agent/broker with a good starting point
- obtains consent to obtain a credit report and verify information, such as employment
- obtains consent to order an appraisal, if for a private mortgage
- discusses options
- explains the process, including who the agent/broker is working for (refer to the law of agency)
- pulling a credit report – this step may be done during the initial consultation to immediately address any concerns, or may be done once the agent/broker has returned to their office and has begun underwriting the application
3. What is the importance of analyzing the borrower’s credit?
To analyze it and follow up with the applicant if there are any issues that need further explanation. This analysis will determine which lenders may approve the application, and if a private lender is being used, the risks that the borrower’s repayment history and current credit may pose.
4. In addition to an appraisal, what tool can a licensee use to determine an approximate value of an applicant’s property?
A Purview report.
5. A borrower has just signed the borrower disclosure, that includes a broker fee. If the borrower backs out of this transaction before closing, does this document mean they are liable for those fees?
No, disclosure documents are not legally binding. They simply confirm that information has been provided to the borrower, not that the borrower agrees to any terms or conditions of the disclosure.
6. What does the term “meeting conditions” mean?
In the lender’s commitment letter, there will be a list of conditions that must be met before the mortgage can be funded. One of the many conditions may be to provide the lender with appropriate income verification, or subject to a satisfactory appraisal, to name but two. The commitment letter will typically describe what documentation is considered acceptable to the lender. It is up to the mortgage agent to advise the borrower of the conditions and assist the borrower in meeting the conditions to ensure that the mortgage is funded.
7. What are several important steps in the initial consultation with a potential private investor?
Know Your Client form:
It’s important to determine the viability of the investor as a private lender by completing a know your client form (such as Form 3, included in chapter 4). At this stage the licensee should be discussing the different types of investments that the brokerage has, their risk profiles and potential appropriateness for the investor.
This step includes the confirmation of money to lend by obtaining confirmation of income on deposit as well as documentary evidence to verify, if applicable, that an investor belongs to a designated class of investors and lenders, discussed in Chapter 4. If the funds being invested on deposit at a financial institution, request a letter from that institution confirming the information provided. If the funds are in other investments, obtain documentary evidence of those deposits, such as a recent account statement.
A confidentiality agreement is a simple agreement whereby the potential investor agrees to keep confidential any information obtained from the licensee. This will ensure the protection of the borrower’s personal information. Furthermore, it is a best practice to provide a potential investor with a summary of an investment before providing full borrower information. If the investor is interested in the investment, a deal specific confidentiality agreement may be signed, and the borrower’s personal information provided to the investor.
If the investor has a lawyer that they typically use, or would like to use, obtain that information at this stage. This may reduce delays when closing their first transaction with the licensee. If they don’t have a lawyer, the licensee can make a recommendation for a lawyer that has experience in private mortgages. This will further reduce delays by ensuring the lawyer is familiar with private lending practices.
8. What document is helpful to determine the suitability of a potential investor?
Know Your Client form (KYC), or Form 3.
9. Under what circumstances must both the borrower and private investor have their own lawyer?
In cases where the mortgage is $75,000 or higher , it is a legal requirement that two lawyers be involved; a lawyer closing on behalf of the investor and a lawyer acting on behalf of the borrower. It is important to note that while the borrower pays the lawyer’s fee, the lawyer is working primarily on behalf of the lender.
10. What types of ongoing communication should a licensee have with the investor about their investment?
Ongoing communication with the investor should include (if the mortgage is being administered by a licensee, see section 12.2.3):
- New information
- Any information obtained post funding that may have impacted the investor’s decision to lend, such as information about falsified documents (application, income, property, etc.)
- Notice of term expiry
- Based on the licensee’s conversations with the borrower, the licensee may offer the investor an opportunity to renew the mortgage, or the investor may not wish to renew. Determining this as early as possible, typically three to four months prior to the end of the term, should provide all parties with sufficient time to make appropriate decisions.
- Borrower correspondence
- If the borrower notifies the licensee about anything that impacts the investor, that information should be shared with the investor in as timely a fashion as possible. For example, if the borrower contacts the licensee about their inability to make an upcoming payment, the licensee may be able to facilitate a solution that prevents default.
Chapter 6: Underwriting the Application
1. How many pieces of identification are typically required by lenders to comply with Canada’s Proceeds of Crime (Money Laundering) and terrorist Financing Act (PCMLTFA)?
In order to comply with Canada’s Proceeds of Crime (Money Laundering) and terrorist Financing Act (PCMLTFA) lenders require the solicitor closing the transaction to verify the borrower’s identification by typically obtaining two pieces of identification. One may be a primary form of identification along with a secondary form of identification, or two forms of primary identification.
2. List three forms of identification that meet the definition of “primary identification.”
Any three of the following:
- Valid driver’s licence issued in Canada;
- Current Canadian Passport;
- Nexus/ CANPASS card;
- Federally issued Firearms Licence
- Certificate of Canadian Citizenship (containing your photograph) or Certification of Naturalization (containing your photograph);
- Federally issued Permanent Resident Card;
- Certificate of Indian Status issued by the Government of Canada, or
- Provincial Government issued Photo ID Card
3. List three forms of identification that meet the definition of “secondary identification.”
Any three of the following:
- Employee identity card with a photograph from an employer well known in the community;
- Signed automated banking machine (ABM) card or client card issued by a member of the Canadian Payments Association;
- Signed credit card issued by a member of the Canadian Payments Association;
- Signed Canadian Institute for the Blind (CNIB) client card with a photograph;
- Birth certificate issued in Canada;
- Social Insurance Number (SIN) card issued by the Government of Canada;
- Certificate of Canadian Citizenship;
- Métis Nation ID Card, or
- FAST ID Card
4. For identification to be considered authentic for the purposes of identity verification, what criteria must be met?
- be authentic, valid and current
- be issued by a federal, provincial or territorial government (or by a foreign government if it is equivalent to a Canadian document)
- indicate the person’s name
- include a photo of the person
- include a unique identifying number, and
- match the name and appearance of the person being identified
5. Mary, a mortgage broker, is reviewing her applicant’s Ontario driver’s license for authenticity. The license number on the license has 16 digits, and everything else seems to be accurate. In this case, should Mary accept this identification?
