Private Mortgage Brokering In Ontario [1 ed.] 9781988049144

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PRIVATE MORTGAGE BROKERING IN ONTARIO 1ST Edition Joseph J White

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Copyright © 2023 by Joseph J. White. All rights reserved. Printed in Canada. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the author. ISBN 978-1-988049-14-4 07122022 Most recent update: January, 2023 This publication is intended for educational purposes only, providing information deemed to be accurate at the time of publication regarding the mortgage industry in Ontario. Legal and other decisions related to financial transactions must be completed only after seeking advice from a competent professional person and must not be based on information contained herein. Neither the publisher nor the author is engaged in rendering legal or other professional advice. The events and characters in this book are fictitious. Any resemblance to persons, living or dead is purely coincidental.

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Acknowledgements I would like to thank all those in the industry who have so richly enhanced my career, including students, colleagues, REMIC staff and the many friends I’ve made over my thirty plus year career. I thank Jeff Levy, Managing Partner of the law firm Levy Zavet PC, Lawyers, who has over 15 years of experience in this field. In my opinion they offer excellent advice, guidance and help with private mortgages, including regulatory guidance and help with underwriting, drafting, and closing simple or complex transactions. You can reach out to Mr. Levy at [email protected]. I would like to thank all those in the private lending field, of which I’ve belonged for much of my career, for their dedication to assisting their clients in an ethical manner, while providing fair returns for themselves and their investors. This book is a testament to how ethical mortgage brokering is beneficial to all involved. For this book, I’ve relied heavily on guidance from the Financial Services Commission of Ontario (FSRA), who have proven themselves to be dedicated to the success of the mortgage brokerage industry, as well as the other sectors in which it regulates. With a focus on consumer protection while fostering a competitive marketplace, they have, in my humble opinion, done a wonderful job. You’ll see their full mandate and values within these pages.

About the Author Joseph J. White is the founder and President of the Real Estate and Mortgage Institute of Canada (REMIC), the Association of Mortgage Investment Professionals (AMIPROS), and the Fraud Prevention Centre of Canada (FPCC), a national charity dedicated to the prevention of fraud. Mr. White has been a staunch supporter of the mortgage industry since 1988, when he began his career as a mortgage agent, and in the mortgage lending sector of the industry he has held positions as National Sales Manager and VP of Sales with two national mortgage lenders. In the industry’s mortgage brokering sector he is a licensed mortgage broker and has been a partner at a successful mortgage brokerage, manager at two national brokerages, principal broker at a commercial brokerage, founder of a mortgage investment corporation, and is owner and principal broker of his own boutique brokerage. As an educator, Mr. White has personally instructed over twenty thousand students since 1996, many of whom are now leaders in the industry. During his years at Seneca College he was a professor, program coordinator, subject matter expert and winner of the Excellence Award for exceptional leadership. In addition to having developed several courses for Seneca College, including the first mortgage broker education program in Ontario's history, he designed the mortgage agent course currently used by REMIC and Ontario's colleges. Mr. White has written two textbooks used in the mortgage industry and by over 20 Ontario colleges, with over fifty thousand copies in print, as well as several business focused books and e-books. Mr. White has made significant contributions to the growth of the mortgage industry. When he began his career in teaching, 120 students per year were taking the mortgage agent course. Because of his passion and dedication to helping those who want to make mortgage brokering their career, REMIC has become the largest mortgage educator in Canada, teaching over 10,000 students per year. Mr. White was inducted into the CMP Mortgage Hall of Fame in 2019. Mr. White can be contacted at [email protected]

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Table of Contents ACKNOWLEDGEMENTS ................................................................................................................................................... III ABOUT THE AUTHOR ...................................................................................................................................................... III INTRODUCTION ..............................................................................................................................................................1 CHAPTER 1: INTRODUCTION TO PRIVATE MORTGAGES....................................................................................... 2 1.1 1.2 1.3

LEARNING OUTCOMES .......................................................................................................................................2 INTRODUCTION .................................................................................................................................................2 WHAT IS A PRIVATE LENDER? ..............................................................................................................................2

1.4 1.5

WHAT IS A PRIVATE MORTGAGE? ........................................................................................................................3 CHARACTERISTICS OF PRIVATE MORTGAGES ...........................................................................................................3

Pause for clarification – Financial Institution ............................................................................................................ 2

1. 2. 3. 4. 5. 6. 7. 8.

Second mortgage ................................................................................................................................................. 3 Uninsured ............................................................................................................................................................ 4 Equity take-out .................................................................................................................................................... 4 Higher interest rates ............................................................................................................................................ 4 Higher risk ............................................................................................................................................................ 4 Non-amortized (interest only) ............................................................................................................................. 4 Short term............................................................................................................................................................ 4 Smaller loan amounts compared to institutional lenders.................................................................................... 5 Pause for clarification – Mortgage Investment Entity (MIE) ..................................................................................... 5 9. Security based lending ......................................................................................................................................... 5 10. Higher fees ...................................................................................................................................................... 5

1.6

THE NEED FOR PRIVATE MORTGAGES ...................................................................................................................5 1.6.1 Legislative changes to institutional lending programs.......................................................................................... 5 Pause for clarification – Stress Test .......................................................................................................................... 6 Pause for clarification – Amortization, Loan to value (LTV), GDS and TDS ............................................................... 6 1.6.2 Reasons for Using a Private Mortgage.................................................................................................................. 9 Top reasons for using a private mortgage ................................................................................................................... 10 1. Accessing equity ................................................................................................................................................ 10 2. Debt consolidation ............................................................................................................................................. 10 3. Bridge financing ................................................................................................................................................. 12 4. Time constraints ................................................................................................................................................ 12 5. Construction ...................................................................................................................................................... 12

1.7 1.8

TRENDS IN PRIVATE LENDING ............................................................................................................................13 BENEFITS OF PRIVATE MORTGAGES ....................................................................................................................14 1.8.1 Borrowers ........................................................................................................................................................... 14 1. Mortgage is declined by another lender ............................................................................................................ 14 2. Flexibility in private lending ............................................................................................................................... 15 1.8.2 Investors ............................................................................................................................................................. 15 1. Rate of Return .................................................................................................................................................... 16 2. Security .............................................................................................................................................................. 16 Why doesn’t everyone become a private lender?....................................................................................................... 17

1.9

COMPARING MORTGAGE INVESTMENTS TO OTHER INVESTMENTS ............................................................................18 1.9.1 Mutual Funds...................................................................................................................................................... 18 1.9.2 Cash and cash equivalents .................................................................................................................................. 21 1.9.3 Fixed income securities ...................................................................................................................................... 21 1.9.4 Equities / Stocks / Shares.................................................................................................................................... 22 1.9.5 Alternative investments ..................................................................................................................................... 23

1.10 1.11 1.12

SOURCES OF INVESTMENT FUNDS .......................................................................................................................24 KEY TERMS AND DEFINITIONS ............................................................................................................................26 REVIEW QUESTIONS ........................................................................................................................................29 1.12.1 Short Answer Questions ................................................................................................................................... 29

1.13

APPENDIX 1 – NHA APPROVED LENDERS ............................................................................................................30

CHAPTER 2: ROLE OF THE BROKERAGE ..............................................................................................................35 2.1

LEARNING OUTCOMES .....................................................................................................................................35

v 2.2 2.3

INTRODUCTION ...............................................................................................................................................35 ROLE OF THE MORTGAGE BROKERAGE IN A PRIVATE TRANSACTION ..........................................................................35 2.3.1 Activities requiring a License .............................................................................................................................. 35 Dealing in mortgages .............................................................................................................................................. 35 Trading in mortgages .............................................................................................................................................. 36 Lending ................................................................................................................................................................... 36 Pause for clarification – Lending: licensed or not? ................................................................................................. 36 2.3.2 Compliance Checklist for Mortgage Brokerages, Brokers and Agents ................................................................ 37 Customer Relations ................................................................................................................................................ 37 Pause for clarification – franchise........................................................................................................................... 37 Disclosure ............................................................................................................................................................... 38 Pause for clarification – disclosure ......................................................................................................................... 38 Pause for clarification – waiting period .................................................................................................................. 39 Prohibited Activities ............................................................................................................................................... 39 2.3.3 The role of the brokerage ................................................................................................................................... 40 2.3.4 Legal responsibility of the brokerage ................................................................................................................. 41 2.3.5 The Law of Agency: more than just expectations ............................................................................................... 44 Agency .................................................................................................................................................................... 44 The agent and the principal .................................................................................................................................... 44 Agent’s duties to the principal..................................................................................................................................... 44 Principal’s duties to the agent ..................................................................................................................................... 44 Termination of the agency .......................................................................................................................................... 44 Agency between the mortgage brokerage/agent/broker and the borrower ......................................................... 45 Agency between the mortgage brokerage and the mortgage agent/broker ......................................................... 45

2.4 2.5

KEY TERMS AND DEFINITIONS ............................................................................................................................46 REVIEW QUESTIONS ........................................................................................................................................47 2.5.1 Short Answer Questions ..................................................................................................................................... 47

CHAPTER 3: ROLE OF THE REGULATORS .............................................................................................................48 3.1 3.2 3.3

LEARNING OUTCOMES .....................................................................................................................................48 INTRODUCTION ...............................................................................................................................................48 REGULATORY AUTHORITIES ...............................................................................................................................48 1. 2. 3.

3.4

Office of the Superintendent of Financial Institutions (OSFI) ............................................................................ 48 Financial Services Regulatory Authority of Ontario (FSRA) ................................................................................ 51 Ontario Securities Commission .......................................................................................................................... 52

FSRA’S ROLE IN LICENSURE .............................................................................................................................. 52 Success Tip - Date your license was issued ............................................................................................................. 53 3.4.1 FSRA’s Guidance No. MB0047INT ....................................................................................................................... 53 Purpose................................................................................................................................................................... 53 Scope ...................................................................................................................................................................... 53 Rationale and background ...................................................................................................................................... 53 Interpretation/Approach ........................................................................................................................................ 54 New licensing classes .............................................................................................................................................. 54 Individual licensee accountability in transactions .................................................................................................. 55 New licensing requirements ................................................................................................................................... 55 Transition to the new licensing requirements ........................................................................................................ 56 Transition milestones .................................................................................................................................................. 56 Spring 2022:................................................................................................................................................................. 56 Early 2023: ................................................................................................................................................................... 56 April 1, 2023: ............................................................................................................................................................... 56 October 31, 2023: ........................................................................................................................................................ 57 March 31, 2024: .......................................................................................................................................................... 57 Demonstration of private lending competencies ................................................................................................... 57 The Challenge Exam: ................................................................................................................................................... 57 Transition requirements for former licensees / reinstated licences ........................................................................... 59 Licensing fees.......................................................................................................................................................... 59 New Continuing Education requirements effective April 1, 2023 .......................................................................... 59 The new CE requirements are being phased in. .......................................................................................................... 60 Labour mobility ....................................................................................................................................................... 61 Applications for education and experience equivalency ........................................................................................ 61

vi Supervision approach and principles ...................................................................................................................... 61 Compliance and enforcement ................................................................................................................................ 62 About this guidance ................................................................................................................................................ 62 Appendix 1: Mortgage Agent Level 1 scope of work scenarios .............................................................................. 62 Appendix 2: Transition requirement scenarios....................................................................................................... 63 General transition scenarios ........................................................................................................................................ 63 Licence reinstatement scenarios ................................................................................................................................. 64 Reference .................................................................................................................................................................... 65 3.4.2 Licensure............................................................................................................................................................. 65 Pause for clarification – Licensure .......................................................................................................................... 65 Five Licenses ........................................................................................................................................................... 65 Pause for clarification – Corporations, partnerships, and sole proprietorships ..................................................... 65 Restrictions ............................................................................................................................................................. 65 Exemptions to Licensure......................................................................................................................................... 66 Pause for clarification – Vendor take-back ............................................................................................................. 66 Having a License Issued by FSRA............................................................................................................................. 67 FSRA's Public Registry ............................................................................................................................................. 67 For your information… FSRA’s public registry......................................................................................................... 68

3.5

PUBLIC RELATIONS MATERIALS AND PRIVATE MORTGAGES .....................................................................................68 3.5.1 The Canadian Code of Advertising Standards ..................................................................................................... 68 Pause for clarification – Bait and switch ................................................................................................................. 69 3.5.2 Legislation ........................................................................................................................................................... 70 Public Relations Materials: Agents and Brokers .......................................................................................................... 70 Use of licensee name................................................................................................................................................... 71 Use of name, etc., in public relations materials .......................................................................................................... 71 Prohibition re public relations materials ..................................................................................................................... 71 Public Relations Materials: Mortgage Brokerages....................................................................................................... 71 Use of authorized name .............................................................................................................................................. 71 Use of name, etc., in public relations materials .......................................................................................................... 71 Pause for clarification – Regulation 188/08 MORTGAGE BROKERAGES: STANDARDS OF PRACTICE ...................... 72 Misleading, Deceptive and False Advertising .............................................................................................................. 72 Advertising Tips – Competition Bureau of Canada ...................................................................................................... 73 Pause for clarification – Competition Bureau of Canada ........................................................................................ 73

3.6

FSRA’S MONITORING AND ENFORCEMENT ..........................................................................................................74 3.6.1 Monitoring, checks, reviews, and audits ............................................................................................................ 74 3.6.2 Investigations ..................................................................................................................................................... 74 3.6.3 Enforcement ....................................................................................................................................................... 74 3.6.4 Prohibited Activities ........................................................................................................................................... 75 3.5.5 Penalty Types...................................................................................................................................................... 75 Pause for clarification – Administrative penalties .................................................................................................. 75 3.6.4.1 Administrative Penalties .................................................................................................................................. 75 Pause for clarification – Financial Services Tribunal ............................................................................................... 76 3.6.4.2 Administrative Penalties: Amounts ................................................................................................................. 76 Example 1: Dealing in Mortgages for more than one brokerage................................................................................. 76 Example 2: Accepting fees from a person or entity other than the licensee’s brokerage ........................................... 76 3.6.4.3 Charges for an offence under the legislation................................................................................................... 78 3.6.4.4 Charges for an offence under the MBLAA: Amounts....................................................................................... 78 Example 3: Accepting falsified documents from a borrower ...................................................................................... 78 Example 4: Not having a suitable email address ......................................................................................................... 79 3.6.5 Having a License Suspended or Revoked by FSRA .............................................................................................. 79 Example 5: (continuation of Example 2); Conditions added to a license..................................................................... 80

3.7 3.8 3.9

EXTERNAL RESOURCES .....................................................................................................................................82 KEY TERMS AND DEFINITIONS ............................................................................................................................83 REVIEW QUESTIONS ........................................................................................................................................85 3.9.1 Short Answer Questions ..................................................................................................................................... 85

CHAPTER 4: LENDERS ........................................................................................................................................86 4.1 4.2 4.3

LEARNING OUTCOMES .....................................................................................................................................86 INTRODUCTION ...............................................................................................................................................86 LENDER CLASSIFICATIONS..................................................................................................................................86

vii 4.3.1 Chartered Banks ................................................................................................................................................. 86 4.3.2 Credit Unions ...................................................................................................................................................... 87 4.3.3 Mortgage Finance Companies (MFCs) ................................................................................................................ 87 4.3.4 Mortgage Investment Entities (MIEs) / Private Lending Structures ................................................................... 88 4.3.5 MBLAA Financial Institutions .............................................................................................................................. 89

4.4

MORTGAGE INVESTMENT CORPORATIONS ...........................................................................................................90 4.4.1 What is a MIC?.................................................................................................................................................... 90 4.4.2 Characteristics of a MIC ...................................................................................................................................... 90 4.4.3 MICs as investments ........................................................................................................................................... 91

4.5

INDIVIDUAL LENDERS AND INVESTORS .................................................................................................................91 Pause for clarification – Investor ............................................................................................................................ 91 Pause for clarification – Lender .............................................................................................................................. 91 4.5.1 Designated classes of lenders and investors ...................................................................................................... 92 Disclosure form for lenders and investors re mortgages............................................................................................. 93 4.5.2 The Importance of knowing your investor/lender.............................................................................................. 94 4.5.3 How to know your investor/lender .................................................................................................................... 95 Pause for clarification – Know Your Client (KYC) form ............................................................................................ 95 KYC for investor/lenders.............................................................................................................................................. 95

4.6

SYNDICATED MORTGAGE INVESTMENTS (SMI) ...................................................................................................115 4.6.1 Qualified Syndicated Mortgage (QSMI) ............................................................................................................ 115 4.6.2 Non-Qualified Syndicated Mortgage (NQSMI( ................................................................................................. 115 Pause for clarification – Permitted Clients ........................................................................................................... 116 Pause for clarification – Non-Individual Permitted Clients ................................................................................... 116 4.6.3 Tips before investing in a syndicated mortgage ............................................................................................... 117 The risks: ............................................................................................................................................................... 117 Your rights and responsibilities ............................................................................................................................ 117

4.7 4.8

KEY TERMS AND DEFINITIONS ..........................................................................................................................120 REVIEW QUESTIONS ......................................................................................................................................123 4.8.1 Short Answer Questions ................................................................................................................................... 123

CHAPTER 5: TRANSACTION PROCESS ............................................................................................................... 124 5.1 5.2 5.3

LEARNING OUTCOMES ...................................................................................................................................124 INTRODUCTION .............................................................................................................................................124 THE STEPS IN THE TRANSACTION PROCESS - BORROWER .......................................................................................124 Pause for clarification – Commitment letter ........................................................................................................ 126 Pause for clarification – Conditions ...................................................................................................................... 127

5.3

THE STEPS IN THE TRANSACTION PROCESS – INVESTOR .........................................................................................129

5.4 5.5

KEY TERMS AND DEFINITIONS ..........................................................................................................................133 REVIEW QUESTIONS ......................................................................................................................................134

Success Tip – Provide disclosure documents to all investors................................................................................ 131

5.5.1 Short Answer Questions ................................................................................................................................... 134

CHAPTER 6: UNDERWRITING THE APPLICATION............................................................................................... 135 6.1 6.2 6.3 6.4

LEARNING OUTCOMES ...................................................................................................................................135 INTRODUCTION .............................................................................................................................................135 FILE CREATION..............................................................................................................................................135 FILE WORKSHEET ..........................................................................................................................................136

6.5

IDENTITY VERIFICATION ..................................................................................................................................137

Success Tip – Is your client working with someone else? ..................................................................................... 137 Pause for clarification – Identity verification ........................................................................................................ 138 6.5.1 Acceptable forms of identification ................................................................................................................... 138 6.5.2 Samples of acceptable identification ................................................................................................................ 139 Citizenship Card .................................................................................................................................................... 139 Firearms License ................................................................................................................................................... 139 Indian Status card ................................................................................................................................................. 139 NEXXUS Card......................................................................................................................................................... 140 Passport ................................................................................................................................................................ 140 Permanent Resident card ..................................................................................................................................... 141 Photo ID card ........................................................................................................................................................ 141

viii Pause for clarification – FINTRAC ......................................................................................................................... 142 Driver’s License ..................................................................................................................................................... 142 Ontario Driver’s License sample ........................................................................................................................... 142 Ontario Driver’s License ............................................................................................................................................ 142 Tips for reading an Ontario Driver’s License .............................................................................................................. 142 Ontario Driver’s License – person under age 19 (aged 16 to 18) .............................................................................. 143 Attestations .......................................................................................................................................................... 143

6.6

THE APPLICATION FORM ................................................................................................................................144 6.6.1 Section-by-section application analysis ............................................................................................................ 146 Pause for clarification – Co-applicants, co-signers, and guarantors ..................................................................... 147 6.6.2 Tips for a complete application ........................................................................................................................ 152

6.7 6.8

DETERMINING THE APPLICANT’S NEEDS .............................................................................................................153 UNDERWRITING THE APPLICATION ....................................................................................................................155 6.8.1 5 Cs of credit ..................................................................................................................................................... 155 6.8.2 Personal covenant ............................................................................................................................................ 156 Credit .................................................................................................................................................................... 156 Capacity/Affordability ........................................................................................................................................... 156 Pause for clarification – Budget ............................................................................................................................ 157 Case Study - Budget .............................................................................................................................................. 157 Capital/Equity ....................................................................................................................................................... 159 Character .............................................................................................................................................................. 160

6.9 6.10

KEY TERMS AND DEFINITIONS ..........................................................................................................................161 REVIEW QUESTIONS ......................................................................................................................................163 6.10.1 Short Answer Questions ................................................................................................................................. 163

CHAPTER 7: SECURITY ..................................................................................................................................... 164 7.1 7.2

LEARNING OUTCOMES ...................................................................................................................................164 INTRODUCTION .............................................................................................................................................164

7.3 7.4

PURPOSES OF A REAL ESTATE APPRAISAL ...........................................................................................................164 PROPERTY TYPES ...........................................................................................................................................165

Pause for clarification – What is an appraisal? ..................................................................................................... 164

1. 2. 3. 4. 5. 6.

7.5

Detached:......................................................................................................................................................... 165 Semi-detached: ................................................................................................................................................ 165 Row-townhouses: ............................................................................................................................................ 165 Condominium unit ........................................................................................................................................... 165 Duplexes, triplexes, fourplexes: ....................................................................................................................... 165 Co-operatives (co-ops): .................................................................................................................................... 165

FACTORS AFFECTING VALUE ............................................................................................................................165 Factors affecting demand ..................................................................................................................................... 165 Factors affecting supply ........................................................................................................................................ 165 7.5.1 Factors affecting demand ................................................................................................................................. 165 1. Demographics .................................................................................................................................................. 165 2. Interest rates ................................................................................................................................................... 166 3. Government policies ........................................................................................................................................ 166 4. The economy ................................................................................................................................................... 166 5. Affordability ..................................................................................................................................................... 166 7.5.2 Factors affecting supply .................................................................................................................................... 166 1. Building permits ............................................................................................................................................... 166 2. Listings ............................................................................................................................................................. 167 3. Land use plans ................................................................................................................................................. 167

7.6

THE REAL ESTATE APPRAISER ..........................................................................................................................167 7.6.1 The Appraiser ................................................................................................................................................... 167 7.6.2 Accreditations ................................................................................................................................................... 167 Pause for clarification – Accreditation .................................................................................................................. 168

7.7

CALCULATING THE MARKET VALUE OF A REAL PROPERTY ......................................................................................169 7.7.1 The value of a property .................................................................................................................................... 169 7.7.2 Market value..................................................................................................................................................... 169 7.7.3 Approaches to determining value .................................................................................................................... 169 The income approach ........................................................................................................................................... 169 The cost approach ................................................................................................................................................ 169

ix The direct comparison approach .......................................................................................................................... 170 Pause for clarification – The number of comparables .......................................................................................... 171 7.7.4 Automated Valuation Models (AVMs) .............................................................................................................. 171 7.7.4 Risk assessment tools ....................................................................................................................................... 172

7.8

THE REAL PROPERTY APPRAISAL REPORT ...........................................................................................................172 7.8.1 Desktop appraisal ............................................................................................................................................. 173 7.8.2 Drive-by appraisal ............................................................................................................................................. 173 7.8.3 Full appraisal..................................................................................................................................................... 173 7.8.4 Drive-by Appraisal - Example ............................................................................................................................ 174 7.8.5 Full Appraisal - Example.................................................................................................................................... 177

7.9

LOAN SECURITY: MORTGAGE REGISTRATION AND DISCHARGE ...............................................................................189 7.9.1 The Charge/Mortgage ...................................................................................................................................... 189 7.9.2 Collateral Charge/Mortgage ............................................................................................................................. 191 7.9.3 The Discharge of Charge/Mortgage.................................................................................................................. 193 7.9.4 Blanket mortgages ............................................................................................................................................ 194 7.9.5 Partial Discharge ............................................................................................................................................... 195

7.10

JUDGMENTS, WRITS OF SEIZURE AND SALE OF LAND, AND LIENS ............................................................................195 7.10.1 Judgments ...................................................................................................................................................... 195 7.10.2 What is a writ of seizure and sale of land? ..................................................................................................... 196 7.10.3 Liens................................................................................................................................................................ 197

7.11

LOAN SECURITY: PERSONAL PROPERTY ..............................................................................................................197 7.11.1 Lien on personal property .............................................................................................................................. 197 What is the process? ................................................................................................................................................. 197

7.12 7.13

KEY TERMS AND DEFINITIONS ..........................................................................................................................198 REVIEW QUESTIONS ......................................................................................................................................201 7.13.1 Short Answer Questions ................................................................................................................................. 201

CHAPTER 8: INVESTOR/LENDER DISCLOSURE & COMMITMENT ....................................................................... 202 8.1 8.2

LEARNING OUTCOMES ...................................................................................................................................202 INTRODUCTION .............................................................................................................................................202

8.3

DISCLOSING CONFLICTS OF INTEREST .................................................................................................................203

Pause for clarification – Business day ................................................................................................................... 202 8.3.1 What is a conflict of interest? ........................................................................................................................... 203 8.3.2 Relevant Legislation .......................................................................................................................................... 203 Legislation: O. Reg. 188/08: MORTGAGE BROKERAGES: STANDARDS OF PRACTICE ................................................. 203 8.3.3 Conflicts due to compensation ......................................................................................................................... 204 8.3.4 Conflicts due to relationships ........................................................................................................................... 204 Examples of relationships which may result in disclosable conflicts of interest:.................................................. 204 8.3.5 Conflicts due to multiple roles in a transaction ................................................................................................ 204 50 percent disclosure rule .................................................................................................................................... 205

8.4

IDENTIFYING ACTUAL AND/OR POTENTIAL CONFLICTS OF INTEREST ...........................................................................205 8.4.1 Personal conflicts of interest ............................................................................................................................ 206 8.4.2 Business conflicts of interest ............................................................................................................................ 206

8.5

DISCLOSURE THAT PROMOTES INFORMED DECISION MAKING ..................................................................................206 8.5.1 Disclosure of conflicts of interest or potential conflicts of interest .................................................................. 206 Points programs.................................................................................................................................................... 207 Broker/agent related to the lender ...................................................................................................................... 207 Broker/agent is the lender or a member of a syndicate lender............................................................................ 207 Broker/agent will acquire the mortgage after funding ......................................................................................... 208 Broker/agent obtaining a benefit from the borrower .......................................................................................... 208 Broker/agent related to the borrower ................................................................................................................. 208

8.6

THE IMPACT OF INAPPROPRIATE CONFLICT OF INTEREST DISCLOSURES ......................................................................208 8.6.1 Administrative Penalties ................................................................................................................................... 208 8.6.1.1Maximum administrative penalties ................................................................................................................ 208 Criteria for determining amount of penalty ......................................................................................................... 209 8.6.2 Offences............................................................................................................................................................ 209 8.6.2.1 Offence re standards of practice ................................................................................................................... 210 Penalties for offences ........................................................................................................................................... 210

8.7

PRACTICES TO HELP MANAGE CONFLICTS OF INTEREST ...........................................................................................210 8.7.1 Conflict of Interest Policies ............................................................................................................................... 210

x 8.7.2 How to Disclose a Conflict of Interest – 3 Simple Steps.................................................................................... 211

8.8

DISCLOSING RISKS .........................................................................................................................................212 8.8.1 What is a material risk? .................................................................................................................................... 212 8.8.2 Relevant Legislation .......................................................................................................................................... 212 8.8.3 Material risks in a private mortgage investment .............................................................................................. 212 8.8.4 Material risks in a syndicated mortgage investment ........................................................................................ 212

8.9

RISK REDUCTION STRATEGIES ..........................................................................................................................213

8.10 8.11 8.12 8.13 8.14 8.15 8.16 8.17

INVESTOR/LENDER DISCLOSURE DOCUMENTS.....................................................................................................214 FORM 1 - INVESTOR/LENDER DISCLOSURE .........................................................................................................215 FORM 1.1 – ADDENDUM FOR CONSTRUCTION AND DEVELOPMENT LOANS ..............................................................229 FORM 1.2 – WAIVER FOR REDUCING THE WAITING PERIOD ..................................................................................236 FORM 2 – RENEWAL FORM ............................................................................................................................. 238 FORM 2.1 – WAIVER FOR REDUCING THE WAITING PERIOD ..................................................................................250 PRESENTING DISCLOSURE AND DISCUSSING THE INVESTMENT ................................................................................252 THE COMMITMENT LETTER ............................................................................................................................. 252

Pause for clarification – Market disruption .......................................................................................................... 214

8.17.1 Sample Commitment Letter ........................................................................................................................... 252 Commitment letter legend ................................................................................................................................... 252 Pause for clarification – Pari-passu ....................................................................................................................... 252 Pause for clarification – Postponement agreement ............................................................................................. 256

8.18 8.19 8.20

EXTERNAL RESOURCES ...................................................................................................................................257 KEY TERMS AND DEFINITIONS ..........................................................................................................................258 REVIEW QUESTIONS ......................................................................................................................................260 8.20.1 Short Answer Questions ................................................................................................................................. 260

CHAPTER 9: EXIT STRATEGIES .......................................................................................................................... 261 9.1 9.2 9.3 9.3

LEARNING OUTCOMES ...................................................................................................................................261 INTRODUCTION .............................................................................................................................................261 TYPICAL EXIT STRATEGIES................................................................................................................................261 DEFAULT REMEDIES .......................................................................................................................................262 9.3.1 Power of Sale .................................................................................................................................................... 262 Power of Sale Process ........................................................................................................................................... 263 Issues with a Power of Sale ....................................................................................................................................... 266 Power of Sale with Mortgage Default Insurance .................................................................................................. 266 9.3.2 Judicial Sale and Foreclosure ............................................................................................................................ 266 Judicial Sale ........................................................................................................................................................... 266 Foreclosure ........................................................................................................................................................... 266 Issues with Foreclosures ............................................................................................................................................ 267 9.3.3 Other Remedies ................................................................................................................................................ 267 1. Demand Letter ............................................................................................................................................ 267 2. Quit Claim ................................................................................................................................................... 267 3. Appointment of a Receiver ......................................................................................................................... 268 4. Assignment of rents .................................................................................................................................... 268 5. Action on the Covenant .............................................................................................................................. 268 9.3.4 Working with the Lender .................................................................................................................................. 268 Success Tip – If your client is about to miss a payment... ..................................................................................... 268

9.4 9.5

KEY TERMS AND DEFINITIONS ..........................................................................................................................269 REVIEW QUESTIONS ......................................................................................................................................271 9.5.1 Short Answer Questions ................................................................................................................................... 271

CHAPTER 10: BORROWER DISCLOSURE ............................................................................................................ 272 10.1 10.2 10.3

LEARNING OUTCOMES ...................................................................................................................................272 INTRODUCTION .............................................................................................................................................272 BORROWER DISCLOSURE – WHAT MUST BE DISCLOSED ........................................................................................273 Pause for clarification – Borrower disclosure is NOT a contract ........................................................................... 273 1. Fees and payments associated with the mortgage ..................................................................................... 273 Pause for clarification – Fees are not regulated ................................................................................................... 273 Advance fees ............................................................................................................................................................. 273

xi 2. The relationship between the brokerage and lender under the proposed mortgage ................................ 274 3. The role of the brokerage ........................................................................................................................... 274 4. The number of lenders the brokerage represented during the previous year ........................................... 275 5. Potential conflicts of interest ...................................................................................................................... 275 Pause for clarification – Conflict of interest ......................................................................................................... 275 6. Risks associated with the proposed mortgage............................................................................................ 276 Risks – sample clauses ............................................................................................................................................... 276 Pause for clarification – NSF (non-sufficient funds) .............................................................................................. 277 7. Terms and conditions of the proposed mortgage ....................................................................................... 279 8. The cost of borrowing ................................................................................................................................. 279 Pause for clarification – The cost of borrowing: dollars and cents ....................................................................... 279 Pause for clarification – Calculating the APR/cost of borrowing .......................................................................... 280

10.4

COST OF BORROWING – EXPANDED EXPLANATION ..............................................................................................280 10.4.1 Cost of Borrowing – Included and excluded costs .......................................................................................... 281 Quick reference chart of included and excluded items ........................................................................................ 281 Included ................................................................................................................................................................ 282 Excluded ............................................................................................................................................................... 283 Pause for clarification – LTT refund, definition of first-time purchaser ................................................................ 284 Pause for clarification – MLTT rebate, definition of first-time homebuyer .......................................................... 285 Success Tip – Closing Cost Worksheet .................................................................................................................. 286

10.5

BORROWER DISCLOSURE – HOW DISCLOSURE MUST BE MADE..............................................................................286

10.6 10.7

BORROWER DISCLOSURE – WHEN DISCLOSURE MUST BE MADE ............................................................................287 SAMPLE BORROWER DISCLOSURE .....................................................................................................................287

10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16

BORROWER DISCLOSURE CHECKLIST .................................................................................................................295 THE IMPORTANCE OF INDEPENDENT LEGAL ADVICE (ILA)......................................................................................296 THE IMPORTANCE OF PROPER DISCLOSURE ....................................................................................................297 SUMMARY ...............................................................................................................................................298 KEY TERMS AND DEFINITIONS......................................................................................................................299 SAMPLE BORROWER DISCLOSURE - FILOGIX .................................................................................................300 SAMPLE CLOSING COST WORKSHEET ............................................................................................................302 EXTERNAL RESOURCES ...............................................................................................................................303 REVIEW QUESTIONS ..................................................................................................................................304

Pause for clarification – What disclosure documents MUST be given to the borrower? ..................................... 286

Pause for clarification – Interest adjustment date and amount ........................................................................... 294

10.16.1 True or False Questions ................................................................................................................................ 304 10.16.2 Short Answer Questions ............................................................................................................................... 304

CHAPTER 11: CLOSING THE TRANSACTION....................................................................................................... 306 11.1 11.2 11.3 11.4

LEARNING OUTCOMES ...................................................................................................................................306 INTRODUCTION .............................................................................................................................................306 ESTIMATING CLOSING COSTS ...........................................................................................................................306 THE CLOSING PROCESS ...................................................................................................................................307 Pause for clarification – When are 2 lawyers required? ....................................................................................... 307 Pause for clarification - Subsearch........................................................................................................................ 308

11.5 11.6

FORMS 9D AND 9E .......................................................................................................................................309 THE INTEREST ADJUSTMENT ............................................................................................................................313 Interest adjustment payment ............................................................................................................................... 313 Interest adjustment date ...................................................................................................................................... 313

11.7 11.8

KEY TERMS AND DEFINITIONS ..........................................................................................................................315 REVIEW QUESTIONS ......................................................................................................................................316 11.8.1 Short Answer Questions ................................................................................................................................. 316

APPENDIX 1: ACKNOWLEDGMENT AND DIRECTION ...........................................................................................................317 APPENDIX 2: DOCUMENT REGISTRATION AGREEMENT (DRA) ............................................................................................319 APPENDIX 3: FORM 9D INVESTMENT AUTHORITY - SAMPLE ...............................................................................................321 A. Details About The Investment: ............................................................................................................................. 321

APPENDIX 4: FORM 9E REPORT ON THE INVESTMENT - SAMPLE ..........................................................................................324 CHAPTER 12: MORTGAGE ADMINISTRATION ................................................................................................... 327

xii 12.1 12.2 12.3

LEARNING OUTCOMES ...................................................................................................................................327 INTRODUCTION .............................................................................................................................................327 ROLE OF THE MORTGAGE ADMINISTRATOR ........................................................................................................327 12.3.1 Compliance Checklist for Mortgage Administrators ....................................................................................... 328 Customer Relations .............................................................................................................................................. 328 Mortgage Administration ..................................................................................................................................... 329 Business Practices ................................................................................................................................................. 330 Prohibited Activities ............................................................................................................................................. 330 12.3.2 Compliance Checklist for Managing the Mortgage Administrator, Keeping Records and Trust Accounts ..... 330 Managing the Mortgage Administrator ................................................................................................................ 330 Keeping Records ................................................................................................................................................... 331 Pause for clarification – Deemed trust funds ....................................................................................................... 332 Trust Funds ........................................................................................................................................................... 332 12.3.3 Communicating with Investors ....................................................................................................................... 333

12.4

THE MORTGAGE ADMINISTRATOR LICENSE ........................................................................................................334 12.4.1 FSRA’s Interpretation Guidance No. MB0039INT ........................................................................................... 335 Purpose................................................................................................................................................................. 335 Scope .................................................................................................................................................................... 335 Rationale and Context .......................................................................................................................................... 335 Interpretation ....................................................................................................................................................... 336 Duty to Notify Investors / Lenders ............................................................................................................................ 336 Exercising Discretion in Accordance with Mortgage Administration Agreements .................................................... 337 Supervision and Enforcement............................................................................................................................... 337 Effective Date and Future Review ........................................................................................................................ 337 About FSRA ........................................................................................................................................................... 338 About this Guidance ............................................................................................................................................. 338

12.5 12.6 12.7

SAMPLE MORTGAGE ADMINISTRATION AGREEMENT .............................................................................................338 KEY TERMS AND DEFINITIONS ..........................................................................................................................349 REVIEW QUESTIONS ......................................................................................................................................350 12.7.1 Short Answer Questions ................................................................................................................................. 350

CHAPTER 13: FRAUD DETECTION AND PREVENTION ........................................................................................ 351 13.1 13.2 13.3 13.4

LEARNING OUTCOMES ...................................................................................................................................351 INTRODUCTION .............................................................................................................................................351 WHAT IS MORTGAGE FRAUD? .........................................................................................................................351 TYPES OF MORTGAGE FRAUD ..........................................................................................................................352 13.3.1 Fraud for Criminal Activities ........................................................................................................................... 352 Marijuana Grow Operations (Grow Ops) and Drug Labs ...................................................................................... 352 Money Laundering ................................................................................................................................................ 352 13.3.2 Fraud for Profit ............................................................................................................................................... 353 Air Loans ............................................................................................................................................................... 353 Value Fraud........................................................................................................................................................... 353 Title Fraud ............................................................................................................................................................. 356 Foreclosure Fraud ................................................................................................................................................. 356 Identity Theft ........................................................................................................................................................ 357 Impersonation ...................................................................................................................................................... 357 Elder Financial Fraud ............................................................................................................................................ 357 Power of Attorney (POA) Fraud ............................................................................................................................ 358 13.3.3 Fraud for Shelter ............................................................................................................................................. 358