No. Ontario drivers licenses have 15 characters, not 16 digits.
6. What is the difference between a co-applicant, co-signor and guarantor?
A co-applicant (also referred to as a co-borrower) is an individual who is applying with the applicant and who will be registered on title and/or on the mortgage. The co-applicant’s income and debts are included in all mortgage calculations.
A co-signer is a person who is helping the applicants get approved for the mortgage by being added to the application in the same way as an applicant or co-borrower and will also be registered on title. A co-signer may be required if the applicant does not have sufficient income to qualify for the mortgage. The co-signer’s income (and debts) will be included. A co-signer is as fully responsible for the mortgage as the applicant.
A guarantor is an individual who is not registered on title but who is guaranteeing to the lender that if the applicant fails to meet his or her obligations under the loan the guarantor will meet those obligations. The guarantor’s income and debts are not included in the mortgage calculations unless he or she lives in the same home, however the lender still does a full application on the guarantor to ensure that the guarantor can make the mortgage payments if the applicant defaults. A guarantor may be required if the co-applicant(s) have poor credit but enough income to qualify.
7. What is a personal covenant?
A personal covenant is a legal covenant that is not tied to a property, but is tied to an individual. Canadian mortgages require a borrower to pledge the real property as collateral as well as his or her personal covenant.
8. What are the 5 Cs of Credit?
9. Of the 5 Cs of credit, explain character.
Character is typically used to describe the borrower’s stability and other traits that do not directly relate to the collateral and financial ability to repay the loan. For example, a borrower that is behind on his or her child support payments is generally regarded to be of high risk. The rationale is that if the borrower is unwilling or unable to meet his or her parental obligations the risk of him or her not making his or her mortgage payment is probably much higher.
10. Explain what a budget is and why it may be important for a potential borrower.
The Financial Consumer Agency of Canada defines a budget as, “a plan that helps you manage your money. It helps you figure out how much money you get, spend and save. Making a budget can help you balance your income with your savings and expenses. It guides your spending to help you reach your financial goals.” For more information visit https://www.canada.ca/en/financial-consumer-agency/services/make-budget.html This is important to a potential borrower in determining if they can afford the mortgage based on their current lifestyle.
Chapter 7: Security
1. What is the purpose of a real estate appraisal?
A real estate appraisal is a key component in a lender’s decision to lend. There are several purposes for completing a real estate appraisal, including to determine:
- The cost to rebuild the home in case of damage, such as by fire (insurable value)
- A value so that a municipality can apply its property tax rate (taxation purposes)
- The price that a real estate investor would pay for a property based on their preferred rate of return (investment value)
- The amount that the property can obtain if sold (selling price)
- The future value of a property under construction (future price)
- The value of a property being expropriated by the Crown (expropriation value)
- The market value of a property for a lender to decide on an appropriate loan amount for mortgage financing
2. List three of the types of properties that are used as security for mortgage financing.
- Condominium unit
- Duplexes, triplexes, fourplexes
- Co-operatives (co-ops)
3. Explain how population affects demand for real estate.
Generally speaking, if a population is increasing in a specific geographic area, the demand for housing will follow suit. Depending on the makeup of the population will further impact the types of housing in demand. Younger buyers, for example, may be more likely to purchase smaller starter homes, such as condos. Buyers who are forming families and having children will likely be moving up from a starter home into a larger home.
4. Explain how land use regulations affect the supply of real estate.
Municipal plans will determine what land can be used for residential, commercial, industrial and agricultural uses, among others, referred to as zoning. Good planning will foresee demands and plan for them. Poor planning may result in the opposite, causing a shortage or glut of properties in that classification, affecting the supply and ultimately the price of the property.
5. What is the most common designation of appraiser used by private lenders?
Canadian Residential Appraiser (CRA).
6. What is the main difference between a CRA and AACI?
An AACI is qualified to offer valuation and consulting services on all types of properties, including residential, industrial, commercial, and rural, while a CRA is qualified to offer valuation and consulting services and expertise for individual, undeveloped residential dwelling sites and dwellings containing not more than four self-contained family housing units.
7. Under what circumstances would a private lender accept the income approach for valuing a property?
The Income Approach of appraisal calculates the value of income producing properties, such as apartment buildings and other commercial properties. This method takes the net operating income that is generated by the property and applies a capitalization rate (a rate of return typical for the area) to that income. The result is the property’s market value. While this process is ideal for private lenders for income producing properties, it holds no value in determining the market value of a residential property for mortgage financing.
8. When is the cost approach used?
This method is included in a typical residential appraisal to illustrate the cost of replacing the property and assist in determining the market value; however, it is not heavily relied upon in making the final valuation of market value and is not appropriate for use, on its own, to determine value for a private lender.
9. What is the most common approach to determining value for a private lender?
The direct comparison approach.
10. What is an AVM and is it suitable for most private lenders?
Automated Valuation Models are computer programs that typically use public record data on residential properties to calculate the market value of a property. AVMs are typically considered not to be suitable for private lenders, except in rare circumstance, such as the availability of a recent appraisal coupled with a stagnant market.
11. What is a risk assessment tool and is it used by private lenders?
Although not a valuation model, both CMHC and Sagen use automated underwriting systems that have a component of AVMs in them. CMHC’s ‘emili’ and Sagen’s ‘MySagen’ are automated programs that will underwrite an application from a lender and make a decision to approve or decline mortgage default insurance. Private lenders do not have access to these tools since they are underwriting systems used by CMHC and Sagen.
12. What are the three types of appraisal reports?
- Desktop appraisal
- Drive-by appraisal
- Full appraisal
13. What type of appraisal is most suitable for private lenders? Explain why.
A full appraisal expands on the information and techniques used in the desktop appraisal and the drive-by appraisal by having a full inspection of the subject property completed. This inspection allows the appraiser to document the characteristics of the subject property, including any upgrades or defects in the home. The report typically contains interior and exterior photographs of the property as well as the immediate neighbourhood. Considered to offer the most information and therefore the highest level of protection for the lender, the full appraisal is the appraisal of choice for lenders who rely heavily on the property as security and less on the personal covenant of the borrower. Virtually every sub-prime and private lender will insist on a full appraisal.