13.5

DIRECT CONSEQUENCES OF MORTGAGE FRAUD ..................................................................................................360 13.5.1 Criminal and civil liability ................................................................................................................................ 360 Pause for clarification – Administrative penalties ................................................................................................ 360

13.6

INDIRECT CONSEQUENCES OF MORTGAGE FRAUD ...............................................................................................361 13.5.1 Psychological .................................................................................................................................................. 361 13.5.2 Reputational ................................................................................................................................................... 361 13.5.3 Economic ........................................................................................................................................................ 361

13.7

FRAUD PREVENTION ......................................................................................................................................361 13.6.1 Industry Steps in Fraud Prevention ................................................................................................................ 361 Default insurers .................................................................................................................................................... 361 CMHC:........................................................................................................................................................................ 362

xiii Canada Guaranty ....................................................................................................................................................... 362 Sagen ......................................................................................................................................................................... 362 Regulators ............................................................................................................................................................. 362 Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) ............................................................... 362 Financial Services Regulatory Authority of Ontario (FSRA)........................................................................................ 362 Mortgage Broker Regulator’s Council of Canada (MBRCC) ....................................................................................... 362 Office of the Superintendent of Financial Institutions (OSFI) .................................................................................... 363 13.6.2 Brokerage Steps in Fraud Prevention ............................................................................................................. 363 13.6.3 Fraud Warning Signs or Red Flags................................................................................................................... 364 Pause for clarification – Earnest Money ............................................................................................................... 366

13.8 13.9 13.10 13.11

THE LAND TITLES ASSURANCE FUND .................................................................................................................368 ADVICE FOR CLIENTS ......................................................................................................................................368 KEY TERMS AND DEFINITIONS......................................................................................................................370 REVIEW QUESTIONS ..................................................................................................................................372 13.11.1 Short Answer Questions ............................................................................................................................... 372

CHAPTER 14: ETHICS ....................................................................................................................................... 373 14.1 14.2 14.3 14.4

LEARNING OUTCOMES ...................................................................................................................................373 INTRODUCTION .............................................................................................................................................373 WHAT IS ETHICS?..........................................................................................................................................373 THE CORE VALUES AND BELIEFS OF THE MORTGAGE INDUSTRY ..............................................................................373 14.4.1 Borrower Expectations ................................................................................................................................... 373 Success Tip – Act in the best interests of the client .............................................................................................. 375 Success Tip – Service is the key ............................................................................................................................ 375 Success Tip – Stay up to date on lender’s products .............................................................................................. 376 Success Tip – Adopt the four borrower expectations ........................................................................................... 376 14.4.2 Lender Expectations ....................................................................................................................................... 377 14.4.3 Core Values ..................................................................................................................................................... 378

14.5

MBRCC CODE OF CONDUCT ...........................................................................................................................379

14.6 14.7 14.8 14.9 14.10

THE DECISION-MAKING MODEL ......................................................................................................................380 CASE STUDY – INVESTMENT SUITABILITY ............................................................................................................382 CONCLUSION ................................................................................................................................................385 KEY TERMS AND DEFINITIONS ..........................................................................................................................386 REVIEW QUESTIONS ..................................................................................................................................387

Mortgage Broker Regulators’ Council of Canada (MBRCC) Code of Conduct for the Mortgage Brokering Sector379

14.10.1 Short Answer Questions ............................................................................................................................... 387

INDEX ............................................................................................................................................................. 388 TABLE OF FIGURES .......................................................................................................................................... 392

Introduction

1

Introduction Welcome to the exciting world of private mortgages! Without doubt, private mortgages are a cornerstone of the mortgage brokering industry. Who knows, maybe a simple question asked from one friend to another, possibly as simple as, “I need some help buying this house. Do you know anyone who can help?” was the catalyst for our burgeoning industry. I like to think that this question resulted in that friend’s dream of home ownership coming true, and that over time, one friend helping another gave birth to an industry helping others: our industry. I also like to think that we have the same best interests at heart for our clients as that first friend did. Today, our industry has matured to a point where our clients rely on our expert advice to help shape their lives; from financing life’s big events, like home ownership, to putting money to work for them in investments that can, in turn, help them provide for their families, put their kids through school, or retire more comfortably. With this comes great responsibility. We must continue to ensure that everyone in our industry has the requisite knowledge to offer that expert advice, and that the impacts we have on our clients’ lives are always positive. While a newly licensed mortgage agent once could, with their brokerage’s approval, arrange private mortgages and mortgage investments, an ever-changing market that continues to innovate has proven that to truly serve our clients means we must be at the forefront of these innovations. We must have a deep understanding of them so that we can give our clients the best possible advice. There will always be discussions within the industry about how to best meet this ongoing challenge. At this stage in our industry’s evolution, private lending, and all that it entails has been given its own place in the spotlight, requiring licensees to meet additional educational and experience requirements, and qualify for an enhanced license. These requirements will help ensure that the public is not only protected, but is given advice that enhances their lives. That simple question, “do you know anyone who can help?” is answered every day: we can!

Joseph J. White Toronto

Chapter 1: Introduction to Private Mortgages

2

Chapter 1: Introduction to Private Mortgages 1.1

Learning Outcomes

Successful understanding of the concepts presented in this chapter will enable the learner to: 1. Differentiate between private lenders and financial institutions 2. Define a private mortgage 3. Describe the characteristics of a private mortgage 4. Explain the benefits of private mortgages to both borrowers and investors 5. Compare private mortgages to other types of investments 6. Explain the various sources of funds that can be used to invest in private mortgages

1.2

Introduction

Investing in mortgages comes in many different forms and can be an attractive vehicle for wealth creation for investors. For borrowers, private mortgages can be the difference between obtaining financing and going without. For brokerages, they offer yet another option in providing their borrowers with the solutions they need. This chapter provides an introduction to the world of private mortgages, explaining what they are, why they’re needed, along with the benefits to both investors and borrowers, and finally how they compare to other investments.

1.3

What is a Private Lender?1

Simply stated, a private lender, as defined by the Financial Services Regulatory Authority of Ontario (FSRA), is any lender that is NOT, as per O. Reg. 409/07: MORTGAGE BROKERS AND AGENTS: LICENSING: • 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”)

Pause for clarification – Financial Institution As per the MBLAA, a ““financial institution” means a bank or authorized foreign bank within the meaning of section 2 of the Bank Act (Canada), a credit union to which the Credit Unions and Caisses Populaires Act, 2020 applies including a central within the meaning of that Act, an insurer licensed under the Insurance Act, a corporation registered under the Loan and Trust Corporations Act or a retail association as defined under the Cooperative Credit Associations Act (Canada); (“institution financière”)” Therefore, lenders such as individuals, mortgage brokerages, mortgage brokers, mortgage administrators, MIC’s, etc. are classified as private lenders.

1

FSRA, Guidance No. MB0047INT, https://www.fsrao.ca/industry/mortgage-brokering/regulatoryframework/guidance-mortgage-brokering/new-mortgage-agent-and-broker-licensing-requirements0#:~:text=In%20response%2C%20the%20Government%20implemented,for%20mortgage%20agents%20and%20br okers

Chapter 1: Introduction to Private Mortgages

3

As of April 1, 2023, on mortgage agents who have a mortgage agent level 2 license and mortgage brokers are eligible to broker private mortgages. This is explained in more detail in chapter 3.

1.4

What is a Private Mortgage?

A private mortgage is a mortgage that is advanced by a private lender, as discussed in the previous section. While there is no specific minimum size to be considered one, an institutional lender is typically considered to be a bank, trust company, credit union or other large institution that lends directly to consumers or invests in mortgages by purchasing pools of mortgages or otherwise investing in bulk groups of mortgages through securitization, mortgage-backed securities, etc. The most common form of private mortgage can be characterized as a scenario in which one individual (the “lender”) lends money to another individual (the “borrower”) using the borrower’s real property (“real property” is a legal term that means all land, and everything affixed to it), such as their home, as collateral or security for that loan. From the perspective of the private lender, the mortgage represents an investment. The private lender invests a specific amount of money by lending it to the borrower and in return receives a contractual rate of return in the form of interest payments. From the perspective of the borrower, the mortgage is a loan that must be repaid, the same as if it was provided by a bank. The closing process is like that of an institutional mortgage transaction as well. A lawyer is required, just like when getting a mortgage from a bank, and the steps he takes are virtually identical to that of an institutional transaction.

1.5

Characteristics of Private Mortgages

Private mortgages differ from institutional mortgages in several ways. These are some of the most common characteristics of private mortgages: 1. Second mortgage 2. Uninsured 3. Equity take-out 4. Higher interest rate 5. Higher risk 6. Non-amortized (interest only) 7. Short term 8. Smaller loan amounts compared to institutional mortgages 9. Security based lending 10. Higher fees 1. Second mortgage Many of the privately funded mortgages are second mortgages. 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

4

Chapter 1: Introduction to Private Mortgages

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. 2. Uninsured Privately funded mortgages do not qualify for default insurance. Rather, only National Housing Act2 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. Equity take-out Many privately funded mortgages are used to access built up equity in the borrower’s property. 4. Higher interest rates Many 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. 5. Higher risk 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. 6. 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. 7. Short term 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.

2

NHA, https://laws-lois.justice.gc.ca/eng/acts/N-11/page-1.html#h-359287

Chapter 1: Introduction to Private Mortgages

5

8. Smaller loan amounts compared to institutional lenders According to CMHC’s 2021 housing data, the average loan size for chartered banks was $326,1803, compared to $276,980 for Mortgage Investment Entities (MIEs)4.

Pause for clarification – Mortgage Investment Entity (MIE) MIEs are mortgage lenders that provide products characterized by short-term loans (between 6 to 24 months) and higher interest rates. MIEs include mortgage investment corporations (MICs) and other private lenders. 9. 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 because 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. 10. Higher fees Due to higher risks, private mortgages tend to charge higher fees as well as higher interest rates. For example, lenders’ fees, as well as fees like NSF charges, are typically higher,.

1.6

The Need for Private Mortgages

Private lending is used for a variety of different reasons. In most cases the reason is simple; obtain financing when institutional lenders are not an option. But the purposes for which private funds are used is as varied as is the need for money in general. For most borrowers, an institutional mortgage would be most advantageous, especially regarding rates. But there is often a lack of flexibility that institutional lenders have, primarily banks or other institutional lenders that securitize mortgages through the NHA, since they’re often tied to CMHC guidelines. As we can see in the following section, government intervention in the Canadian mortgage market has resulted in a tightening of lending practices, resulting in an increased need for private mortgage lending.

1.6.1 Legislative changes to institutional lending programs The Canadian government sets the guidelines for default insured mortgages to, in part, manage the housing market, while provincial governments can use other tools, such as taxes. Except for the B20 stress test, the majority of these rules apply to high ratio (mortgages in excess of 80% loan to value – this will be discussed in detail in later chapters) default insured mortgages, low ratio mortgages that are default insured and portfolio insurance. The bulk of low ratio mortgages are insured through portfolio

3

CMHC, https://www.cmhc-schl.gc.ca/en/professionals/housing-markets-data-and-research/housingdata/residential-mortgage-industry-data-dashboard 4 CMHC, https://assets.cmhc-schl.gc.ca/sites/cmhc/professional/housing-markets-data-and-research/housingresearch/research-reports/housing-finance/residential-mortgage-industry-report/2021/residential-mortgageindustry-report-2021-10-en.pdf?rev=e269b608-9ebc-4e28-ae3e-1629f9a5a674

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Chapter 1: Introduction to Private Mortgages

insurance. This means that even though a lender may not be providing a high ratio, insured mortgage to a borrower, it must still follow these guidelines if they are insuring them through portfolio insurance.

Pause for clarification – Stress Test Explained in detail in chapter 13. As of 2016 the government has imposed an interest rate test to ensure that a borrower could afford their mortgage payments if their interest rate increases. This means that a borrower must qualify at the current rate, as set by OSFI (Office of the Superintendent of Financial Institutions), which is 5.25%, or the rate the lender is offering plus 2%; whichever is higher. In the years prior to 2008, the mortgage industry was more aggressive in its lending. There was a time when a borrower could get 100% ltv financing to purchase an owner occupied or a rental property, and 40-year amortizations and 95% ltv refinancing was common. After the U.S. sub-prime mortgage meltdown of 2007, regulators and the federal government became concerned about the stability of the Canadian real estate and mortgage markets and began taking steps to reduce the likelihood of a similar meltdown in Canada. Lending practices began to tighten.

Pause for clarification – Amortization, Loan to value (LTV), GDS and TDS This section uses terms that are explained in detail in chapter 13, but to assist you in understanding this section, the following terms are explained briefly here. • Amortization: the amount of time it will take repay the entire amount borrowed • GDS: gross debt service ratio. This is a percentage of gross income that can be used for shelter • Loan to Value (LTV): This is the amount of the loan divided by the value of the property • TDS: total debt service ratio. This is a percentage of gross income that can be used for shelter and debt servicing The following summarizes the changes made by governments since the financial crisis of 2007. July, 2008: Maximum Amortization • The maximum amortization was reduced to 35 years from 40 years February, 2010: 2 new restrictions • Maximum Refinance: Reduced to 90% loan to value from 95% • Non-owner-occupied insured mortgages: 20% down

payment

required

January, 2011: 2 new restrictions • Maximum Amortization: Reduced to 30 years from 35 years • Maximum Refinance: Reduced to 85% loan to value from 90% June, 2012: 4 new restrictions • Stress Test – GDS/TDS: The government changed the maximum GDS to 39% and TDS to 44% for insured mortgages. • Maximum Amortization: Reduced to 25 years from 30 years • Maximum Refinance: Reduced to 80% loan to value from 85% • Maximum Property Value: High ratio insurance limited to properties valued at less than $1 million

Chapter 1: Introduction to Private Mortgages

7

December, 2015: High Ratio Down payments The government increased the minimum down payment for high ratio insured mortgages on homes valued over $500,000 from 5% to 10%. October 2, 2016: Foreign Ownership This is not related to default insured mortgages, rather it is a change to the income tax system. An individual who was not resident in Canada in the year the individual acquired a residence will not— on a disposition of the property after October 2, 2016—be able to claim the capital gains exemption for that year. This measure ensures that permanent non-residents are not eligible for the exemption on any part of a gain from the disposition of a residence. In addition, The Canada Revenue Agency (CRA) will require a taxpayer to report the disposition of a property for which the principal residence exemption is claimed. The CRA currently does not require this reporting where a property is eligible for the full principal residence exemption. The change means that, when a taxpayer disposes of a principal residence, the taxpayer will be required to provide basic information in the taxpayer’s income tax return for that year in order to claim the exemption. October 17, 2016: Stress Test – Interest Rate Borrowers must qualify at the Bank of Canada’s five-year fixed posted mortgage rate. This rate is an average of the posted rates of the big six banks. As of February, 2022, the rate was 5.25, or the rate the lender is offering plus 2%, whichever is higher. This means that even though a lender may offer the borrower a much lower rate, the borrower must still qualify at the higher rate. November 30, 2016: Low ratio and portfolio insured mortgages Mortgages insured using low ratio default insurance and portfolio insurance must meet the following criteria: 1. A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan 2. A maximum amortization length of 25 years. 3. A property value below $1,000,000. 4. For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the established amortization schedule. 5. A minimum credit score of 600. 6. A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and, 7. If the property is a single unit, it will be owner-occupied. April 21, 2017: Non-Resident Speculation Tax (NRST)5 The NRST is a 15 per cent tax on the purchase or acquisition of an interest in residential property located in the Greater Golden Horseshoe Region (GGH) by individuals who are not citizens or permanent residents of Canada or by foreign corporations (foreign entities) and taxable trustees.

5

Ontario Ministry of Finance, http://www.fin.gov.on.ca/en/bulletins/nrst/nrst.html

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Chapter 1: Introduction to Private Mortgages

January 1, 2018: Guideline B20 stress test for uninsured mortgages6 OSFI is setting a new minimum qualifying rate, or “stress test”, for uninsured mortgages. • Guideline B-20 now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%. OSFI is requiring lenders to enhance their loan-to-value (LTV) measurement and limits so they will be dynamic and responsive to risk. • Under the final Guideline, federally regulated financial institutions must establish and adhere to appropriate LTV ratio limits that are reflective of risk and are updated as housing markets and the economic environment evolve. OSFI is placing restrictions on certain lending arrangements that are designed or appear designed to circumvent LTV limits. A federally regulated financial institution is prohibited from arranging with another lender a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law. July 1, 2020: CMHC changes to qualifying standards7 Effective July 1, the following changes apply for new applications for homeowner transactional and portfolio mortgage insurance: • Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to our standard requirements of 35/42. • Establish minimum credit score of 680 for at least one borrower; and • Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes. July 5, 2021: CMHC returned to its pre-July 2020 underwriting practices for homeowner mortgage loan insurance, specifically:8 • CMHC will consider a Gross Debt Service (GDS) ratio up to 39% and Total Debt Service (TDS) ratio up to 44% for borrowers who have a strong history of managing their payment obligations. • At least one borrower (or guarantor) must have a credit score that is greater than or equal to 600 at the time of the request for insurance. • As always, CMHC will consider the overall strength of the mortgage loan insurance application, including alternative methods of establishing creditworthiness for borrowers without a credit history. March 30, 2022: Ontario’s Non-Resident Speculation Tax (NRST) rate was increased to 20 per cent and expanded provincewide9

6

OSFI, http://www.osfi-bsif.gc.ca/eng/osfi-bsif/med/Pages/b20_dft_nr.aspx CMHC, https://www.cmhc-schl.gc.ca/en/media-newsroom/news-releases/2020/cmhc-reviews-underwritingcriteria 8 CMHC, https://www.cmhc-schl.gc.ca/en/media-newsroom/notices/2021/cmhc-reviews-underwriting-criteria 9 Ontario Ministry of Finance, https://www.fin.gov.on.ca/en/bulletins/nrst/ 7

Chapter 1: Introduction to Private Mortgages

9

January 1, 2023: Prohibition on the Purchase of Residential Property by Non-Canadians Act came into effect, prohibiting the purchase of any residential property by a non-Canadian10

1.6.2 Reasons for Using a Private Mortgage Private mortgages have always been part of the mortgage landscape, but their popularity and necessity changes based on market trends. As FSRA noted in its Mortgage brokering sector Supervision Plan 2021-22, “Homebuyers who have less financial flexibility may increase their leverage in order to enter or remain in the housing market. These homebuyers will need to seek financing from alternative lenders, such as private lenders. As we have noted, private loans are intended to provide bridge liquidity and require the borrowers to be disciplined to improve their current financial situations to transition from the more expensive private financing to more affordable traditional financing. In the private lending market, mortgage brokerages and their brokers/agents play an important role in identifying mortgage options for the borrowers. It is equally important that they explain the terms of potential mortgages, and the consequences if their financial situations deteriorate or they do not follow the identified exit strategy”. From a low of 0.25 in March, 2022, to a high of 4.25% in December, 2022, a span of only nine months, the Bank of Canada (BoC) overnight interest rate (also referred to as the Bank of Canada Prime Rate) climbed dramatically. This rate affects lenders’ prime rates, which in turn affects what they charge borrowers, as illustrated in the following charts. As of January, 2023, the major banks’ prime rates are 6.45%. Figure 1 – Bank of Canada Prime Rates11

10 11

Government of Canada, Justice Laws Website, https://laws-lois.justice.gc.ca/eng/acts/P-25.2/page-1.html Bank of Canada, https://www.bankofcanada.ca/rates/interest-rates/canadian-interest-rates/

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Chapter 1: Introduction to Private Mortgages

Figure 2 – Chartered Bank Rates12

Top reasons for using a private mortgage While there are several reasons for using a private mortgage, here are five of the top reasons. Market conditions change over time, so these reasons are not meant to be a definitive list, or in order of most to least popular. However, they highlight why private mortgages are useful for many borrowers. 1. Accessing equity 2. Debt consolidation 3. Bridge financing 4. Time constraints 5. Construction 1. Accessing equity Homeowners often have a need for accessing additional money for several reasons, including: 1. Projects, such as home renovations 2. investments 3. down payments for additional properties 4. divorce settlements 2. Debt consolidation It is often advantageous for a homeowner to combine their debts into a single mortgage. This can be done through an equity take-out, and is often financed by a private, second mortgage.

12

Bank of Canada, https://www.bankofcanada.ca/rates/banking-and-financial-statistics/posted-interest-ratesoffered-by-chartered-banks/

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Example Adela owns a detached house in Whitby valued at $950,000. She currently has a $450,000 fixed rate mortgage through TD Canada Trust at 3.5% that will renew in 2025. Her current mortgage payment is $2,371.53, based on the original mortgage amount of $475,000. She also has $32,000 in credit card debts. These debts are costing Adela a total of $960 per month. She has applied to TD Canada Trust to increase her mortgage to consolidate these debts, however she would have to break her mortgage and refinance at their current rate of 5.4%, along with paying a penalty. In analyzing her situation, we can see that the penalty would be $3,937.50 and her new mortgage payment, based on a new mortgage of $485,938 ($450,000 + $32,000 + $3,937.50) would be 2,937.90 an increase of $566.37. Calculation of 3 months’ interest in Adela’s example We will divide the interest by 4 since there are 4 quarters in a year (3 months in a quarter). Outstanding balance x current rate / 4 $450,000 x 3.5% / 4 $450,000 x .035 / 4 $15,750 / 4 $3,937.50 Based on this situation, Adela has decided to apply to her mortgage broker, Dalila, to obtain a second mortgage for $40,000 to pay off her credit cards and have a bit of money left over to take her family on a trip. Her broker has told her that she can get Adela a private, second mortgage of $40,000 at 13.5% with a 1% broker fee and a 1% lender fee. Dalila’s proposal is: • • • • • • • •

$40,0000 second mortgage with a monthly payment of $450 1 year term Interest only payments Brokerage fee of $$400 Lender fee of $400 Legal fees of approximately $1,500 Appraisal fee of $550 Net to Adela: $5,150 ($37,150 - $32,000)

Analysis • Adela’s total combined payment after Dalila’s proposed consolidation is $2,821.53 ($2,371.53 + $450) • Adela’s savings over obtaining a new mortgage with TD Canada Trust: $116.37 (2,937.90 $2,821.53) • Adela’s savings over her current situation: $510 ($2,371.53 + $960 - $2,821.53) Benefits • Increased cash flow • Additional $7,150 net

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Risks • •

Potential to combine this mortgage with her TD Canada Trust first mortgage if rates decrease during the term, or by the end of the term

Interest only; Adela will still owe $40,000 after the 1-year term 1 year term: Adela will have to renew or refinance at the end of the term with potentially higher rates and additional fees

In comparing these options, Adela has decided to take the second mortgage to increase her cash flow. 3. Bridge financing Bridge financing, also referred to as interim financing, is used when a person is selling their current home and buying a new one. The issue requiring this type of financing occurs when they are closing on the purchase of their new home before the sale of their current home. This results in the homeowner owning two homes, at least until the sale of their home occurs. Because the down payment for the new purchase may be coming from the sale (this is common when selling one house and buying another), they may not have enough money to complete the purchase. Bridge financing solves this issue by lending the borrower the amount of the down payment, secured by a second mortgage placed on the home waiting to be sold. Once their original home sells that second mortgage is repaid. This type of mortgage is often provided by the lender doing the mortgage on the new home, or by a private lender. 4. Time constraints There are times when a borrower needs access to quick cash, for any one of a number of reasons. Private lenders often have the ability to fund a mortgage faster than an institutional lender, sometimes in as little as one week. Obviously, an agent or broker would have to analyze the benefits of this type of transaction to ensure it is in the best interests of the borrower. 5. Construction A draw or builder’s mortgage, commonly referred to as a construction mortgage, is a mortgage used for the construction of a new home. In Ontario, the borrower can hire a builder or build the house themselves. The difference between this and a standard mortgage is that construction mortgages provide cash in stages, instead of all at once. These stages are referred to as draws. The amount advanced per draw may vary slightly and the number of draws may differ from to lender (usually 4 or 5). The following is one example of a 5-draw construction mortgage. 5 Draws First Draw: Once the land is excavated and the foundation of the house set in place, the borrower will receive approximately 15% of the mortgage amount. The borrower will have to pay for the land, excavation, and foundation from their own funds. These funds are used to build the structure of the house, including the roof. Second Draw: Once the borrower has constructed the roof and has built enough to make the building watertight, they will be given another 25% of the construction mortgage. At this stage the house will be considered approximately 40% complete. Third Draw: At this point, the borrower will have begun the installation of plumbing and electrical wiring, with heating and drywall in place. For this draw they will be given another 25% of the construction mortgage. At this stage the house will be considered approximately 65% complete.

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Fourth Draw: By now the installation of fixtures and cabinets for areas like the washrooms, bedrooms, and kitchen should be complete. For this draw they will be given another 20% of the construction mortgage. At this stage the house will be considered approximately 85% complete. Fifth Draw: The home should be fully built by this stage. All interior and exterior work will be finished, including landscaping and the driveway. This is the final stage, and the lender will advance the remaining 15% of the construction mortgage. At this stage the house will be considered 100% complete and the mortgage will have been fully advanced.

1.7

Trends in Private Lending

With changing markets come new trends. The following trends have been identified, however, they may not be applicable in all markets. Smaller markets with less competition, for example, may not experience all of the following trends. 1. Fees Traditionally, private mortgages were either a first or second with large lender and broker fees. As more investors have entered the market, increased competition has driven rates and fees slightly lower. 2. Short Term In addition, most private mortgages have been characterized by a one-year term. As interest rates rise and housing prices flounder, more private lenders are opting for shorter terms to protect themselves against decreasing values of their security. A decreasing property value during the term increases the private lender’s loan to value, and therefore overall risk of loss if the borrower were to default on the mortgage payments. 3. Lower Loan to value As the Bank of Canada raises rates in an attempt to fight inflation, property values have suffered since those rates hikes, as you can see in the figure 3. At the time of writing, it is expected that property prices will continue to decline. These declines continue to pose significant threats to private lenders who have lent at a high loan to value. Forecasts indicate that private lenders may be considering lower loan to values to offset the risk of declining property values. 4. Competition As more investors continue to enter the industry, there is competition for borrowers. This competition is often resulting in lower rates and fees for borrowers. 5. Access to additional underwriting data Private lenders have access to more information than ever before. They have the ability to view current and historical pricing, registered owners, neighbourhood pricing trends, registered debt, etc. using tools like Teranet’s Purview. They can view land ownership documents, deeds, mortgages, and plans of survey for title using Ontario’s ONLAND13 system. In short, they have the ability to use these tools to mitigate risk.

13

Government of Ontario, https://www.ontario.ca/page/search-land-property-records

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1.8

Benefits of Private Mortgages

Private mortgages offer many benefits to both borrowers and investors, which will become clearer as we discuss the reasons that a borrower will choose a private lender, and the reasons that an investor will choose to invest in a mortgage.

1.8.1 Borrowers There are two main reasons that a borrower may need or want to borrow money from a private mortgage lender. “You can always make a loan at a bank if you can show sufficient evidence that you don’t need it”. Evan Esar (an American humorist, 1899 – 1995) 1. Mortgage is declined by another lender A common reason is that the borrower has had his or her mortgage request declined by an institutional lender. The typical reasons for a decline are (these aren’t in any specific order): 1. Poor credit – the borrower’s credit does not meet the lender’s minimum standards 2. Property condition – the condition of the property doesn’t meet the lender’s minimum standards 3. Property location – the property is located in a town or location where the lender does not lend 4. Insufficient equity – the borrower requires refinancing over 80% loan to value 5. Self-employed – the borrower is self-employed and doesn’t meet the lender’s employment guidelines 6. Lack of verifiable income – the borrower has income but doesn’t declare it and therefore can’t prove it 7. Employment issues – the borrower hasn’t been at his or her current job long enough to meet the lender’s minimum standards 8. Property type - the property type is not acceptable to the lender (for example the property is a leasehold or commercial property such as a gas station) 9. Net worth – the borrower doesn’t have a positive net worth 10. Property tax arrears – the borrower is currently behind on his or her property taxes 11. Family obligation arrears – arrears on child support or alimony 12. Any combination of these reasons – while one reason alone might not result in a declined application, a combination of these reasons might Figure 3 – GTA Historical Property Prices14

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CREA, https://www.crea.ca/housing-market-stats/mls-home-price-index/hpi-tool/

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2. Flexibility in private lending Another reason is that private mortgage lenders do not have to conform to the strict lending guidelines of institutional lenders. Private mortgage lenders can be more flexible in their lending terms and conditions, and therefore can offer loans that are individually structured to meet the borrower’s specific requirements. Some examples of flexible lending may include: 1. Interest only payments – reduces the overall payment size to assist the borrower’s cash flow 2. Lower ranking mortgages – institutional lenders typically only lend on a first mortgage while private mortgage lenders may provide a second, third, fourth, etc. 3. Prepaid mortgage payments – for example, if a borrower has poor cash flow but good equity the private mortgage lender can withhold an amount equal to several months’ worth of mortgage payments 4. Higher loan to value – refinancing in excess of 80% ltv 5. Odd term lengths – often used in second mortgages to make the term’s renewal coincide with the renewal of the first mortgage 6. Cross collateralization – taking additional properties as collateral for one loan 7. Purpose – construction, paying property taxes, judgments, mortgage arrears, child support arrears, etc. Funds can be used for any purpose, including repairing credit so that the borrower may qualify for an institutional mortgage in the future. 8. Property types – there is no limitation on the types of properties that a private mortgage lender may lend on whereas all institutional lenders will have certain property type limitations. These aren’t the only examples. Private mortgage lenders can be as flexible as their imagination and the law permit, making them the preferred choice when flexible underwriting is required.

1.8.2 Investors

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For investors, two of the most important reasons for investing in private mortgages is the rate of return and security of the investment. 1. Rate of return A main benefit for most investors is the rate of return. Private mortgage lenders can often achieve rates of return between 9% and 14%, based on the rank and risk involved in the mortgage. In addition, most private lenders will also charge a lender’s fee, in essence a bonus for lending to the borrower, which will increase the overall rate of return. Couple this with the fact that registered funds such as RRSPs can be used for this investment and the financial benefits are even more pronounced. When discussing a mortgage investment with a potential investor it is important that the licensee understand how to explain the internal rate of return (assuming the licensee is able to determine the IRR – if not there are several online programs available that will do this, as well as an Excel function called the XIRR). The internal rate of return is used to calculate the potential annual returns of an investment over time, while considering the cash flow, in the case of a private mortgage, the interest only payments. This is an effective way to compare the rates of return between different investments that the investor may have available. 2. Security Another benefit is that the investment is secured by real property. Investors have many different options when deciding where to invest. In most cases those options involve unsecured investments, such as stocks and mutual funds. An investor also has the choice of secured investing by lending money secured by some form of collateral or guarantor. Secured loans tend to generate less of a return for the investor because there tends to be less risk due to the investor’s ability to recover monies using the security. If a borrower defaults on a loan secured by collateral that collateral can be, generally speaking, seized by the investor, and sold to repay the investor’s loan. If the loan is secured by a guarantor, then the investor has the right to demand that the guarantor repay the loan. If the guarantor fails to do so the investor has the right to take legal action against the guarantor. So, you can see that, in most cases a loan secured by collateral is less risky than a loan secured by a guarantor. I say in most cases because sometimes a guarantor can be more valuable than the collateral. The strength of the security is dependent on the type of collateral used to secure the loan. While a piece of furniture can be used as collateral, it may depreciate or lose its value rather quickly, and because furniture can be low in value and the costs associated with seizing it and selling it rather high, furniture is not an ideal form of collateral. In addition, based on its size, it may be able to be quickly and easily moved by its owner, thereby thwarting attempts by the lender to seize and sell it. In this case it would be best if the lender had a strong guarantor. A strong guarantor would be someone who has the ability to repay the loan if necessary, and the stability to want to repay the loan. In other words, it would be more painful for the guarantor to fail to repay the loan then it would be to repay it. When discussing collateral, the likelihood that the lender will be able to recover their investment if the borrower defaults is based on the strength of that collateral. While furniture may be low on the list of strong collateral, real property is high on that list. Real property can’t be moved, so there’s no chance that it will disappear in the middle of the night like a piece of furniture or a car. Of course, if the furniture or car is given to the lender to hold during the term of the loan, like with a pawn shop, then the collateral has much more value. If the collateral is cash or commodities such as gold being held, the

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collateral has even more strength. However, the likelihood of a borrower being able to or wanting to give an equal amount of cash as collateral is slim, unless it’s a small amount, such as a secured credit card. Real property tends to retain its value much better than chattels, and in most cases will increase in value over time. Owner occupied properties are generally even more secure because owners tend to take good care of the place in which they live. In other words, your borrower is just as concerned about the welfare of the collateral as the lender is. Of course, there are exceptions to each of these scenarios, which is why it is vitally important to be able to properly assess and value real property when using it as security for a loan. This is typically done by an appraiser. When properly appraised, real property can be extremely secure collateral. The question you should be considering now is, “if real property is so secure, why won’t the banks lend to these borrowers?” That’s a great question, and the answer is often misunderstood. In general, most people feel that institutions won’t lend to a borrower because the loan to that borrower would be too risky. In other words, the borrower doesn’t deserve the loan. But banks don’t necessarily not lend to specific borrowers because they don’t want to. In many cases they don’t lend because they can’t. The regulatory environment in Canada is such that banks are prohibited from lending under many circumstances that most investors consider to be low risk situations, such as high loan to values, regardless of the strength of the collateral. In other situations, institutional lenders have no incentive to lend to borrowers unless they have the ability to use multiple products. A bank, for example, is interested in far more than just a mortgage. It wants to capture its customer’s credit card, deposit and investment business, all of which are high profit products. If a borrower can’t use these products now, the lender may lend to the borrower as long as the mortgage is default insured. That means that the borrower must have at least 20% in equity or as a down payment. In fact, there are myriad reasons that institutional lenders don’t lend to what many consider to be low risk borrowers, and that’s why private mortgage lenders are required. To be clear, I don’t mean that the risk of default is low. I mean that the risk of loss can be mitigated with proper underwriting. A borrower may lose his or her job, get divorced, injured, etc., but the real property won’t. It is not subject to the same risks as the borrower is. So, is being a private mortgage lender risk free? Does it mean easy money for everyone? No. A good private mortgage lender understands how to risk rate a potential mortgage to reduce the likelihood that he or she will suffer a loss. Every lender, whether private or institutional needs to do this to be successful at lending. Why doesn’t everyone become a private lender? There are many reasons, ranging from not having enough money to invest to not knowing that this type of investment even exists. Most Canadians don’t know about private mortgage lending because it’s not something that is promoted by banks or other investment professionals. This isn’t because it’s not a good investment, but because those industry participants either don’t get paid to promote this type of investment, don’t understand it, or know so little about it that they don’t discuss it with their clients.

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For those who have heard about it many believe that they need such vast amounts of money that they’d never accumulate enough cash to invest. That’s another myth. There are borrowers who require small amounts of financing, such as $10,000. Because investors can use their current RRSP to lend, many Canadians already have access to more than enough cash to invest. But because none of the banks, nor most of the other institutional deposit takers allow their clients to use their registered funds (such as RRSP) to invest in mortgages (except in non-arm’s length mortgages where the investor is the borrower), most Canadians don’t even realize that this is an option.

1.9

Comparing Mortgage Investments to Other Investments

Investors in today’s financial markets have many different options. This section is not designed to provide an answer to the question, “what is the best investment?” Why? Investing is a highly personal and subjective proposition due to risk tolerance and several other factors that make the investor unique. That means there is no one size fits all investment, rather the investor’s decision must be based on his or her unique circumstances. When it comes to mortgage investments, the MBLAA is clear in this regard. Section 24.1 of Regulation 188/08 – Mortgage Brokerage Standards of Practice reads as follows: Duty re suitability of mortgage for customer 24. (1) A brokerage shall take reasonable steps to ensure that any mortgage or investment in a mortgage that it presents for the consideration of a borrower, lender or investor, as the case may be, is suitable for the borrower, lender or investor having regard to the needs and circumstances of the borrower, lender or investor. O. Reg. 188/08, s. 24 (1). We’ll exam suitability in more detail in a later chapter, but at this stage it’s important to focus on the fact that while a private mortgage loan or a syndicated mortgage loan may be suitable for one investor, it may not be suitable for another. Suitability must be determined for each individual investor. The following information is designed to provide you with an overview of the characteristics of several other forms of investments so that you may speak knowledgably to your clients about their other investment options. Of course, you cannot give financial advice on any particular products unless you are appropriately licensed to do so.

1.9.1 Mutual Funds As defined by the Canadian Securities Administrators (CSA) a mutual fund “is a type of investment fund” that combines investments from one of more asset class. It is a collection of investments, such as stocks, bonds or other funds. Unlike most other types of investment funds, mutual funds are “open-ended,” which means as more people invest, the fund issues new units or shares.

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A mutual fund typically focuses on specific types of investments. For example, a fund may invest mainly in government bonds, stocks from large companies or stocks from certain countries. Some funds may invest in a mix of stocks and bonds, or other mutual funds.”15 Pros •

•

Dividend reinvestment Dividend and other income generated by the fund can be used to purchase additional shares in the mutual fund, helping grow the investment. On smaller amounts this income could be insufficient to invest in products that require larger initial amounts.