14. What is the legal instrument used to register a mortgage debt against the borrower’s property?
15. What is the instrument used to discharge the debt registered against the borrower’s property that releases the lender’s interest in the property?
The Discharge of Charge/Mortgage.
16. Alice, a private lender, wishes to increase the amount of security by placing a mortgage on both of her client’s properties. What is this referred to as?
18. Explain the term “partial discharge.”
A partial discharge is when a lender releases a property being used as a security for the loan. In Sasha’s example, let’s assume his crypto investment has done very well and he has put a lump sum payment on his mortgage, bringing the LTV on his townhouse to 50%. Sasha now wants to sell his cottage. The lender, having sufficient security in the townhouse for the loan, will discharge the mortgage on the cottage.
18. What is a judgment?
A judgment, as it relates to a debt, is a judge’s decision that a debt is owed by a debtor to a creditor. In Ontario a creditor can, after obtaining a judgment, file a Writ of Seizure and Sale of land against a debtor in any county or district in which the debtor owns land.
19. What is a Writ of Seizure and Sale?
A creditor can file a writ of seizure and sale of land against a debtor in any county or district where the debtor may own land (including a house). The writ would encumber any land presently owned or land which may be purchased in the future by the debtor in the county(ies) or district(s) where the writ is filed. If you wish to enforce the writ in more than one location, you must issue a separate writ for each location and file it there.
20. A private lender may wish to further secure the investment by registering a lien against a borrower’s personal property. What is a lien on personal property?
A lien is a filing of notice for a security agreement against personal property to guarantee payment of a debt. It is not linked to the Land Registry.
Chapter 8: Investor/Lender Disclosure & Commitment
1. What is a conflict of interest?
When the brokerage, broker or agent in a transaction has (or appears to have) an incentive to place their own interests ahead of the interests of the borrower, lender or investor.
2. What legislation describes the disclosure requirements for conflicts of interest?
Reg. 188/08: MORTGAGE BROKERAGES: STANDARDS OF PRACTICE.
3. List and explain five different types of conflicts of interest that may arise in a transaction.
List any five from these sections:
- The lender is a family member of the borrower
- A mortgage broker/agent is related to the developer on the project (where the developer is different from the borrower)
- A mortgage broker/agent is related to the appraiser
- A mortgage broker/agent is acting for both the borrower and lender
- A mortgage brokerage or any of its related parties have, or expect to have, a direct or indirect interest in the subject property
- A mortgage brokerage or any of its related parties is related to the developer (where the developer is different from the borrower)
- A mortgage brokerage is related to the mortgage administrator
- The mortgage broker/agent is acting as both the intermediary and the lender
- The mortgage broker/agent or his/her spouse funds the mortgage for the borrower
- A client is being sent to a lender because they are offering the mortgage broker/agent an incentive, such as travel points or a free trip
- The mortgage broker/agent is receiving a higher bonus/commission for working with a specific lender during a specific timeframe
- The principal broker is also a real estate broker who is involved with listing and selling the subject property
- The mortgage brokerage/broker/agent is also the lender
- The mortgage brokerage is receiving a fee from a party involved in the transaction (e.g., commission or gift from the lender/investor)
- A lender is being favoured due to monetary reasons
- A large portion of the business (over 50 per cent) is being done exclusively with one party
4. Adam, a mortgage broker, is arranging a second mortgage for a borrower that will be funded by his wife’s self-directed RRSP. Is this a conflict that must be disclosed?
5. What is the maximum penalty an individual for failing to disclose any potential conflicts of interest to a private lender?
6. What is the maximum penalty for a brokerage that fails to disclose any potential conflicts of interest to a private lender?
9. What is a material risk?
In the mortgage industry, a risk can be described as the possibility of loss. If we consider this as the definition, then we can view the disclosure of materials risks as disclosing issues that may result in a loss. To make an informed decision about the level of risk an investor is willing to take, they must be informed of all potential risks, including material risks. FSRA describes a material risk as, “A risk is material if it is significant for an investor / lender to make a decision about a mortgage, or if its omission or misstatement would likely influence or change the decision of the investor / lender.
10. List and explain ten risk reduction strategies that can be used to reduce the risk in a specific transaction.
Know the borrower: verification of income and identity, as well as debt service ratios to ensure affordability; this will reduce the risk of default
Verify the value of security: have a new, full appraisal conducted by an appropriate appraiser (one that is familiar with the needs of private investors) to ensure the value of the security is confirmed; this will reduce the risk of a loss if the property must be sold by the investor.
Use conservative LTVs: understanding the costs associated with remedies such as the power of sale process is important in determining an acceptable loan to value limit for an investor. Changing market conditions that may lower the property’s value and therefore increase the loan to value can be mitigated by beginning with a more conservative loan to value; this will reduce the risk of a loss if the property must be sold by the investor.
Have the mortgage administered: by having the mortgage administered the investor can reduce the risk of loss through the timely management of issues, such as property insurance lapses, default, extensions, etc., by the administrator.
Diversification: as an overall strategy to minimize risk, investing in several different vehicles with varying degrees of risk can minimize the risk of loss in an investor’s overall investment portfolio.
Exit strategies: discussed in chapter 9, having and understanding potential exit strategies is a vital strategy in reducing the risk of loss.
Reaction time: dealing with issues in a timely manner will help to ensure that issues can be handled before they become more serious. For example, if a borrower misses a payment, contact the borrower immediately to discuss remedial actions, such as adding the payment to the end of the term, extending the time allowed for the payment, waiving or reducing the NSF fee to allow for payment of the arrears, etc.
Innovative terms: depending on the borrower’s situation, an investor may be able to make a sound investment by being innovative. For example, a borrower who has just lost their job and only has employment insurance income, wants to consolidate their debts. The LTV of the proposed loan is very low. The borrower is a professional who doesn’t’ want to take just any job but wants the time to find a high paying job. In this case the risk of defaulting on the mortgage payments is high due to the cashflow issue, and while there is significant equity to recover the investment in case of default, the investor simply wants a safe return, not to have to sell the property. In this scenario, the investor may prepay the mortgage payments to assist with the borrower’s cash flow while they seek new employment.