•

Professional management The mutual fund’s portfolio is managed by a professional portfolio manager who is responsible for the buying and selling of the fund’s securities. This removes the requirement of the investor to be knowledgeable in all of the individual securities in the fund.

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Diversification Diversification can help limit risk by spreading the investment over several to hundreds of different stocks. In so doing the investor limits the potential harm done by an underperforming stock.

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Selection Mutual funds don’t just invest in stocks. Investors can choose mutual funds that suit their risk tolerance, are involved in social activism or other considerations that may be important to the investor. Liquidity Normally mutual funds can be liquidated quickly, within a few days. This allows the investor flexibility in his or her investment strategy, as well as quick access to invested funds for other purposes, such as family emergencies, etc.

•

Cons •

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Investment size Mutual funds typically have low investment thresholds. In other words, you can invest with as little as $2,000, depending on the product and provider.

Complexity While mutual funds may seem straight forward, they have many complexities. These are found in the prospectus that is required to be filed. A prospectus is a legal document that is filed with the appropriate provincial securities commission and contains detailed information that an investor needs to know to make an informed decision. It will normally include relevant information, such as the risks associated with the fund.

OSC, Understanding Mutual Funds, http://www.osc.gov.on.ca/documents/en/Investors/res_mutualfunds_en.pdf

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Mutual fund disclosures always advise investors to read the prospectus. It is unclear how many actually do. For example, the TD Asset Management TD Mutual Funds Simplified Prospectus16 is nearly 300 pages and contains over 160,000 words. The disclosure on its website that suggests reading the prospectus is itself over 3,000 words. Whether an investor reads that information or not, the fact is that it is available. The benefit to the prospectus is that it is incredibly detailed, is vetted by the appropriate securities commission, and contains the information necessary to make an informed decision. Of course, it is up to the investor to read and understand the material.

16

•

Fees All mutual funds charge management fees and expenses, such as trailing commissions and incentive fees. These fees and expenses are deducted from the fund’s assets and therefore reduce the returns of that investment.

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Taxes Investors will receive distributions from the fund throughout the year that are treated as capital gains.

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Too many choices With hundreds of mutual funds available, the sheer volume of choice and information can be enough to discourage an investor from doing his or her due diligence and making an informed decision. Speaking with a qualified investment advisor is highly recommended.

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No guarantee Most mutual funds offer no guarantee, meaning that an investor could lose part or all of his or her investment.

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Risks Risks may include the following17: o Capital depreciation risk o Credit risk o Corporate class return of capital risk o Derivatives risk o Equity risk o Interest rate risk o International market risk o Foreign currency risk o Fund-of-funds risk

TD Asset Management, TD Mutual Funds Simplified Prospectus, https://www.tdassetmanagement.com/FundDocument/pdf/Prospectus/TD-Mutual-Funds/TD_MF_SP_Final_E.pdf 17 TD Asset Management, TD Mutual Funds Simplified Prospectus, https://www.tdassetmanagement.com/FundDocument/pdf/Prospectus/TD-Mutual-Funds/TD_MF_SP_Final_E.pdf

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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

1.9.2 Cash and cash equivalents Cash and cash equivalents include cash that you have in bank accounts and other investments that are relatively low risk and can be quickly liquidated. They are typically low yield in comparison to other forms of investments due to their low risk. Examples of these types of investments include: • Bank account • Savings bond • Treasury bill (T-Bill) • Guaranteed investment certificate (GIC) • Money market fund These types of investments are not deemed to be in the same category of investments as private mortgage loans and syndicated mortgages due to their low risk and rate of return. Since it is prudent for an investor to have a portion of his or her investment portfolio in this category it is not recommended that these funds be used for higher risk investing, like private mortgage loans and syndicated mortgages.

1.9.3 Fixed income securities A fixed income security is a loan to a government body or a company (for all intents and purposes the borrower in this transaction) for a specific period of time. In return for this loan the borrower agrees to pay a fixed rate of interest throughout the term and then repay the face value at the end of the term. This is similar to an interest only mortgage, but without the added security of a charge registered against real property. Examples of these types of investments include: • Bond This is a loan or debt security to a government or company. A government bond has the security of the government’s ability to print money or raise money through taxes, thereby reducing the risk to virtually nil that it would default. Bonds issued by a company are secured by specific company assets. If the bond issuer were to be dissolved, the bondholders would have the right to a percentage of the issuer’s assets, ahead of shareholders but behind creditors, tax authorities and employees. Unlike mortgages where rates are determined by a combination of risk, availability of funds (the more difficult it is to obtain a loan the higher the rate on that loan) and other factors, bonds

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tend to pay higher rates of interest if there is a greater risk that the bond issuer will default. Therefore, rate is strongly tied to risk of default. Commissions are included in the price of the bond. •

Stripped Bond A stripped bond, strip bond or strip is a bond that has had its two components, the interest payments, and its face value, separated from each other and sold individually. The rate of return is determined by the purchase price and the face value at maturity. For example, if you purchase a strip bond that matures in ten years and has a face value of $5,000 yielding a return of 5%, you will purchase that strip bond now for $3,069.57. Therefore, the longer the term the lower the purchase price and the greater the yield. Because this is deferred income the question of capital gains will only be answered upon maturity when the strip is held in a registered account. Strips not held in a registered account are typically taxed annually, using the then current value less the previous value as the amount to be taxed. These are additional considerations when considering investing in strips. Commissions are included in the price of the bond.

•

Debenture A debenture is similar to a bond in that it is a loan to a company. However, it is not secured by any specific assets, unlike a bond which is. A debenture is backed by the reputation and creditworthiness of the issuer. A government debenture, such as a Treasury Bill (T-bill) is virtually risk free since the government has the ability to print money or raise taxes to pay its debts. A corporate debenture is secured by the debtor’s credit, making it a secured debt. In bankruptcy a secured debtor has priority over an unsecured debtor but does rank behind a bond holder that has security in specific assets. Commissions are included in the price of the debenture.

•

Mortgage-backed securities (MBS) Mortgage-backed securities are fixed-rate investments that represent a part ownership in a pool of mortgages. The investment is fully guaranteed by Canada Mortgage and Housing Corporation (CMHC) resulting in virtually no risk for the investor. These investments typically provide interest and principal repayments to investors on a monthly basis and may be sold at any time. The interest payments are considered income and will be taxed as such when earned. The yields are typically higher than T-bills or government of Canada bonds even though they are considered equally as secure. Commissions are included in the price of the MBS.

1.9.4 Equities / Stocks / Shares Equities, stocks, or shares are a way to purchase a part of a company. These shares may entitle the holder to vote in shareholders’ meetings and they may receive profits from the company in the form of dividends.

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An investor can make money from shares in one of two ways: an increase in the value of the share when sold and/or from dividends. Of course, these both depend on the success of the company and other factors that are often outside of the control or influence of the shareholder. To be able to trade publicly a company must file a prospectus with the appropriate provincial securities commission. Publicly traded shares can be purchased by anyone while there are restrictions on privately traded shares. There are several types of shares that an investor may invest in. •

Common share Common shares are securities that are equity ownership in a company. These shares entitle the holder to vote in the election of the board of directors and corporate policy and receive dividends, if issued. In the event of a dissolution, common shareholders are typically last in line for the company’s assets after tax authorities, employees, creditors, bondholders, and preferred shareholders have been paid. Commissions are paid when a share is traded.

•

Restricted voting share Restricted voting shares are similar to common shares except they have no voting rights. Commissions are paid when a share is traded.

•

Preferred share These shares typically provide the holder with a fixed dividend that is paid before common shareholders and have priority over common shareholders in the case of a dissolution. These shares do not typically have voting rights but may be given other rights such as the right to convert their shares to common shares at a certain price. In the event of a dissolution, preferred shareholders rank ahead of common shareholders in line for the company’s assets after tax authorities, employees, creditors, bondholders, and preferred shareholders have been paid. Commissions are paid when a share is traded.

•

Rights and warrants Rights and warrants are like stock options that allow the owner to purchase securities from the issuer at a set price within a specific time frame. They are often included when issuing a bonds or preferred shares. Commissions are paid when a right or warrant is bought or sold on a stock exchange.

1.9.5 Alternative investments

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Alternative investments include highly complicated forms of investing, and are normally meant for knowledgeable, higher risk investors who are willing to take the risk to earn a higher rate of return than other investments. There are several types of alternative investments that an investor may choose. •

Options An option is a contract which gives the owner the right to buy or sell an underlying asset, such as a stock, commodity, currency, or index at a specific price on or before a specific date. The owner is not obligated to use this right; however, the buyer/seller must fulfill the order when the option is exercised.

•

Futures This is a contract between two parties to buy and sell an asset at a price agreed upon today, with delivery and payment occurring in the future. These are transacted through futures exchanges.

•

Income trust An income trust is a trust that distributes income to its investors. In the real estate industry, the most common form is the real estate investment trust, or REIT. A REIT will earn income based on the profits that it realizes from the real estate assets that it holds. As of 2006 tax law changed that had exempted REITs from paying tax, essentially allowing the REIT to act as a flow through, as MICs currently do. However, REITs must now pay tax on their income at the regular corporate rate (some limited exceptions may still apply)

•

Hedge fund A hedge fund is an investment pool, like mutual funds. The high-risk aspect of hedge funds is that they are much more flexible in what they can invest in and can use much riskier investments strategies than are normally seen in other types of investments. Typically invested in by sophisticated investors with over $150,000 to invest, hedge funds are aggressive and not for uninitiated.

1.10 Sources of Investment Funds Investors can use several different sources of investment funds, depending on their needs and circumstances. Common sources include, but are not limited to:

1. Non-registered funds: such as investments that can be converted to cash, or cash on deposit with a bank, credit union, trust and loan company or cooperative. Federally regulated deposittaking institutions (DTIs), regulated by the Office of the Superintendent of Financial Institutions

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(OFSI), account for approximately 90% of total assets among Canada’s federally regulated DTIs.18 Credit unions and caisses populaires in Ontario are regulated by FSRA.

2. Registered funds: these are funds held in accounts that are registered with the federal government. They receive unique tax advantages, unlike non-registered funds that do not receive the same tax advantages. They include RRSPs, RESPs, RRIFs, RDSPs, and TFSAs. As per “Income Tax Folio S3-F10-C1, Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs, and TFSAs”19 these funds are eligible to be used for qualified investments, as defined by CRA, and includes mortgages. There are several requirements for arm’s length and non-arm’s-length mortgages, and a decision to use registered funds should only be undertaken after consulting an appropriately licensed firm or individual knowledgeable in such issues. More information can be found in section 1.32 to 1.36 of the above noted CRA folio. To invest in a mortgage using registered funds it is typically necessary to use a trustee, such as a trust company. Banks will do self-directed RRSP mortgages, for example, but not non-arm’s length mortgages, which is what a private lender requires. CWB Trust Services’ Arm’s Length Mortgages is an example of how a private investor can use registered funds to fund a private mortgage. Investing registered funds in non-qualified investments can have significant implications, including sever penalties issued by CRA. Typically, a Pooled Registered Pension Plan (PRPP) is not eligible to investing in individual private mortgages as the PRPP administrator chooses the types of eligible investments available to plan members.

18

Office of the Superintendent of Financial Institutions (OFSI), https://www.osfi-bsif.gc.ca/Eng/fi-if/dtiid/Pages/default.aspx 19 Canada Revenue Agency, https://www.canada.ca/en/revenue-agency/services/tax/technicalinformation/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-propertyinvestments-savings-plan-folio-10-registered-plans-individuals/income-tax-folio-s3-f10-c1-qualified-investmentsrrsps-resps-rrifs-rdsps-tfsas.html

26

Chapter 1: Introduction to Private Mortgages

1.11 Key Terms and Definitions Bond A loan or debt security to a government or company. Common share Securities that are equity ownership in a company. These shares entitle the holder to vote in the election of the board of directors and corporate policy and receive dividends, if issued. Debenture Like a bond in that it is a loan to a company. However, it is not secured by any specific assets, unlike a bond that is. Draw mortgage Also referred to as a builder’s mortgage or construction mortgage, is a mortgage used for the construction of a new home. Financial Institution As per the MBLAA, a ““financial institution” means a bank or authorized foreign bank within the meaning of section 2 of the Bank Act (Canada), a credit union to which the Credit Unions and Caisses Populaires Act, 2020 applies including a central within the meaning of that Act, an insurer licensed under the Insurance Act, a corporation registered under the Loan and Trust Corporations Act or a retail association as defined under the Cooperative Credit Associations Act (Canada); (“institution financière”).” Fixed income security A loan to a government body or a company (for all intents and purposes the borrower in this transaction) for a specific period of time. In return for this loan the borrower agrees to pay a fixed rate of interest throughout the term and then repay the face value at the end of the term. Financial Services Regulatory Authority of Ontario (FSRA) The Financial Services Regulatory Authority of Ontario (FSRA) is an independent regulatory agency created to improve consumer and pension plan beneficiary protections in Ontario. It regulates Property and casualty insurance, Life and health insurance, Credit unions and caisses populaires, Loan and trust companies, Mortgage brokers, Health services providers (related to auto insurance), Pension plan administrators, and financial planners and advisors Futures contract between two parties to buy and sell an asset at a price agreed upon today, with delivery and payment occurring in the future. These are transacted through futures exchanges. Hedge fund An investment pool, like mutual funds. The high-risk aspect of hedge funds is that they are much more flexible in what they can invest in and can use much riskier investments strategies than are normally seen in other types of investments. Income trust A trust that distributes income to its investors. In the real estate industry, the most common form is the real estate investment trust, or REIT.

Chapter 1: Introduction to Private Mortgages

27

Mortgage Investment Entity (MIE) Mortgage lenders that provide products characterized by short-term loans (between 6 to 24 months) and higher interest rates. MIEs include mortgage investment corporations (MICs) and other private lenders. Mortgage-Backed Securities (MBS) Fixed-rate investments that represent a part ownership in a pool of mortgages. The investment is fully guaranteed by Canada Mortgage and Housing Corporation (CMHC) resulting in virtually no risk for the investor. Mutual fund As defined by the Canadian Securities Administrators (CSA) a mutual fund “is a type of investment fund” that combines investments from one of more asset class. It is a collection of investments, such as stocks, bonds or other funds. Non-registered funds Investments that can be converted to cash, or cash on deposit with a bank, credit union, trust and loan company or cooperative. Options a contract which gives the owner the right to buy or sell an underlying asset, such as a stock, commodity, currency, or index at a specific price on or before a specific date. Overnight rate The average interest rate that the Bank of Canada wants to see in the marketplace for one-day (overnight) loans between financial institutions. Preferred share These shares typically provide the holder with a fixed dividend that is paid before common shareholders and have priority over common shareholders in the case of a dissolution. Prime rate The prime interest rate, also known as the “prime rate”, is the interest rate commercial banks charge their most credit-worthy business customers. It is a baseline rate upon which all floating rate loans are negotiated (for example, prime + 3%). The prime rate is set by financial institutions in a competitive fashion. It is based on the overnight rate that is set by the Bank of Canada. Private lender Any lender that is NOT, as per O. Reg. 409/07: MORTGAGE BROKERS AND AGENTS: LICENSING: • 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”) Private mortgage A private mortgage is a mortgage that is advanced by a private lender. Registered funds Funds held in accounts that are registered with the federal government. They receive unique tax advantages, unlike non-registered funds that do not receive the same tax advantages.

28

Chapter 1: Introduction to Private Mortgages

Restricted voting shares Like common shares except they have no voting rights. Rights and warrants Like stock options that allow the owner to purchase securities from the issuer at a set price within a specific time frame. They are often included when issuing a bonds or preferred shares. Stress Test An interest rate test to ensure that a borrower could afford their mortgage payments if their interest rate increases. Stripped bond A stripped bond, strip bond or strip is a bond that has had its two components, the interest payments, and its face value, separated from each other and sold individually.

Chapter 1: Introduction to Private Mortgages

29

1.12 Review Questions Answers to the Review Questions are found at www.REMIC.ca

1.12.1 Short Answer Questions 1. What is the difference between a private lender and an institutional lender? 2. Is it possible to get default insurance on a private mortgage? 3. List and describe at least 5 characteristics of a private mortgage. 4. In your opinion, what legislative change has had the most significant impact on the need for private mortgages? 5. What are the top reasons for using a private mortgage? 6. List 2 benefits of a private mortgage for a borrower. 7. List 2 benefits of a private mortgage for an investor 8. What are some of the risks associated with investing in mutual funds? 9. What are the two main sources of investment funds for private mortgages? 10. What is the main difference between registered funds and non-registered funds?