Ensure a benefit to the borrower: the mortgage should improve the borrower’s position. If it doesn’t, the borrower may become disgruntled and file a complaint or sue the investor. By ensuring the investment benefits both the borrower and the investor this likelihood is reduced.
Know the market: understanding market trends and the possibility of market disruptions, such as housing price decreases, increasing unemployment, interest rate hikes, increases in inflation, etc. will help an investor determine the overall risk at any given time. By ensuring the investment is for one year or less, the risk of unforeseen market disruptions is reduced.
11. List the 9 different disclosure forms that FSRA
- Form 1 – Investor/Lender Disclosure Statement for Brokered Transactions
- Form 1.1 – Investor/Lender Disclosure Statement for Brokered Transactions: Addendum for Construction and Development Loans
- Form 1.2 – Investor/Lender Disclosure Statement for Brokered Transactions: Waiver for Reducing the Waiting Period
- Form 2 – Renewal Form
- Form 2.1 – Renewal Form Waiver: To Reduce the Waiting Period
- Form 3.0 – Information about Investor/Lender in a Non-Qualified Syndicated Mortgage
- Form 3.1 – Suitability Assessment for Investor/Lender in a Non-Qualified Syndicated Mortgage
- Form 3.2 – Disclosure Statement for Investor/Lender in a Non-Qualified Syndicated Mortgage
- Form 3.2.1 – Supplemental Disclosure for Retail Investors in a High-risk Syndicated Mortgage
12. What is the standard form that must be used to provide disclosure to an investor/lender?
Form 1 – Investor/Lender Disclosure.
13. What is a commitment letter?
A commitment letter (also known as a commitment, conditional commitment, or approval letter), is used to advise the applicant that the application for financing has been approved by the lender and outlines the major terms and conditions of the lender’s offer. To continue the process the applicant must sign the commitment, agreeing to its terms and conditions.
14. What is a postponement agreement?
This is a document that is typically used to allow a mortgage lender, for example a first mortgage lender, to refinance their mortgage without losing their position (in this example the first mortgage). When a mortgage is refinanced, it must be discharged, then a new mortgage registered. This would result in the new mortgage being registered after the second mortgage, thereby changing the second mortgage into a first mortgage and the refinanced mortgage into a second mortgage. The postponement agreement prevents this. The agreement must be authorized by the second mortgage lender to be valid, unless otherwise stated in the mortgage agreement.
15. Define pari-passu.
This term means ranked equally. For example, a mortgage registered after a second should be a third, but if registered pari-passu, it will have the same rights as the second mortgage lender.
Chapter 9: Exit Strategies
1. List the exit strategies that a private lender should be made aware of by a licensee.
- Sell the property on or before the end of the term
- Renew at the end of the term
- Refinance with another investor or institutional lender during or at the end of the term
- Refinance with an institutional lender at the end of the term
- Use a default remedy if the borrower defaults
- Assign/Sell the mortgage
2. What four provinces is the power of sale process used in?
- Newfoundland and Labrador
- New Brunswick
- Prince Edward Island
3. In the power of sale process, what is the redemption period?
The redemption period is a period of time that the borrower has to either pay the arrears plus costs or pay the entire amount owing, plus costs. The Mortgages Act, R.S.O. 1990, c.M.40 allows the borrower to bring the mortgage into good standing by paying the arrears and associated costs involved in the power of sale process as long as the mortgage is not under renewal. If the term of the mortgage has expired, the borrower does not have this option and must pay the entire outstanding principal balance of the mortgage plus costs.
The borrower has thirty-five days after notice is provided, which equates to thirty-seven days since the date of the notice and the final day of the redemption period are not included, in which to exercise these options. If the borrower does not pursue the options available, the lender may file what is called a Statement of Claim for Debt and Possession with the courts for possession.
In addition, the lender can no longer charge a penalty to the borrower for repaying the mortgage. This has the effect of opening the mortgage for full repayment without penalty, although all associated legal costs involved in the power of sale process are still payable.
4. What is the name of the document used to notify all parties involved in the mortgage that the lender has started the power of sale process?
NOTICE OF SALE UNDER MORTGAGE.
5. Who must be notified when a lender starts the power of sale process?
All parties involved in the mortgage, all parties registered on title and all parties who may have an interest in the land. In addition, if there are any liens registered against the property in the name of the Crown or any other public authority, notice must be provided to them.
6. Explain the process of selling a property under a power of sale.
Once the lender has possession of the property, it will sell the property, normally using a real estate salesperson. When doing so, the lender must provide the real estate salesperson with a Certificate of Power of Sale, proving that the lender has the legal right to sell the property. A schedule must also be attached to the agreement of purchase and sale, entitled Seller Selling Under Power of Sale.
7. Once the lender has received default judgment in the power of sale process, what document is used to evict the owner?
Writ of Possession.
8. If an institutional mortgage that has been defaulted on is insured through a mortgage default insurance policy and there is still a balance outstanding, what can the insurer do?
The mortgage default insurer will pay the lender’s claim and proceed against the borrower to recover the amounts paid.
9. Explain a judicial sale.
A judicial sale and foreclosure are similar in nature. The main difference between a judicial sale and a foreclosure is that the courts are handling the sale in a judicial sale, whereas in a foreclosure, the lender obtains ownership of the property and sells it. While the specific details of the judicial sale and foreclosure processes differ in each province, they are the primary processes used in recovering the mortgage debt in the following provinces:
- British Columbia
- Nova Scotia
- Quebec, and
10. What other default remedies are available to lenders in Ontario other than a power of sale?
- Demand letter
- Quit claim
- Appointment of a receiver
- Assignment of rents
- Action on the covenant
Chapter 10: Borrower Disclosure
True and False questions
1. The role of the brokerage must be disclosed to the borrower.
True. The Borrower must be informed who the brokerage is working for, the Borrower or the Lender or both.
2. The nature of the relationship between the brokerage and the borrower must be included in the disclosure document to the borrower.
False. The nature of the relationship between the brokerage and the lender must be disclosed in the borrower disclosure document.
4. To comply with the MBLAA and its Regulations a borrower disclosure document should state “refer to the lender’s commitment’ to disclose the lender’s terms and conditions.
False. The document should include those terms and conditions.