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Chapter 1: Introduction to Private Mortgages

1.13 Appendix 1 – NHA Approved Lenders20 Lender ATB Financial All Nations Trust Company Caisse populaire Alliance ltée Alterna Savings and Credit Union Limited Assumption Mutual Life Insurance Company Atlantic Central B.C. Housing Management Commission B2B Bank BNP Paribas (Canada) Bank of China (Canada) Bank of Montreal Bank of Montreal Mortgage Corporation Bank of Nova Scotia Bridgewater Bank Canada ICI Capital Corporation CMHC CMLS Financial Ltd. Caisse populaire acadienne ltée. CS Alterna Bank

20

Type of Approved Lender Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan

Lending Type

Jurisdictions

All

AB

All

All

All

ON

All

ON

All

PE, NS, NB, QC

All

NS, NB, PE

All

BC

All

All

Multi Unit 5+ 1–4 Units

All AB, BC, ON & QC

All

All

All

All

All

All

All

All

Multi Unit 5+

All

All

All

All

NL, PE, NS, NB, QC, ON, MB, SK, AB, BC, NT & YT

All

All

All

All

CMHC, https://www.cmhc-schl.gc.ca/en/professionals/project-funding-and-mortgage-financing/mortgage-loaninsurance/nha-approved-lenders/nha-approved-lenders

Chapter 1: Introduction to Private Mortgages Lender

CU Central Alberta Ltd. CU Central of Manitoba Ltd. CU Central of Ontario Ltd. CU Central of Saskatchewan Canada Life Assurance Company Canadian Mortgage Capital Corporation Canadian Western Bank Canadian Western Trust Company Canadian Imperial Bank of Commerce Central 1 CU CIBC Mortgages Inc. (CMI) CIBC Mortgages Inc. / Firstline Mortgages CIBC Trust Corporation Coast Capital Savings Federal Credit Union Community Trust Concentra Bank Conexus Credit Union Cooperators Life Insurance Company CP Groupe Financier Desjardins Financial Security Duca Financial Services CU Ltd. Effort Trust Company Empire Life Insurance Company

Type of Approved Lender Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin

Lending Type

Jurisdictions

All

AB

All

MB

All

ON

All

SK

All

All

All

ON

All

All

All

All

All

All

All

BC

All

All

All

All

All

All

All

All

All

All

All

All

All

All

All

All

All

MB

All

All

All

ON

All

All

All

All

31

32

Chapter 1: Introduction to Private Mortgages

Lender Equitable Life Insurance Company Canada Equitable Bank Fiducie Desjardins Inc. Firm Capital Corporation First National Financial GP First Nations Bank of Canada Fédération des caisses Desjardins du Québec* Fédération des caisses populaires de l'Ontario* Haventree Bank Home Bank Home Trust Company HSBC Bank Canada HSBC Trust Company (Canada) ICICI Bank Canada IG Investment Management Ltd. Industrial Alliance Insurance & Financial Services Inc. Institutional Mortgage Capital Canada Inc. Institutional Mortgage Servicing Canada Inc. Investors Group Trust Company Ltd. Investors Syndicate Ltd. Ivari KingSett Mortgage Corporation La Capitale Civil Service Insurance Laurentian Bank of Canada

Type of Approved Lender Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin

Lending Type

Jurisdictions

All

All

All

All

All

All

5+ unit

BC, AB, ON

All

All

All

All

All

QC

All

ON

1–4 Units

NL, PE, NS, NB, QC, ON, MB, SK, AB, BC

All

All

All

All

All

All

All

All

All

All

All

All

All

All

Underwriting Loans

5+ Units

BC, NB, NS, ON, PEI, QC

Loans Admin

5+ Units

AB, BC, MB, NB, ON, SK, NS, PE, QC

All

All

All

All

All

All

5+ units

BC, ON, QC

All

QC

All

All

Underwriting & Loan Admin Underwriting & Loan Admin Loan Admin. Only Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin

Chapter 1: Introduction to Private Mortgages Lender League Savings & Mortgage Company Marathon Mortgage Corp. MCAP Financial Corporation MCAP Service Corporation Manitoba Housing and Renewal Corp. Manufacturers Life Insurance Company Manulife Bank of Canada Manulife Trust Company Montrose Mortgage Corporation Ltd. Motus Bank National Bank of Canada Nesto Inc. New Brunswick Housing Corporation Newfoundland & Labrador CU Ltd. Omers Administration Corporation Ontario Infrastructure and Lands Corporation Otéra Capital Holding Inc. Paradigm Quest Inc. Peace Hills Trust Company Peakhill Capital Inc. Peoples Trust Company Radius Financial Inc. Ratehub Inc. (o/a CanWise Financial) RBC Life Insurance Company

Type of Approved Lender Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Loan Admin. Only Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin

Lending Type

Jurisdictions

All

All

1–4 Units

AB, BC, NB, NL, NS, ON,QC, MB, PE, SK

All

All

All

All

All

MB

All

All

All

All

1–4 Units Multi Unit 5+ 1–4 Units

33

All NL, PE, NS, NB, ON, MB, SK, AB, BC, YK, NT, NU AB, BC, NB, NL, NU, NS, NWT, ON, MB, PE, SK, YT

All

All

Underwriting

1-4 unit

AB, BC, MB, NB, NL, NS, ON, QC, SK

Loan Admin. Only

All

NB

All

NL

Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting Only Underwriting Underwriting & Loan

Multi Unit 5+ Multi Unit 5+

ON ON

All

ON,QC

1–4 Units

NL, PE, NS, NB, QC, ON, MB, SK, AB, BC

All

All

Multi Unit 5+

AB, BC, NS, ON, QC, MB, NB

All

All

1–4 Units 1–4 Units Multi

NL, PE, NS, NB, QC, ON, MB, SK, AB, BC AB, BC, ON, MB, QC, PEI, NS, NB, NL, SK All

34

Chapter 1: Introduction to Private Mortgages

Lender

Type of Approved Lender Admin

RFA Bank of Canada

Underwriting Only

RFA Mortgage Corporation

Underwriting Loans

Royal Bank of Canada Royal Trust Company Scotia Mortgage Corporation Simplii Financial SSQ, Société d'Assurance-Vie Société de Fiducie Natcan St.Stanisclaus-St-Casimir's Polish CU Strive Capital Corporation SBI Canada Bank Sun Life Assurance Company Canada Tangerine Bank Toronto-Dominion Bank True North Mortgage Inc. (o/a THINK Financial) Union du Canada, AssuranceVie Vancity Community Investment Bank Vancouver City Savings CU VersaBank Wealth One Bank of Canada MCAN Home Mortgage Corporation

Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Admin Underwriting & Loan Administration Underwriting Only

Lending Type Unit 5+ 1–4 Units 1–4 Units

Jurisdictions

All AB, BC, NS, ON, PEI, SK, NL, NB, MB

All

All

All

All

All

All

All

All

All

QC

All

All

All

ON

1–4 Units

ON, NS, NB, PEI, NL, BC, SK

All

All

All

All

All

All

All

All

1–4 Units

AB, BC, NS, ON, QC, MB & SK

All

QC, ON

All

All

All

BC

All

All

1–4 Units 1–4 Units

All NL, PE, NS, NB, ON, MB, SK, AB, BC

Chapter 2: Role of the Brokerage

35

Chapter 2: Role of the Brokerage 2.1 Learning Outcomes Successful understanding of the concepts presented in this chapter will enable the learner to: 1. List the activities requiring a license 2. Explain the difference between trading and dealing in mortgages 3. Describe the role of the brokerage in a brokered transaction 4. Explain a brokerage’s responsibilities regarding compliance 5. Describe a brokerage’s legal responsibility

2.2 Introduction A mortgage brokerage holds the key to safeguarding the interests of both borrowers and investors by ensuring that its agents, brokers, and staff comply with all the requirements of the MBLAA and its Regulations. A brokerage is responsible for who it hires, how it trains, supervises, and oversees the transactions of its agents, brokers and staff, and by extension has potential liability when one of its licensees contravenes the legislation.

2.3 Role of the Mortgage Brokerage in a Private Transaction The mortgage brokerage plays a key role in a private mortgage transaction. There are several regulatory requirements that the brokerage must meet to ensure its agents and brokers act appropriately given the needs and circumstances of both borrowers and investors.

2.3.1 Activities requiring a License 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 Regulated activities are set out in MBLAA, sections 2 to 6. These sections, which refer specifically to the terms “dealing” and “trading in mortgages”, as well as “lending”, which were included in the old Mortgage Brokers Act but never defined, are now clearly explained. Those dealing or trading in mortgages, as well as those lending on real estate (unless exempted) must have a broker’s or agent’s license.

Dealing in mortgages 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: 1. Soliciting another person or entity to borrow or lend money on the security of real property. 2. Providing information about a prospective borrower to a prospective mortgage lender, whether or not the Act governs the lender. 3. Assessing a prospective borrower on behalf of a prospective mortgage lender, whether or not the Act governs the lender. 4. Negotiating or arranging a mortgage on behalf of another person or entity or attempting to do so.

36

Chapter 2: Role of the Brokerage

Trading in mortgages 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 themself out as doing so: 1. Soliciting another person or entity to buy, sell or exchange mortgages. 2. Buying, selling, or exchanging mortgages on behalf of another person or entity. 3. Buying, selling, or exchanging mortgages on the person’s or entity’s own behalf.

Lending The MBLAA states that a person or entity is a mortgage lender in Ontario when he, she or it lends money in Ontario on the security of real property or holds themself out as doing so. In this case the person or business must be licensed as a mortgage brokerage (or an agent or broker authorized by a brokerage) unless it is exempt. Typically, a business will be exempt if it is licensed under other legislation, such as the Bank Act or the Trust and Loan Companies Act, or if the person’s or business’s lending activities are done solely through a mortgage brokerage or other regulated lender.

Pause for clarification – Lending: licensed or not? Yes: 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. No: If you are strictly using mortgage brokerages to find borrowers and not advertising to the public, you do not have to be licensed. Several changes were made to the Financial Services Commission of Ontario Act, 1997 as well as the Licence Appeal Tribunal Act, 1999 to reflect the changes to legislation, resulting in the MBLAA. One that is of particular interest is paragraph 5 of subsection 35.2 of the Securities Act, which states: “Subject to the regulations, registration is not required to trade in the following securities: Mortgages or other encumbrances upon real or personal property, other than mortgages or other encumbrances contained in or secured by a bond, debenture or similar obligation or in a trust deed or other instrument to secure bonds or debentures or similar obligations, if such mortgages or other encumbrances are offered for sale by a person or company licensed, or exempted from the requirement to have a licence, under the Mortgage Brokerages, Lenders and Administrators Act, 2006.” The MBLAA introduced a new licensing requirement for those administering mortgages. This activity is defined as being any individual or business that receives mortgage payments on behalf of another. If engaged in this activity the individual or business must have a mortgage administrator’s license. The following is FSRA’s Compliance Checklist for Mortgage Brokerages, Brokers and Agents.21 This checklist was developed by the regulator to assist in complying with the Act and its Regulations. All of these requirements are set out in the law – they are not suggestions.

21

FSRA, http://www.FSRA.gov.on.ca/en/mortgage/compliancechecklists/Documents/CompCheck3.pdf

Chapter 2: Role of the Brokerage

37

2.3.2 Compliance Checklist for Mortgage Brokerages, Brokers and Agents

Customer Relations ❏ Ensure the mortgage product presented is suitable for your customer. Consider the needs and circumstances of the borrower, lender, or investor to ensure that any mortgage or mortgage investment presented is suitable for your customer. This requirement does not apply if the customer is another Mortgage Brokerage or financial institution. ❏ If asked, provide the name in which you are licensed along with your Mortgage Brokerage/Broker/Agent licence number. ❏ Prominently disclose the Mortgage Brokerage’s authorized name and licence number in all public relations materials. If the name of a Mortgage Broker or Agent is included, use the name in which he/she is licensed and the title Mortgage Broker, Broker, Mortgage Agent level 2, mortgage Agent Level 2. ❏ If the Mortgage Brokerage is a franchise, clearly indicate that it is independently owned and operated. The public relations materials must clearly indicate that the company is independently owned and operated if the Mortgage Brokerage’s authorized name is the name of a franchise or includes the name of a franchise.

Pause for clarification – franchise A franchise (or franchising) is a method of distributing products or services involving a franchisor, who establishes the brand's trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system. ❏ Disclose the role in which the Mortgage Brokerage is acting. • Disclose in writing to the borrower or lender whether the Mortgage Brokerage is acting for the lender, the borrower, or both the borrower and the lender without preference to the interests of either. • This requirement does not apply when the Mortgage Brokerage is the lender. • Disclosure must be in plain language that is clear and concise. It should not include false, misleading, or deceptive information. ❏ Use plain language and be clear, brief, and logical in written disclosures, consents, and acknowledgements. ❏ Issue a receipt upon receiving trust funds. Indicate the amount that was received, the date, the name of the individual/ business that provided the funds, the purpose of the funds, the Mortgage Brokerage’s terms for holding the funds, and the name of the Mortgage Broker/Agent who received the funds. ❏ Return original documents to their owners when requested, at no charge. ❏ Provide a written response to a written complaint. Tell the client that they may contact FSRA if they are not satisfied with your response and believes the law has not been followed.

38

Chapter 2: Role of the Brokerage

Disclosure Pause for clarification – disclosure The revealing of facts or making secret information known. ❏ Disclose in writing to the borrower the number of lenders on whose behalf the Mortgage Brokerage acted during the previous fiscal year and whether the Brokerage itself was a lender. Upon request, 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. Or whether the Mortgage Brokerage itself was the lender of more than 50 per cent of the total number of mortgages and mortgage renewals ❏ Disclose information about fees the Mortgage Brokerage receives or will/may receive from others. Disclose in writing to the borrower whether fees are payable by others to the Mortgage Brokerage in connection with the mortgage. Include the person/entity paying the fees, the basis for calculating the amount of the fee, and if a benefit other than money, the nature of that benefit. Also disclose whether the Mortgage Agent/Broker receives or may receive any incentive from another person/entity, and who that person/entity is. Obtain written acknowledgement from the borrower. ❏ Disclose information about fees the Mortgage Brokerage is paying. Disclose to the borrower in writing whether the Mortgage Brokerage has paid, may pay, or will pay a fee to another person/entity in connection with the mortgage, the name of person/entity receiving the fee, and the basis for calculating the fee or other remuneration. If it is a benefit other than money, disclose the nature of the benefit. Obtain written acknowledgement from the borrower. ❏ Disclose information about referral fees the Mortgage Brokerage is receiving. 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. ❏ Disclose material risks. Disclose in writing to the borrower, lender, or investor the material risks of the mortgage or mortgage investment. Get written acknowledgement that the customer has received this disclosure. This disclosure requirement does not apply to designated classes of lenders and investors defined in Section 2 of Ontario Regulation 188/08. ❏ Disclose potential conflicts of interest. Disclose in writing to a borrower, lender or investor, any conflict of interest that the Mortgage Brokerage, Broker or Agent may have in connection with the mortgage or trade in a mortgage. This does not apply if the lender is another Mortgage Brokerage, or if the investor is another Brokerage or financial institution. Obtain written acknowledgement of the disclosure. ❏ Disclose the cost of borrowing to the borrower. Provide the borrower a written disclosure statement on the cost of borrowing as detailed in the Cost of Borrowing and Disclosure to Borrowers (Ontario Regulation 191/08), Sections 8 and 9. Provide this disclosure at least two business days before the borrower makes any payment in relation to the mortgage or enters into the mortgage agreement. This timing requirement does not apply if the borrower consents in writing before the earliest of these dates described.

Chapter 2: Role of the Brokerage

39

❏ For reverse mortgages, ensure the borrower provides a signed statement from a lawyer stating that the lawyer has provided independent legal advice to the borrower. ❏ Disclose information based on an estimate or assumption. Inform the borrower/investor/lender in writing that the information is an estimate or is based on an assumption. ❏ Inform the lender as soon as possible, if you doubt the borrower’s legal authority to mortgage a property, or if you doubt the accuracy of the borrower’s application or supporting documentation. ❏ Verify the identity of each borrower, lender, and investor. Advise the borrower, lender, or investor, as the case may be, if you are unable to verify the identity of another party to the transaction. Do this 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. ❏ Disclose to an investor if a mortgage has been in default during the past 12 months. Include the amount and duration of the default in the disclosure. Get written acknowledgement that the investor has received this information. ❏ Give a completed Investor/Lender Disclosure Statement to the investor/lender. Include all relevant documentation and provide disclosure at least two business days before: • the Mortgage Brokerage receives funds from the investor/lender; • the Mortgage Brokerage enters into an agreement to receive funds from the investor/lender; • the lender enters into an agreement to enter into a mortgage, or the investor enters into an agreement to purchase/ exchange/sell a mortgage; • the borrower receives funds for their mortgage; • the trade completion date. This waiting period may be reduced to one business day if the investor/lender consents in writing.

Pause for clarification – waiting period The amount of time an individual or entity must wait before being able to enter into an agreement, contract or other prescribed activity ❏ For mortgage renewals, provide the lender a completed Renewal Form and supporting documents.

Prohibited Activities The Mortgage Brokerages, Lenders and Administrators Act, 2006 and Regulations, prohibit: • Trading or dealing in mortgages without a licence —as of July 1, 2008, all Mortgage Brokerages, Administrators, Brokers and Agents must be licensed with FSRA to carry on business in Ontario, unless an exemption applies. • Using an unauthorized name — you can use only the name in which you are licensed.

40

Chapter 2: Role of the Brokerage •

• • • • •

Collecting advance fees for mortgages of $400,00022 or less — if the principal amount of the mortgage is $400,000 or less, the Mortgage Brokerage cannot require or accept an advance payment/deposit for services to be rendered and expenses to be incurred by the Brokerage or any other person. Receiving funds from investors/lenders in advance — 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. Indicating that Mortgage Brokerage fees are approved by the government — you cannot claim that Mortgage Brokerage fees are approved by a government authority. The only exception is fees under the Land Titles Act or the Registry Act. Offering guarantees to lenders/investors — you cannot offer a guarantee to an investor/lender regarding a mortgage loan or mortgage investment. Engaging in tied selling — borrowers/lenders/investors cannot be required to obtain a product or service as a condition for obtaining another product or service from the Mortgage Brokerage. Acting for a borrower/investor/lender if you believe a mortgage is unlawful.

2.3.3 The role of the brokerage, representation Section 18 of Regulation 188/08 states that the brokerage must disclose, in writing to a prospective borrower or lender the following information about the nature of its relationship with borrowers and lenders: 1. If the brokerage is acting as a representative of the lender but not the borrower in a transaction. 2. If the brokerage is acting as a representative of the borrower but not the lender in a transaction. 3. If the brokerage is acting as a representative of both the borrower and the lender in a transaction and is not giving preference to the interests of either. These can be classified as: 1. Working on behalf of the investor 2. Working on behalf of the borrower 3. Working for both the investor/lender and the borrower A brokerage may also be a mortgage administrator, which is discussed in detail in Chapter 12: Mortgage Administration. 1. Working on behalf of the investor/lender In this circumstance, the licensee is focused on assisting the investor/lender by: • Acts in the best interests of the investor • Recommending an investment that is suitable for the investor • Underwriting the application • Assisting in determining lending value of the property • Understanding the investor’s risk tolerance, needs and circumstances • Communicates to the investor/lender on a regular basis about trends • Completes the appropriate disclosure forms accurately and completely • Explains the disclosure documents in a manner that promotes understanding

22

FSRA, https://www.fsrao.ca/consumers/how-fsra-protects-consumers/mortgage-brokering

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Pause for clarification – lending value This is typically the appraised value or the sale price of the property, however it may differ from these based on the lender’s level of risk tolerance. For example, an investor may decide that they wish to discount the value of an appraisal by 10% to reduce exposure, applying their maximum loan to value constraint on the lower value, resulting in a lower mortgage amount. 2. Working on behalf of the borrower • Acts in the best interests of the borrower • Recommends mortgage options that are suitable given the needs and circumstances of the borrower • Negotiates, where applicable, lower rates and fees, and more favourable terms and conditions • Completes the appropriate disclosure forms accurately and completely • Explains the disclosure documents in a manner that promotes understanding 3. Working on behalf of both the investor/lender and borrower • Acts in the best interests of both parties, with preference to neither • Ensures that the investor/lender and borrower are a suitable match given the needs and circumstances of both • Completes the appropriate disclosure forms accurately and completely • Explains the disclosure documents in a manner that promotes understanding Role of the brokerage – sample clauses Clauses may be worded as follows: • REMIC Mortgages Inc. is acting solely on behalf of the lender in this mortgage transaction. • REMIC Mortgages Inc. is acting solely on behalf of the borrower in this mortgage transaction. • REMIC Mortgages Inc. is acting on behalf of both the lender and the borrower in arranging this mortgage transaction.

2.3.4 Legal responsibility of the brokerage Simply put, the legal responsibility of the brokerage is consumer protection. The MBLAA and its Regulations clearly indicate the legal responsibilities of a mortgage brokerage, its agents and brokers to borrowers and investors involved in a private mortgage transaction. The brokerage is represented by its agents and brokers, meaning that while an agent or broker may contravene the legislation on their own, in violation of their contract with their mortgage brokerage, the brokerage is still liable for their actions. In other words, a brokerage can’t take the position that if an agent or broker acts unlawfully by not giving full disclosure of investment risks, for example, that the brokerage is exempt from responsibility because this requirement is in their policies and procedures, and the agent or broker did not abide by them. There are enforcement activities by FSRA that penalizes both the agent and the brokerage. This is clear in one decision where the agent was fined for contravening the MBLAA and causing the brokerage to therefore contravene the MBLAA. In addition, the brokerage was fined for contravening the MBLAA.