5. If a prospective mortgage was default insured by CMHC, the insurance fee would have to be included in the cost of borrowing.
False. The cost of default insurance is not included in the cost of borrowing, as per Regulation 191/08 Cost of Borrowing and Disclosure to Borrowers.
6. Lawyer’s fees, excluding disbursements, must be included in the cost of borrowing.
False. Disbursements must be included.
7. It is not necessary to include an exact dollar amount in the cost of borrowing if the cost is unknown.
False. It must be shown in dollars and cents as well as a rate.
8. The borrower disclosure must be given to the borrower at least 72 hours before they can enter into the mortgage.
False. It must be provided two business days, which may be waived in writing.
9. APR stands for Actual Percentage Rate.
False. It stands for annual percentage rate.
10. PST on a default premium must be included in the cost of borrowing.
True. While the default premium is excluded, tax on the premium is included.
Short Answer Questions
1. List the types of information (e.g., risks) that must be included in a borrower disclosure form.
- fees and payments associated with the mortgage
- the nature of the relationship between the brokerage and lender under the proposed mortgage
- the role of the brokerage
- the number of lenders the brokerage represented during the previous year
- any potential conflicts of interest
- the risks associated with the proposed mortgage
- the terms and conditions of the proposed mortgage
- estimated costs
- the cost of borrowing
2. Explain the timing requirements of providing disclosure to a borrower.
Disclosure must be provided to the borrower at least two business days before the borrower is required to make any payment or enter into the mortgage agreement; however, the two business days may be waived if the borrower consents in writing and the disclosure is still made before the borrower is required to make any payment or enter into the mortgage agreement.
3. List the specific costs that must be included when calculating the cost of borrowing.
- administrative charges including charges for services, transactions or any other activity in relation to the mortgage
- lawyer’s fees, including disbursements, for a lawyer hired by the lender and paid by the borrower (the majority of cases)
- insurance charges, excluding default insurance premiums for high-ratio mortgages
- appraisal, inspection or survey costs payable by the borrower, when required by the lender
4. How must the cost of borrowing be expressed in a borrower disclosure form?
As both a percentage and in dollars and cents.
5. If a cost is unknown, how must it be disclosed?
The cost of borrowing must be disclosed as an annual percentage rate, section 8.1 of Regulation 191/08 states that it must also be disclosed in dollars and cents over the course of the term for all fixed and variable rate mortgages.
6. What is a conflict of interest?
A potential conflict of interest is present when a brokerage, broker or agent has a direct or indirect interest in the mortgage being arranged resulting in a situation where the broker/agent must choose between his or her best interests and the interests of his or her borrower, investor or lender, as the case may be.
7. When does a brokerage have to disclose the name of any lender that it’s used to fund over 50% of the mortgages it brokered in the previous fiscal year?
Section 19.3 of Regulation 188/08 states that upon request, “a brokerage shall disclose the following information in writing to a borrower:
- Whether the brokerage itself was the lender for more than 50 per cent of the total number of mortgages and mortgage renewals completed by the brokerage during the previous fiscal year.
- The name of the lender, if any, with whom the brokerage arranged mortgages during the previous fiscal year if the mortgages constituted more than 50 per cent of the total number of mortgages and mortgage renewals completed by the brokerage during the previous fiscal year. O. Reg. 188/08, s. 19 (3).”
8. There are three possible relationships that a brokerage may have with a borrower. List them.
- Acting for the lender
- Acting for the borrower
- Acting for both the borrower and the lender
9. Discuss how brokerage fees are regulated by the MBLAA.
They are not regulated by the MBLAA.
10. What legislation prohibits the cost of borrowing from exceeding 60% APR?
The Criminal Code of Canada. Section 347 of the Criminal Code makes it a criminal offense to charge in excess of 60%, which for a mortgage includes the fees and costs payable by the borrower in addition to the interest charged by the lender. This figure is represented in the borrower disclosure as the cost of borrowing.
Chapter 11: Closing the Transaction
1. How much should a borrower have set aside for closing costs?
Between 1.5% and 3% of the purchase price.
2. Under what circumstances is PST included in the closing costs?
When there is a mortgage default insurance premium.
3. Under what circumstances is HST charged in the purchase of a property?
On a new home, HST is charged; however, the builder may include it in the purchase price. If it is not included, it must be paid on closing. In addition, there is a HST rebate applicable to new homes, substantially renovated homes, and modular and mobile homes for which an application must be completed.
4. What tax is charged on the mortgage default insurance premium?
When there is a mortgage default insurance premium.
5. Explain the significance of the Acknowledgement and Direction in the closing process.
This document allows the Lawyer to close the transaction electronically.
6. What purpose does the DRA serve?
This document allows the Lawyers to handle the client’s documents and funds and by signing this document, both Lawyers agree to undertake their professional obligations as to the handling of these documents and funds.
7. In a title-insured transaction, who remits the insurance premium to the title insurer?
8. Explain the interest adjustment.
An interest adjustment is the amount of interest that has accumulated from the date the mortgage was advanced until the date of the first mortgage payment.
9. Explain the interest adjustment payment?
The interest adjustment payment is the amount of the payment to pay that accumulated interest.
10. Define the interest adjustment date.
The interest adjustment date is the date that the interest adjustment payment is due.
11. What is a subsearch?
A subsearch is an update of a previously completed full search, commonly performed on behalf of a purchaser by his or her lawyer immediately prior to registration of a transfer, and on behalf of mortgagees immediately prior to the registration of a mortgage.
12. What is the first step in the closing process?
The purchaser’s lender is satisfied that all conditions have been met.
13. Who chooses which lawyer to use to close the transaction?
Either the borrower or the lender, but the lawyer must be acceptable to the lender.
14. What documents are included in the lender’s Instructions to Solicitor package?
This package commonly contains:
- A copy of the lender’s mortgage approval
- The lender’s disclosure statement
- Solicitor’s Final Report and Certificate of Title document for the lawyer to fill in
- Solicitor’s Interim Report and Requisition for Funds document for the lawyer to fill in
- Pre-authorized Debit Form
- Acknowledgement and Direction
- Instructions on the requirements for title-insured mortgages and non-title-insured mortgages
- Requirements regarding property insurance, surveys, condominium units, proof of identity, etc.
15. If a lender prohibits a vendor take-back, what must a lawyer do if they become aware that one exists?
The lawyer is required to inform the lender if they become aware of any secondary financing. This may cause the transaction to be cancelled.
16. Does the purchaser’s lawyer or the vendor’s lawyer register the discharge/cessation of mortgage?
The vendor’s lawyer registers the discharge/cessation of mortgage, transfer/deed, charge/mortgage and advises the purchaser’s lawyer of registration.
17. Which lawyer sends money to the original lender to discharge the current mortgage in a purchase transaction?
The vendor’s lawyer releases funds and documents and sends money to the original lender to discharge the current mortgage (if applicable).
18. What is the purpose of Form 9D?
Form 9D contains the written instructions from the lender. It crystallizes the transaction and is available for confirmation purposes in the event of a claim to the LawPRO®.
19. What is the purpose of Form 9E?
Form 9E is a report on the investment for the lender.
20. Under what circumstances are two lawyers required in a private mortgage transaction?
In cases where the mortgage is funded by a private lender and the mortgage is $75,000 or higher, it is a legal requirement that two lawyers be involved; a lawyer closing on behalf of the investor and a lawyer acting on behalf of the borrower.
Chapter 12: Mortgage Administration
1. What is the role of the Mortgage Administrator?
A mortgage administrator is a company or sole proprietorship that manages a mortgage after it has been funded. The duties of an administrator may include:
- Collecting mortgage payments from borrowers
- Sending payments to the lender on the mortgage being administered
- Collecting defaulted payments
- Collecting NSF fees, where applicable
- Enforcing payment using available mortgage remedies, such as the power of sale process
2. What is the minimum financial guarantee a Mortgage Administrator must have to get licensed?
Maintain a financial guarantee of $25,000. The guarantee may be unimpaired working capital, or another form of financial guarantee that is acceptable to the Superintendent. Immediately notify FSRA if this financial guarantee is cancelled or does not meet the required amount. Failure to notify FSRA may result in a $1,000 penalty.
3. Can a Mortgage Administrator be a sole proprietor?
Yes. Corporations, partnerships and sole proprietorships wishing to be licensed as a mortgage administrator must meet licensing requirements and must pass tests of suitability as per Regulation 411/07.
4. What is the amount of E and O that a Mortgage Administrator must maintain?
Maintain errors and omissions insurance. Each Mortgage Administrator is required to have errors and omissions insurance that includes coverage for fraudulent acts. The insurance must cover a minimum of $500,000 for any one occurrence and $1 million for all occurrences during a 365-day period. Notify FSRA if errors and omissions insurance is cancelled or not renewed. Failure to comply with this requirement may result in a $1,000 penalty.
5. Does a Mortgage Administrator have to verify the identity of each lender/investor before entering into an agreement with them?
Yes. A Mortgage Administrator must verify the identity of each lender/investor before entering into an agreement with the lender/investor to administer the mortgage. This does not apply if a Mortgage Brokerage is required by law to verify the lender’s or investor’s identity in connection with the mortgage.
6. When must a Mortgage Administrator have a trust account?
Whenever it plans to accept trust funds.
7. What are deemed trust funds?
These are funds held on behalf of a third party or that have yet to be earned. In other words, if you receive funds not meant for you, or you take a deposit payable once you have earned the fee, that will otherwise be refundable if you don’t earn the fee. This is detailed in O. Reg. 189/08: MORTGAGE ADMINISTRATORS: STANDARDS OF PRACTICE.
8. Do Mortgage Administrators have to file audited financial statements with OSFI?
Yes. The Mortgage Administrator must file the following statements with FSRA within 90 days of fiscal year end:
- Audited financial statements for the year prepared in accordance with the Generally Accepted Accounting Principles, as set out in the Handbook of the Canadian Institute of Chartered Accountants and audited by a licensed public accountant. Late filings may result in a $1,000 penalty.
- The auditor’s report on books, records and accounts of the Mortgage Administrator for the year.
- The auditor’s report about the Mortgage Administrator’s trust account, as well as assets and liabilities under administration for the year.
9. Under what circumstances must a Mortgage Administrator immediately notify an investor/lender?
As per subsection 18(3) of the Standards of Practice, a mortgage administrator has a duty to promptly notify each investor / lender in a mortgage if the mortgage administrator becomes aware of:
- a subsequent encumbrance on the mortgaged property or any other significant change in circumstances affecting the mortgage; and/or
- a borrower defaulting under the mortgage.
10. List 5 examples of significant changes in a borrower’s circumstances.
Significant changes in circumstances include, but are not limited to:
- borrower’s failure to make scheduled mortgage payments;
- potential amendments to the mortgage (e.g., mortgage maturity is extended);
- potential forbearance (e.g., payments are allowed to be deferred or capitalized) that could materially impact the performance of the mortgage;
- material delay in development of a project being funded by the mortgage;
- substantial reduction in sales / forecasted sales for the project funded by the mortgage;
- other encumbrances being registered on a mortgaged property (e.g., a tax lien);
- change in value of the underlying property and mortgage-based investments, such as syndicated mortgage investments;
- change in the ability of investors / lenders to redeem prior to the maturity date of the mortgage investment; and
- change in redemption policies.
Chapter 13: Fraud Detection and Prevention”
1. Define mortgage fraud.
Mortgage fraud is the deliberate omission of information, use of misstatements or misrepresentations to obtain, purchase, or fund a mortgage loan.
2. What factors contribute to mortgage fraud?
The increased usage of technology in the mortgage industry has allowed those committing mortgage fraud to take advantage of legitimate initiatives such as AVMs, Risk Assessment Tools, electronic registration of land titles documents and to communicate without face-to-face meetings. The mortgage market’s competitiveness is also a factor. There are more Lenders in today’s mortgage market than at any other time in Ontario’s history and those Lenders are competing for Borrowers. Due diligence is often sacrificed for faster approvals as Lenders cope with the potential of losing customers to other Lenders who provide faster service.