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Example (names have been changed for privacy issues, however a full version of this order is online at FSRA’s website.) IN THE MATTER OF the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29, as amended (the “Act”), in particular sections 38 and 39; AND IN THE MATTER OF ABC Brokerage. (“Brokerage”) and Authorized Broker (“Broker”). ORDER IMPOSING ADMINISTRATIVE PENALTIES Brokerage was licensed as a mortgage brokerage (licence #00000). Brokerage is no longer licensed. Broker was licensed as a mortgage broker (licence #M00000000) under the Act until his licence expired on April 1, 2020. Broker was also principal broker of Brokerage from April 1, 2014, to May 24, 2017 and from July 10, 2018 onwards. On December 20, 2018, Broker and Brokerage entered an undertaking on consent with the Superintendent of Financial Services. On behalf of Brokerage and himself, Broker undertook that, amongst other things, neither Broker nor Brokerage would deal or trade in mortgages nor carry on business as a mortgage lender. This undertaking remains in force. Effective June 8, 2019, pursuant to the Financial Services Regulatory Authority of Ontario Act, 2016, S.O. 2016, c. 37, Sched. 8, Financial Services Regulatory Authority of Ontario became the regulator under the Act and the powers and duties previously vested in the Superintendent of Financial Services under the Act were vested in the Chief Executive Officer of Financial Services Regulatory Authority of Ontario (the "Chief Executive Officer"). On February 25, 2021, by delegated authority from the Chief Executive Officer, the Director, Litigation and Enforcement (the "Director") issued a Notice of Proposal to: 1. impose administrative penalties on Brokerage for: a) using ready-to-develop values in the calculation of loan-to-value ratios in the Form 1 disclosures on the Riverdale and Bathurst Projects, contrary to subsection 43(1) of the Act; b) not adequately identifying conflicts of interest in accordance with Section 27 of Ontario Regulation 188/08; c) not adequately identifying certain Project-specific risks in accordance with Section 25 of Ontario Regulation 188/08; d) not adequately documenting investors' suitability assessment in a way that demonstrates that an adequate suitability assessment was completed in accordance with Section 24(1) of Ontario Regulation 188/08; and e) not adequately maintaining policies and procedures in accordance with Sections 40(1) and 40(2) of Ontario Regulation 188/08. 2. impose administrative penalties on Broker for:

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a) as broker, using ready-to-develop values in the calculation of loan-to-value ratios in the Form 1 disclosures on the Riverdale and Bathurst Projects, contrary to section 43(2) of the Act; b) as broker, not doing or omitting to do actions that might reasonably be expected to result in the brokerage to contravene or fail to comply with a requirement established under the Act contrary to section 3 of Ontario Regulation 187/08; c) as principal broker, not adequately ensuring compliance by Brokerage and other brokers and agents with the requirements of the Act contrary to section 2 of Ontario regulation 410/07; and d) as principal broker, not adequately reviewing the policies and procedures of Brokerage and recommending changes to Brokerage in accordance with section 3 of Ontario regulation 410/07. A Request for Hearing (Form 1) dated March 12, 2021, was delivered to the Financial Services Tribunal (the "Tribunal") in accordance with section 39(5) of the Act respecting the Notice of Proposal. On February 16, 2022, Brokerage and Broker withdrew the Request for Hearing, and, on February 16, 2022, the Tribunal closed its file in respect of this matter. This Order is made pursuant to a settlement entered into by Brokerage, Broker and the Director. ORDER Administrative penalties in the total amount of $280,000 are hereby imposed on Brokerage, for the reasons set out in the Notice of Proposal. Administrative penalties in the total amount of $55,300 are hereby imposed on David Broker, for the reasons set out in the Notice of Proposal. TAKE NOTICE THAT the Financial Services Regulatory Authority of Ontario will deliver an invoice to Brokerage and Broker with information as to where and how to pay the administrative penalties. Brokerage and Broker must pay the administrative penalties no later than sixty (60) days after the date of the invoice. If Brokerage and Broker fail to pay the administrative penalties in accordance with the terms of this Order, the Chief Executive Officer may file the Order with the Superior Court of Justice and the Order may be enforced as if it were an order of the court. An administrative penalty that is not paid in accordance with the terms of the order imposing the penalty is a debt due to the Crown and is enforceable as such. DATED at Toronto, Ontario, February 25, 2022 Original signed by Elissa Sinha Director, Litigation and Enforcement By delegated authority from the Chief Executive Officer

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As can be seen in this example, FSRA takes consumer protection and adherence to the MBLAA and its Regulations very seriously.

2.3.5 The Law of Agency: more than just expectations The following section deals with a discussion of legal concepts for educational purposes only and while efforts are made to provide accurate information, it is the sole responsibility of the licensee to obtain independent legal advice before acting on the information presented in this section.

Agency In common law, agency refers to the relationship that exists when one person or party (the principal) engages another (the agent) to act for them.

The agent and the principal In the common law of agency, an agent is an individual who has the legal authority to act in place of another, referred to as the principal. While lenders and borrowers have certain expectations of the mortgage agent, there are also legal responsibilities that may exist. An agent's relationship with a principal is fiduciary in nature. That is, the agent must act in the best interests of the principal and may not put their own interests before those of the principal. Where the agent is in a position in which their interests conflict with those of the principal, the agent is obliged to fully disclose that conflict to the principal. Agent’s duties to the principal The following are some of the main duties an agent has to their principal: 1. A duty to account for monies received or spent while acting on behalf of the principal 2. A duty to protect the confidential information of the principal 3. A duty of dealing with a third party or the principal in good faith 4. A duty to act in the best interests of the principal 5. A duty of loyalty to the principal 6. A duty to act with reasonable care and skill at all times 7. A duty to follow and obey the instructions of the principal If an agent fails to carry out any of the above duties, resulting in the principal suffering damage of any kind, the principal may win a tort case against the agent for breach of duty. Principal’s duties to the agent In addition, the principal has duties to their agent, namely: 1. A duty to indemnify the agent, and 2. A duty to pay the agent, for example, a commission or fee Termination of the agency The agency may be terminated by: 1. Performance, where the purpose of the agency has been achieved 2. Mutual agreement, where both parties agree to terminate 3. Individually, where one party terminates the agency (this may still result in liability for the terminating party), and 4. By operation of law

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Agency between the mortgage brokerage/agent/broker and the borrower With regards to mortgage brokering, that authority can stem from the application form that a borrower signs, authorizing the brokerage to submit the application to and negotiate with lenders. In common law, the person who the agent is acting for is referred to as the principal. Despite this, whether a mortgage agent is acting as an agent in this manner is not always clear. It is therefore suggested that a mortgage agent assume that they are acting as an agent for the principal (who is the borrower or lender, as the case may be).

Agency between the mortgage brokerage and the mortgage agent/broker Under the law of agency, a mortgage brokerage may be deemed to be the principal and its mortgage agents and brokers its agents. The principal can authorize the agent to carry out various functions, including brokering, or restrict the agent to the performance of specific functions, such as brokering institutional mortgages and not private mortgages. As noted earlier, the agent has specific duties to their principal. However, regardless of the scope of authority that the principal gives the agent, the agent is under the control of the principal and represents his/her interests. More importantly, principals are held liable for the outcome of actions that they direct the agent to perform.

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2.4 Key Terms and Definitions Agency In common law, agency refers to the relationship that exists when one person or party (the principal) engages another (the agent) to act for them. Authorized name The name in which a licensee is licensed with FSRA. Dealing in mortgages 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: 1. Soliciting another person or entity to borrow or lend money on the security of real property. 2. Providing information about a prospective borrower to a prospective mortgage lender, whether or not the Act governs the lender. 3. Assessing a prospective borrower on behalf of a prospective mortgage lender, whether or not the Act governs the lender. 4. Negotiating or arranging a mortgage on behalf of another person or entity or attempting to do so. Disclosure The revealing of facts or making secret information known. Franchise A method of distributing products or services involving a franchisor, who establishes the brand's trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system. Lending The MBLAA states that a person or entity is a mortgage lender in Ontario when he, she or it lends money in Ontario on the security of real property or holds themself out as doing so. Role of the brokerage Information about the nature of a brokerage’s relationship with borrowers and lenders. Trading in mortgages 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 themself out as doing so: 1. Soliciting another person or entity to buy, sell or exchange mortgages. 2. Buying, selling, or exchanging mortgages on behalf of another person or entity. 3. Buying, selling, or exchanging mortgages on the person’s or entity’s own behalf. Waiting period The amount of time an individual or entity must wait before being able to enter into an agreement, contract or other prescribed activity.

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2.5 Review Questions Answers to the Review Questions are found at www.REMIC.ca

2.5.1 Short Answer Questions 1. What mortgage activities require a license in Ontario? 2. What does dealing in mortgages mean? 3. What does trading in mortgages mean? 4. Who requires a license to lend private money in Ontario? 5. When do you have to include your licensed title in public relations materials? 6. Does a brokerage have to disclose on whose behalf it is working if the lender is the mortgage brokerage? 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? 8. Does a brokerage have to disclose if it is receiving referral fees for referring a borrower to another investor? 9. When must a brokerage verify the identity of a borrower or investor? 10. Under what circumstances can a brokerage accept funds from an investor for investment in a mortgage?

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Chapter 3: Role of the Regulators 3.1 Learning Outcomes Successful understanding of the concepts presented in this chapter will enable the learner to: 1. List the different regulatory authorities involved in lending 2. Explain the roles of the different regulators 3. Describe the role of mortgage brokering licensees 4. Explain the licensing requirements for dealing and trading in private mortgages 5. List the licensing exemptions 6. Discuss how legislation affects public relations materials and the marketing of private mortgages 7. Explain the legal and regulatory framework that applies to private mortgages

3.2 Introduction Regulatory authorities, such as OSFI, FSRA and the OSC, as discussed in this chapter, have responsibilities regarding interpreting and enforcing the legislation that affects their specific sectors. Each of these regulators has a significant role to play in the Ontario mortgage market, and either directly or indirectly in the mortgage brokering industry. In this chapter we discuss their roles and impact.

3.3 Regulatory Authorities Lenders in Ontario are regulated by three bodies: 1. Office of the Superintendent of Financial Institutions (OSFI) 2. Financial Services Regulatory Authority of Ontario (FSRA) 3. Ontario Securities Commission (OSC) OSFI is responsible for institutional lenders, as discussed below, while FSRA is responsible for mortgage brokerages and the Ontario Securities Commission of Ontario oversees mortgage investment corporations. The following descriptions are provided by each regulatory authority. 1. Office of the Superintendent of Financial Institutions (OSFI)23 The Office of the Superintendent of Financial Institutions (OSFI) is an independent federal government agency that regulates and supervises more than 400 federally regulated financial institutions and 1,200 pension plans to determine whether they are in sound financial condition and meeting their requirements. Federally regulated entities include all banks in Canada, and all federally incorporated or registered trust and loan companies, insurance companies, cooperative credit associations, fraternal benefit societies and private pension plans. OSFI’s scope of regulation does not include consumer or consumer-related issues or the securities sector, which are the responsibility of other agencies, both federal and provincial.

23

OSFI, https://www.osfi-bsif.gc.ca/Eng/osfi-bsif/Pages/default.aspx

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OSFI regulates by developing rules, interpreting legislation and regulations, and providing regulatory approvals for certain types of transactions. It also contributes to new accounting, auditing, and actuarial standards. All of this must balance the goals of safety and soundness with the need for institutions to operate within a competitive marketplace. OSFI supervises by analyzing financial and economic trends to identify emerging issues that could adversely affect institutions. It assesses an institution’s financial condition, material risks and the quality of its governance, risk management and compliance. When weaknesses are identified, OSFI intervenes early and works with executive management, boards, and pension plan administrators to correct matters. Although OSFI plays an important oversight role, it does not manage the operations of institutions or pension plans. Their executive management, boards of directors and trustees are responsible for their success or failure. OSFI’s supervision approach is risk-based to reflect the nature, size, complexity, and risk profile of an institution. Financial institutions must be allowed to take reasonable risks and compete effectively both at home and abroad, while at the same time safeguard the interests of depositors, policyholders, beneficiaries, and pension plan members. OSFI’s goal is to balance competitiveness with financial stability, and international standards with Canadian market realities. Blueprint OSFI is undergoing a transformational journey that will better position the organization to thrive in an era of intensifying uncertainty, so that the public’s confidence in a sound financial system remains unwavering. The Blueprint serves as the compass for that journey by refocusing our mandate, expanding and fortifying our risk management capabilities, and enhancing our culture. The transformation plan set out in the Blueprint will guide OSFI’s overall direction through to 2025. Multiple operational plans ensure that our transformation is reflected in specific and tangible goals for each sector and the organization overall. Corporate values OSFI’s corporate values represent both who we are as an organization and where we want to go. Those values – Respect, Curiosity, Stewardship – guide our actions and decision-making and are embedded as an essential part of OSFI’s Blueprint. Respect We empower diversity of thought, promote inclusion and collaboration and behave with authenticity and professionalism. We encourage OSFI employees to embrace a deep commitment to diversity, equity, and inclusion (DEI), so that it informs all aspects of our human capital practices and makes us an employer of choice. DEI is not just a business imperative, but a moral one. Curiosity Curiosity is central to our organizational mission. We ensure that a culture of curiosity – where we foster diverse mindsets and make it safe to be different and even to fail – is at the core of all we do. Differences are explored and celebrated, which drives innovation and positive transformation. We learn from our attempts and embrace failure quickly and proactively as a step in the learning process. Stewardship We act with integrity and take accountability, we make decisions in an informed, transparent, and balanced manner and we uphold the credibility and reputation of OSFI. Our Blueprint calls for a shift to a macro-responsive mindset rather than a micro-centric one. While we will always prudentially regulate

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and supervise regulated institutions, how we manage the risks they face will be recalibrated to better balance the individual institutions and the broader macro-risks they face. By developing a greater risk appetite among our people and as an organization, we will be able to make decisions more quickly and confidently while managing associated risks with speed and agility. Partners in Canada’s federal regulatory system OSFI reports to Parliament through the minister of Finance. Various formal and informal processes are used to ensure effective execution of OSFI’s mandate. For example, the Financial Institutions Supervisory Committee, whose members are OSFI, the Department of Finance, the Bank of Canada, the Canada Deposit Insurance Corporation, and the Financial Consumer Agency of Canada, meets at least quarterly to share information on matters relating to the supervision of federally regulated financial institutions. OSFI also works with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), which is responsible for ensuring compliance with Canada’s Proceeds of Crime (money laundering) and Terrorist financing Act. Collaboration and consultations with provincial counterparts and industry stakeholders in Canada and abroad are a regular occurrence and help OSFI to understand and resolve potential issues. International context International organizations such as the Financial Stability Board, the Basel Committee on Banking Supervision, and the International Association of Insurance Supervisors play a key role in the development of regulatory frameworks for banks and insurers that contribute to a strong and stable global financial system. OSFI has earned a strong international reputation through its active participation in such international organizations, which allow it to share Canadian perspectives and help shape international rule setting. Benefits to Canada A properly functioning, efficient financial system in which Canadians can place their trust and confidence is essential to Canada’s economy. OSFI’s regulation and supervision activities play a key role in contributing to public confidence in the Canadian financial system. And OSFI doesn’t cost Canadian taxpayers any money. OSFI is funded from fees charged to regulated entities. Office of the Chief Actuary The Office of the Chief Actuary is an independent unit housed within OSFI that provides a range of actuarial valuation and advisory services to the federal government. This includes actuarial reports on the Canada Pension Plan (CPP), Old Age Security Program and the Canada Student Loans Program. Although the Chief Actuary reports to the Superintendent, he or she is solely responsible for the content and actuarial opinions in the reports.

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2. Financial Services Regulatory Authority of Ontario (FSRA)24 The Financial Services Regulatory Authority of Ontario (FSRA) is an independent regulatory agency created to improve consumer and pension plan beneficiary protections in Ontario. FSRA was established to replace the Financial Services Commission of Ontario (FSRA) and the Deposit Insurance Corporation of Ontario (DICO). The agency is flexible, self-funded and designed to respond rapidly to an evolving commercial and consumer environment. In this capacity, FSRA will: • Promote high standards of business conduct • Foster a sustainable, competitive financial services sector • Respond to market changes quickly • Promote good administration of insurance and pension plans • Encourage innovation Sectors we regulate The newly created agency protects Ontarians by regulating: • Property and casualty insurance • Life and health insurance • Credit unions and caisses populaires • Loan and trust companies • Mortgage brokers • Health services providers (related to auto insurance) • Pension plan administrators • Financial planners and advisors As of September 29, 2022, FSRA regulated or registered: • 290 insurance companies • 4,603 regulated pension plans • 61 credit unions and caisses populaires • 50 loan and trust corporations • 1,232 mortgage brokerages • 3,001 mortgage brokers • 16,121 mortgage agents • 240 mortgage administrators • 4,903 accident benefit service providers • 68,414 insurance agents • 6,811 corporate insurance agencies • 1,562 insurance adjusters Legislative mandate • Regulate and generally supervise the regulated sectors • Contribute to public confidence • Monitor and evaluate developments and trends

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FSRA, https://www.fsrao.ca/about-fsra

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Chapter 3: Role of the Regulators • • •

Promote public education and knowledge Promote transparency and disclosure of information Deter deceptive or fraudulent conduct, practices, and activities

3. Ontario Securities Commission25 The Ontario Securities Commission is an independent Crown agency that regulates Ontario’s capital markets by making rules that have the force of law and by adopting policies that influence the behaviour of capital markets participants. The OSC carries out the powers, duties and functions given to it pursuant to the Securities Commission Act, 2021. The OSC exercises its regulatory oversight function through the administration and enforcement of Ontario’s Securities Act and Commodity Futures Act and administration of certain provisions of Ontario’s Business Corporations Act. Our statutory mandate is to provide protection to investors from unfair, improper, or fraudulent practices, to foster fair, efficient and competitive capital markets, and confidence in the capital markets, to foster capital formation, and to contribute to the stability of the financial system and the reduction of systemic risk. We contribute to the health and performance of Ontario’s economy by using our rule‑making and enforcement powers to help safeguard investors, to deter financial misconduct, and to direct participants involved in capital markets in Ontario. We regulate market participants including firms and individuals who sell securities and derivatives, firms who provide investment advice in Ontario, and public companies. We also regulate marketplaces, such as the Toronto Stock Exchange. Our Goals • Promote confidence in Ontario’s capital markets • Reduce regulatory burden • Facilitate financial innovation • Strengthen our organizational foundation

3.4 FSRA’s Role in Licensure FSRA is responsible for the licensing and oversight of the mortgage brokerage industry. The introduction of new licensing classes, as discussed below, is the result of extensive consultation with industry, regulators, and the general public. It is designed to enhance consumer protection by mandating additional licensing requirements and restrictions, as detailed in FSRA’s Guidance No. MB0047INT26

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OSC, https://www.osc.ca/en/about-us FSRA, https://www.fsrao.ca/industry/mortgage-brokering/regulatory-framework/guidance-mortgagebrokering/new-mortgage-agent-and-broker-licensing-requirements 26

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Success Tip - Date your license was issued Not sure when your license was issued? You can use this form to: 1. request a certificate confirming the licence status of an individual, partnership, corporation, company; or 2. request the licensing history of an individual, partnership, corporation, company; or 3. request the licensing history of a mortgage agent or mortgage broker be submitted to another regulator for the purpose of reciprocal licensing. The Request for Licensee Information from FSRA is available at https://www.fsrao.ca/request-licensee-information-fsra-0

3.4.1 FSRA’s Guidance No. MB0047INT

Purpose This Guidance1 provides FSRA’s interpretation and approach for the implementation of: • the proposed new licensing provisions set out in section 1, subsections 2(1)5, 2(1)6, 2(3) and sections 5, 5.0.1, 5.0.2 and 6 of Ontario Regulation 409/07 (“O. Reg. 409/07”) under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (“MBLAA”) • new continuing education (“CE”) requirements per subsection 9(1)4 of O. Reg. 409/07

Scope This guidance affects the following FSRA licensees: • mortgage agents • mortgage brokers • mortgage brokerages The guidance also applies to individuals applying for a new licence or individuals licensed in other provinces who are seeking a licence in Ontario.