3. Explain the difference between fraud for criminal activities and fraud for profit.
According to the Criminal Intelligence Service Canada (CISC), mortgage fraud may be committed to further other criminal activities such as the financing of marihuana grow operations, drug labs, and money laundering. Many crime organizations and individuals will commit mortgage fraud to obtain the proceeds of the mortgage without the intent to repay the loan.
4. In your opinion, is fraud for shelter harmful? If so, to whom and why?
Fraud for shelter is one of the most common forms of fraud in the mortgage industry. This type of fraud occurs when an individual wishes to purchase a home in which to reside with no intent to abscond with mortgage funds or fraudulently sell the property by misstating or misrepresenting his or her status. In most cases this type of fraud involves inflation of the purchaser’s income to obtain mortgage financing. This can be harmful to the Borrower since he or she may not be able to afford the mortgage, leading to financial hardship. It can harm the Lender due to mortgage arrears and defaulting loans, and the Mortgage Brokerage industry as a whole since Lenders may scale back these products if they show a high vulnerability to fraud.
5. What is the most common factual misstatement made under fraud for shelter, according to Fannie Mae?
Misstatements about liabilities, at 71%.
6. What are the impacts of mortgage fraud on industry participants?
Psychological, reputational and economic.
7. What steps can a mortgage agent take to assist in mortgage fraud prevention?
The steps include identity verification, employment and income verification, occupancy verification, credit and property verification.
8. List and describe the typical fraud warning signs.
- The applicant cannot provide any photo identification, or says that he or she will provide photo identification but consistently does not. In addition the quality of the identification must be considered, especially if it does not appear to be genuine.
- If the applicants are not available to meet or if one applicant is never present.
- Employment and Income:
- The applicant’s job letter contains inconsistencies or errors. For example, if it does not match pay stubs or what the applicant has disclosed about the amount of income, the time employed or his or her job title or has spelling or grammatical errors.
If, when verifying the applicant’s employment, the Mortgage Agent cannot find a directory listing for the business, or the business contact number (as provided or as stated on the job letter) is a residential number or cellular number. This information can be obtained by conducting a business phone number search or reverse directory lookup using www.canada411.com or other Internet services.
- The position and/or income is inconsistent with the applicant’s age.
- The applicant’s job letter contains inconsistencies or errors. For example, if it does not match pay stubs or what the applicant has disclosed about the amount of income, the time employed or his or her job title or has spelling or grammatical errors.
- The applicant states that he or she has significant income but little or no assets.
- Meeting Location:
- If the client insists on meeting at a location other than the location of the property to be mortgaged. This may simply be based on convenience, and if the Mortgage Agent’s process includes meeting in his or her office this may not be considered a warning sign. The Mortgage Agent should request a copy of a recent utility bill with the applicant’s address and name.
- Contact Information:
- If the applicant only has a cellular phone for contact purposes (although more consumers are using cellular phones as their homes phone).
9. How does the Land Titles Assurance Fund assist homeowners who are victims of fraud?
The LTAF is designed to compensate individuals who have suffered financial losses due to errors or omissions in the land registration system and real estate fraud.
10. What ways can consumers protect themselves from fraud?
- Title Insurance
- Consumers should obtain title insurance on every property that they buy and get a title insurance for any property that they currently own. This can protect against future acts of title or mortgage fraud.
- Document Destruction
- Consumers should destroy all bills and other personally identifiable documents by using a paper shredder instead of simply throwing them in the garbage. This can prevent criminals from obtaining this information by going through a consumer’s garbage. It is now common for criminals to take several containers of garbage from consumers’ homes to a different location to search for documents containing personal identity information which can then be used to impersonate the consumer.
- Home Inspection
- A homebuyer purchasing a resale home should have it inspected. This can prevent the buyer from purchasing a house that was used as a grow op or a drug lab.
- Consumers should strive to withdraw cash only from their bank’s ATMs. There have been several circumstances where ATMs in small gas stations or other stores have been compromised, allowing the criminal to record debit card and PIN information.
- PIN Numbers
- Consumers should always protect their PIN numbers, including debit card and credit card numbers to prevent unauthorized use of these cards.
- Credit Reports
- Consumers should pull their own credit report every three to six months to ensure that there are no inquiries or debts that the consumer has not authorized. This can be done online through Equifax and Transunion.
- Online Shopping
- Consumers should only use online retailers that they have knowledge of and/or use secure, encrypted processing of payment information. This can be confirmed in many instances through the web browser by way of a lock icon.
- Phone Solicitations
- Consumers should never give their credit card information to unsolicited callers. If it is for a charity the consumer should obtain a number that he or she can verify and call the charity back, or have the charity send a payment request by mail. Many criminals will impersonate charities or other groups to obtain personal information by phone.
- Internet Phishing
- Phishing is an Internet scam whereby the criminal sends an email to the consumer requesting personal information. The email may appear to be from the consumer’s bank or other company such as Amazon or ebay. The technology can produce emails and websites that look identical to the actual company’s. However, respectable companies will not request this information by email.
- SIN Card
- Consumers should not carry their social insurance number card with them as this can be stolen and used for identity theft. There are only limited situations where a SIN card is required, and it is typically not required on a daily basis.
- Consumers should use passwords that are unique, excluding birth dates and other common forms of passwords. Consumers should keep this information, if written, locked in a secure place.
11. What steps have the default insurers taken to prevent mortgage fraud?
Default insurers have implemented strategies to prevent fraud, including publications and seminars on fraud prevention.
12. What steps has FSRA taken to assist the industry in preventing fraud?
FSRA has taken several steps to assist industry in preventing fraud, including updates to licensing and continuing education course curriculum, guidance to industry on regulations, and creation of industry checklists.
13. What resources has the MBRCC developed to assist the industry in preventing fraud?
The MBRCC has developed anti-fraud resources for the mortgage industry. These resources are located at https://www.mbrcc.ca/Anti-FraudResourcesforIndustry and include the following publications:
- Brokers’ Responsibilities to Prevent Mortgage Fraud
- Checklist for Detecting and Preventing Mortgage Fraud
- The Consequences of Mortgage Fraud
14. List five warning signs of mortgage fraud with regards to an applicant’s assets.
Any five of the following:
- The applicant states that they have significant income but little or no assets.
- Down payment source is other than deposits (gift, sale of personal property)
- Applicant’s salary doesn’t support savings on deposit
- Applicant doesn’t utilize traditional banking institutions
- Pattern of loyalty to financial institutions other than the subject lender
- Balances are greater than the Canadian DepositInsurance Corporation (CDIC) insured limits
- High asset applicant’s investments are not diversified
- Excessive balance maintained in checking account
- Dates of bank statements are unusual or out of sequence
- Recently deposited funds without a plausible paper-trail or explanation
- Bank account ownership includes unknown parties
- Balances verified as even dollar amounts
- Source of earnest/deposit money is not apparent
- Earnest/deposit money isn’t reflected in account withdrawals
- Earnest/deposit money is from a bank or account with no relationship to the applicant
- Bank statements do not reflect deposits consistent with income
15. What steps has OSFI taken to ensure its regulated entities prevent fraud?
OSFI, through guidelines such as B-20 and B-21, outlines steps that its regulated entities must take to prevent fraud, including identity verification, maintaining adequate mechanisms for detecting and preventing fraud or misrepresentation in automated underwriting systems, income verification and employment status of the borrow.
Chapter 14: Ethics
1. Define the term “ethics”.
Ethics can be defined as the process of applying the core values of the mortgage industry to a practitioner’s daily conduct.
2. What are the core values of the mortgage industry?
Honesty, integrity, acting in the best interests of the client and the industry, and complying with the law and codes of conduct are the core values of the industry.
3. What are the steps in the Decision-Making Model?
1. What are the facts?
Before one can come to a decision whether an action is ethical he or she must be relatively certain that all of the facts have been obtained. Failure to do so can result in a faulty decision.
2. Identify the potential solutions
Next, it is necessary to list the possible solutions to the problem. Once all of the possible solutions are listed, one can apply the next step in the process. It’s important to note that if you are too involved in a situation you may not be able to clearly see all of the potential solutions. In this instance it may be necessary to obtain the input of others, such as a co-worker or family member, to add some clarity and objectivity to the discussion.
3. Apply the core value: Honesty
Which potential solutions support this core value? To answer this question apply this core value to each of the solutions from step 2. Do any of the solutions contravene this value? If so, it is not necessary to proceed further; that solution is clearly unethical. Move to the test for integrity with the remaining solutions.
4. Apply the core value: Integrity
Does the potential solution compromise your integrity? In other words, would this solution be inconsistent with how you live and what you believe in? If the answer is yes you must deem this solution unethical. Move to the test of acting in the best interests of your client with the remaining solutions.
5. Apply the core value: Act in the best interests of your client
To be able to apply this core value it is necessary to have performed a detailed needs assessment to determine exactly what his or her needs are. Does the potential solution result in an action that is in the best interests of your client? If it does not, you must discard that solution. The remaining solutions can be taken to the next test.
6. Apply the core value: Act in the best interests of the industry
Does the potential solution reflect well on the industry? Acting in the best interests of the industry does not necessarily mean that the solution must have a positive impact on the industry, such as raising public awareness of the benefits of using a broker, but that it must not act against the best interests of the industry. Even if a potential solution has made it this far, the question would then be: is this solution detrimental to the industry? If the answer is yes, the solution must be discarded. If not, move on to the final core value test.
7. Apply the core value: Comply with law and codes of conduct
Finally, this core value is applied to the remaining solutions. If any contravene this core value they must be discarded.
8. Choose the best solution
Any solutions now available to you can be reasonably assumed to be ethical. If you have more than one solution still available, the test of which provides the greatest good can be applied. In most cases, however, only one solution will remain.
9. Review the process
Once you’ve reached a decision it is important to review the process step by step to ensure that your tests were applied objectively and without bias. It may also be helpful to discuss the process with someone you trust, as long as the discussion does not disclose confidential information, or information that might damage another’s reputation.
4. Why should an individual review the Decision Making Model process before making his or her final decision?
To ensure that he or she has thought of all possibilities and that his or her final decision was arrived at objectively and free of bias.
5. What are some options for an individual to ensure that he or she has obtained all of the facts?
Do additional research if applicable, ask family, friends and colleagues.
6. What should an individual do if he or she can’t obtain all of the facts?
He or she should make every effort to obtain all of the facts and should refrain from making a final decision until he or she is certain that all of the facts, or as many facts as possible, have been considered.
7. If two or more possible solutions make it to the final step, how would you choose the best option?
If two or more possible solutions make it to the final step, the decision maker should consider the choice that makes the most positive impact.
8. List your core values and compare them to the industry’s core values. How does the Decision Making Model that you would use for your personal decisions differ from those of your business decisions, if at all?
This question requires personal introspection.
9. Is it possible for an individual to determine all of the potential solutions to a scenario? If not, how else might he or she develop additional solutions?
Depending on the situation an individual might not be able to see all solutions clearly. If this is the case others should be consulted to determine if there are any solutions that may have been excluded.
10. Ask your friends or family members not in the mortgage industry what they believe the core values of the industry are. Write them down and compare them to those listed in this chapter. What did you find? Is the perception of the mortgage industry similar to this chapter’s core values or different? If different, how might the industry change this perception?
This question requires personal research and will differ from person to person.
11. What is the MBRCC?
The MBRCC is a forum for Canadian mortgage broker regulators to collaborate and promote regulatory consistency to serve the public interest.
12. If a code of conduct found in the MBRCC Code of Conduct for the Mortgage Brokering Sector is not as strict as what is required by the MBLAA, what should a mortgage agent do?
Any stricter or more specific requirements, rules or standards of conduct take priority over the Code.
13. What is the purpose of the MBRCC Code of Conduct for the Mortgage Brokering Sector?
The MBRCC developed this plain-language Code of Conduct (Code) to promote high standards of conduct to protect consumers of mortgage brokering services.
14. Does acting in the best interests of the industry mean that your decision must have a positive impact on the industry?
Acting in the best interests of the industry does not necessarily mean that the solution must have a positive impact on the industry, such as raising public awareness of the benefits of using a broker, but that it must not act against the best interests of the industry.
15. Your client wants a mortgage that they cannot afford. Would arranging this mortgage be acting in their best interests? Why or why not?
No, because if it is not affordable it is not in the borrower’s best interests.