Rationale and background The 2019 Report to the Minister of Finance on the Legislative Review of the MBLAA (“2019 MBLAA Review Process”) recommended that the Ministry of Finance (“MOF”) work with FSRA, in consultation with the industry, to propose options for licensing schemes that better respond to the unique practices required by certain segments of the mortgage market. Stakeholder feedback received during the 2019 MBLAA Review Process indicated that licensees working with private mortgage lenders and raising capital require a specific set of competencies, which should be reflected in the licensing and education requirements. In response, the Government proposed effective April 1, 2023: • the establishment of a separate licence for mortgage agents who transact in private mortgages and arrange investments for private investors / mortgage lenders • enhanced education and experience requirements for mortgage agents and brokers The new proposed licence for mortgage agents includes enhanced requirements that address the need for agents (as well as brokers) to have additional education, knowledge, and experience regarding private mortgages. Private mortgages may have terms and conditions that pose unfamiliar risks to consumers,2 given that they are not underwritten in the same way as those offered by more traditional financial institutions. Mortgage agents and brokers must have the appropriate expertise to recommend products that meet

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consumers’ needs. They must take reasonable steps to properly understand, assess and inform consumers of any potential risks associated with private mortgages or mortgage investments. The proposed new mortgage agent licence and enhanced mortgage agent and broker requirements support the following outcomes: • education/competency requirements that better align with activities in the mortgage market • enhanced consumer protection as borrowers and lenders / investors receive appropriate levels of information and recommendations to make informed decisions relevant to their mortgages / mortgage investments • enhanced confidence in the mortgage brokering industry as licensees are prepared for their career in the mortgage brokering sector The implementation of the proposed new licensing classes by FSRA aligns with: • FSRA’s statutory objects as set out in the Financial Services Regulatory Authority of Ontario Act, 2016 (“FSRA Act”), specifically: o to contribute to public confidence in the mortgage brokering sector o to promote high standards of business conduct o to protect the rights and interests of consumers •

Principles 4, 5 and 6 of the Mortgage Broker Regulators’ Council of Canada’s (MBRCC) Code of Conduct for the Mortgage Brokering Sector (“the MBRCC Code of Conduct”), which state: o Principle 4 – “Competence: Regulated persons must maintain the skills, knowledge, and aptitudes necessary for their business activities. They should decline to act when they are unable to provide products/services in accordance with this Code”. o Principle 5 – “Suitability: Regulated persons and entities must take reasonable steps to present products/services that are suitable for their client(s). They must have a sound understanding of how the products/services match the disclosed circumstances of their client(s)”. o Principle 6 – “Disclosure: Regulated persons and entities must fully disclose material information to applicable parties in a transaction. Disclosures must be meaningful and made in an honest and timely manner”.

Interpretation/Approach Under subsections 2(3), 3(3) and 4(2) of the MBLAA, those who deal, trade, or lend in mortgages must be licensed by FSRA unless exempted from doing so as described under section 6. Individuals need to meet the licensing eligibility criteria in sections 2, 5, 5.0.1, 5.0.2 and 6 of O. Reg. 409/07.

New licensing classes It is proposed that effective April 1, 2023, the following new licence classes would be established under sections 2, 5, 5.0.1 and 5.0.2 of O. Reg. 409/07 for individuals seeking a mortgage agent or broker licence in Ontario: • Mortgage agent level 1 licence authorizes licensees to deal and trade in mortgages provided by: o financial institutions, as defined in section 1 of the MBLAA o lenders approved by Canada Mortgage and Housing Corporation (“CMHC”) under the National Housing Act (“NHA”) • Mortgage agent level 2 licence authorizes licensees to deal and trade in mortgages provided by: o financial institutions, as defined in section 1 of the MBLAA o lenders approved by CMHC under the NHA

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all other lenders, such as mortgage investment companies, syndicates, private individuals, agents, brokers, and brokerages • Mortgage broker licence authorizes licensees to deal and trade in mortgages provided by: o financial institutions, as defined in section 1 of the MBLAA o lenders approved by CMHC under the NHA o all other lenders, such as mortgage investment companies, syndicates, private individuals, and brokerages Mortgage brokers can supervise mortgage agents (levels 1 and 2) and can be appointed as the principal broker for a brokerage. o

Individual licensee accountability in transactions 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. See Appendix 1 for more details.

New licensing requirements For the proposed new licensing classes, licence applicants must meet the education and experience requirements set out in Table 1. Subsections 2(1)5, 2(1)7, 5.0.1(1)5 and 5.0.2(1)5 of O. Reg. 409/07 require that individuals seeking to obtain a licence successfully complete an education program approved by the Chief Executive Officer (“CEO”) of FSRA. The education programs that the CEO has approved for the proposed new licensing classes are found in Table 1. The mortgage agent level 2 and broker education programs include a Private Mortgages Course. The objective of the course is to ensure that licensees have enhanced knowledge about the regulatory framework, transaction processes, fraud and risks associated with private lending vehicles. The course aligns with the MBRCC Private Lending Competencies and Curriculum and the MBRCC Code of Conduct. Subsections 2(1)6 and 5.0.2(1)6 of O. Reg. 409/07 set out the experience requirements to obtain the mortgage agent level 2 and mortgage broker licences, as proposed in Table 1. The education and experience requirements for the new licensing classes effective April 1, 2023 are found in Table 1. They apply to individuals not covered by the transition timelines in Table 2. Table 1: Licensing and Experience Requirements effective April 1, 202327 Requirement Mortgage agent level 1 Mortgage agent level 2 Experience No experience required. Applicants must have at least 12 months experience over the last

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Mortgage broker Applicants must have at least 24 months experience over the last

FSRA, Table 1, https://www.fsrao.ca/industry/mortgage-brokering/regulatory-framework/guidance-mortgagebrokering/new-mortgage-agent-and-broker-licensing-requirements-0

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Licensing Education

Approved program

Applicants must: a. successfully complete the mortgage agent level 1 education program approved by the CEO. b. apply for a mortgage agent level 1 licence within two years of successfully completing the approved education program.

education The mortgage agent Level 1 education program consists of: a) Mortgage Agent Level 1 Course.

Continuing Education

24 months as a mortgage agent level 1. Applicants must: a. successfully complete the mortgage agent level 2 education program approved by the CEO. b. apply for a mortgage agent level 2 licence within two years of successfully completing the approved education program.

36 months as a mortgage agent level 2. Applicants must: a. successfully complete the mortgage broker education program approved by the CEO. b. apply for a mortgage broker licence within three years of successfully completing the approved education program.

The mortgage agent level 2 education program consists of: a) Mortgage Agent Level 1 Course plus b) Private Mortgages Course

The mortgage broker education program consists of: a) Mortgage Agent Level 1 Course plus b) Private Mortgages Course plus c) Broker Course

Subsection 9(1)4 of O. Reg. 409/07 addresses the continuing education requirements for licensees to renew their licence. See requirements in Table 4.

Transition to the new licensing requirements Transition milestones The transition period for the new licensing requirements starts April 1, 2023 and ends March 31, 2024. Below are the key transition milestones: Spring 2022: Final amendments to O. Reg. 409/07 and FSRA Guidance effective Early 2023: Private Mortgages Course and Challenge Exam available Licensees who choose to transition to the mortgage agent level 2 or mortgage broker licence can begin taking the Private Mortgages Course or Private Mortgages Course Challenge Exam (“Challenge Exam”). April 1, 2023: New licensing classes come into force As of April 1, 2023, mortgage agents and brokers will be issued the mortgage agent level 1, level 2, and broker licences, based on the requirements described in Table 2. Existing licensees will be issued a new licence as part of the 2023 licensing renewal cycle.

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October 31, 2023: Deadline to complete the Challenge Exam Eligible individuals who choose to complete the Challenge Exam must pass the exam by October 31, 2023. March 31, 2024: Final date to complete the Private Mortgages Course Mortgage agent level 2 and mortgage brokers must complete the Private Mortgages Course and apply to renew their licence before March 31, 2024. Licensees who do not meet the education requirements will automatically be transitioned to the mortgage agent level 1 licence upon renewing their licence.

Demonstration of private lending competencies All existing licensees who are eligible and wish to transition to the mortgage agent level 2 or mortgage broker licence must demonstrate their competency in dealing and trading in private mortgages as described in Table 2, by either: • completing a FSRA-accredited Private Mortgages Course6 • passing a FSRA-accredited “Challenge Exam” The Challenge Exam option is ONLY offered to agents and brokers who have five or more years of continuous licensing experience. The Challenge Exam: • is available to those who believe they have the experience and competencies reflected in the new education requirement to be a mortgage agent level 2 or mortgage broker • may only be attempted once; individuals who do not pass the Challenge Exam must complete a Private Mortgages Course The Private Mortgages Course and Challenge Exam are based on the MBRCC’s Private Lending Competencies and Curriculum. They are designed to ensure that licensees have the competencies to transact in private mortgages consistent with the MBRCC Code of Conduct and the MBLAA requirements. Table 2: Transition Period Requirements – April 1, 2023 – March 31, 202428 Appendix 2 provides examples of how the new requirements will be applied to different scenarios. Licensing history Current licence Requirement for new licence To transition to mortgage agent Individuals with five or more Mortgage agent level 2, individuals must: years of continuous licensing as a) complete the Private of April 1, 2023. Mortgages Course by March 31, 2024, or b) pass the Challenge Exam by October 31, 2023 Mortgage broker To maintain their mortgage broker licence, individuals must:

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FSRA, Table 2, https://www.fsrao.ca/industry/mortgage-brokering/regulatory-framework/guidance-mortgagebrokering/new-mortgage-agent-and-broker-licensing-requirements-0

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Chapter 3: Role of the Regulators a) complete the Private Mortgages Course by March 31, 2024, or b) pass the Challenge Exam by October 31, 2023

Individuals with less than five Mortgage agent but one or more years of continuous licensing as of April 1, 2023.

Mortgage broker

Brokers who do not meet the new education requirements will transition to the mortgage agent level 1 licence upon renewal on April 1, 2024 and cannot carry out activities as a principal broker. To transition to mortgage agent level 2, individuals must: a) complete the Private Mortgages Course by March 31, 2024. To maintain their mortgage broker licence, individuals must: a) complete the Private Mortgages Course by March 31, 2024. Brokers who do not meet the new education requirements will transition to the mortgage agent level 1 licence upon licence renewal on April 1, 2024, and cannot carry out activities as a principal broker

Individuals with less than one Mortgage agent year of continuous licensing

To transition to mortgage agent level 2, individuals must: a) attain one year of experience, and b) complete the Private Mortgages Course. See Table 1 for further details.

Mortgage broker

To maintain their mortgage broker licence, individuals must: a) complete the Private Mortgages Course by March 31, 2024. b) Brokers who do not meet the new education requirements will transition

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59 to the mortgage agent level 1 licence upon licence renewal on April 1, 2024, and cannot carry out activities as a principal broker Existing brokers are exempt from attaining two years' experience as an agent, level 2 prior to transitioning to the new broker licence.

Transition requirements for former licensees / reinstated licences Under subsection 3(1) and section 6 of O. Reg. 409/07, an individual who was previously licensed by FSRA is exempted from the prescribed education and experience requirements if the individual was licensed at any time during the last 24 months before applying for a licence. For the purposes of the transition to one of the new licensing classes, individuals who apply to reinstate their licence post April 1, 2023, must meet the requirements in Table 2. Appendix 2 includes examples of the requirements when former licensees are applying to reinstate their licence during the transition period.

Licensing fees Subsection 21(2) of the FSRA Act provides FSRA with authority to make rules governing fees and other charges deemed appropriate for its operation. The licensing fees for a mortgage agent or mortgage broker licence are set by FSRA’s Fee Rule. In the 2022-2023 fiscal year, FSRA will be reviewing the mortgage broker sector fees set in FSRA Fee Rule 2019001. FSRA will post for public consultation any proposed changes to the Fee Rule.

New Continuing Education requirements effective April 1, 2023 Under subsection 9(1)4 of O. Reg. 409/07, licensees must complete a FSRA-approved continuing education (CE) requirement to renew their licence. FSRA is enhancing the CE requirement to ensure that licensees obtain and maintain the skills and knowledge that are consistent with changes in the mortgage market. FSRA’s proposed enhanced CE requirement includes two types of learning outcomes (see Table 3):

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Table 3: FSRA’s CE Learning Outcomes29 Conduct CE requirements • Outcome: Agents and brokers conduct mortgage brokering activities in compliance with the MBLAA and its regulations, and topics identified as important by FSRA.

Technical Knowledge / Professional Development CE requirements • Outcome: Agents and brokers apply up-todate technical knowledge in their area of focus

FSRA selects topics, learning objectives and outcomes that help ensure licensees remain current on topics identified as important by FSRA. a) Conduct CE must be provided by a provider of a FSRA-accredited mortgage agent course. b) Conduct CE hours required may vary depending on the topics selected by FSRA. In general, the required hours may range between 5 to 10 hours every two years. Licensees select professional development topics and learning objectives and outcomes that relate to the licensee’s business focus. a) Licensees may select Technical Knowledge / Professional Development CE courses from various education providers, including providers whose courses are not accredited by FSRA. b) Licensees are required to complete 10 hours of Technical CE hours every two years.

The new CE requirements are being phased in. What stays the same: • licensees must complete the appropriate CE requirement every two years, by March 31, in a year ending with an even number • the term of the CE cycle remains unchanged at two years. It runs from April 1 to March 31 — for example, April 1, 2020, to March 31, 2022 (and so on every two years) • FSRA typically provides the sector with details of the CE requirement in the fall What is new: • licensees must complete the FSRA CE requirements by licence category outlined in Table 4 beginning with the April 1, 2024, to March 31, 2026 cycle. This is the new conduct and technical knowledge requirements which will be required by March 31, 2026. Table 4: FSRA Conduct and Technical Knowledge / Professional Development CE Requirements30 Licence Category Conduct CE Technical Knowledge / Total CE Hours The new program will March 31, 2026 Professional be implemented: Development CE9 March 31, 2026 Mortgage agent level 1 5 - 8 hours 10 hours 15 -18 hours

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FSRA, Table 3, https://www.fsrao.ca/industry/mortgage-brokering/regulatory-framework/guidance-mortgagebrokering/new-mortgage-agent-and-broker-licensing-requirements-0 30 FSRA, Table 4, https://www.fsrao.ca/industry/mortgage-brokering/regulatory-framework/guidance-mortgagebrokering/new-mortgage-agent-and-broker-licensing-requirements-0

Chapter 3: Role of the Regulators Mortgage agent level 2 Mortgage broker

5 - 8 hours 5 - 10 hours

10 hours 10 hours

61 15 -18 hours 15 -20 hours

Labour mobility The Canadian Free Trade Agreement and the Ontario Labour Mobility Act, 2009 make it easier for individuals licensed in another Canadian province or territory to apply for and receive a licence for the same occupation in Ontario. With the proposed new licensing provisions, individuals licensed in a Canadian province or territory must meet the education requirements under subsections 2(1)5 and 5.0.2(1)6 of O. Reg. 409/07 to obtain a mortgage agent level 2 or mortgage broker licence. During the transition period, individuals licensed in the provinces listed below may transition to a mortgage agent level 2 or mortgage broker licence, following the requirements set out in Table 2: • British Columbia • Alberta • Saskatchewan • Manitoba • New Brunswick • Quebec The post-transition reciprocity requirements will be available on the FSRA website once this Guidance is finalized following this consultation.

Applications for education and experience equivalency Under subsections 2(2), 5.0.1(2) and 5.0.2(2) of O. Reg. 409/07, the CEO may issue to an individual a mortgage agent or mortgage broker licence, if the CEO is satisfied that the individual has the education and experience equivalent to the applicable requirements. Individuals who wish to obtain a licence, and who have relevant experience and education in a related field but not in the mortgage brokering sector, may apply to FSRA to demonstrate if they meet FSRA’s equivalency to the applicable requirements for any of the proposed new licensing classes: • mortgage agent level 1 licence • mortgage agent level 2 licence • mortgage broker licence Individuals must successfully complete the Private Mortgages Course once FSRA has approved their equivalency application for the mortgage agent level 2 or broker licence. For more information regarding FSRA’s education equivalency requirements, see: https://www.fsrao.ca/licensing/mortgage-broker/become-mortgage-broker/education-equivalencyrequests-mortgage-agent-or-broker-licence

Supervision approach and principles FSRA’s supervision approach has not changed as a result of the proposed new mortgage agent and mortgage broker licensing requirements. FSRA’s general approach to supervision continues to reflect: • Proactive, Risk-based Approach – FSRA focuses its supervision on high-risk licensees and activities posing a higher risk of consumer harm. FSRA targets its supervision resources based

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• •

on the establishment of risk criteria and the risk profiling of mortgage brokerages. Risk profiling considers numerous factors such as: o number of brokers, agents, and locations o compliance history of the brokerage and its sponsored brokers and agents, including complaints received and supervision review outcomes Focus on Oversight and Controls – FSRA expects brokerages to have effective internal processes and supervision to promote high standards of conduct and to effectively identify and manage conduct risks that could lead to poor or unfair outcomes for consumers. Proportionate Approach to Discipline – FSRA uses a range of compliance and enforcement tools to influence marketplace behaviour and ensure compliance with the MBLAA and its regulations. The tools used depend on, for example, the nature and extent of risks to consumers, mitigating actions taken by licensees, and past supervisory findings.

Compliance and enforcement The MBLAA requires that licensees only engage in mortgage brokering activities permitted under their licence. Failure to comply with licensing requirements may result in supervisory or enforcement action against the licensees, their brokerages, and their principal brokers, including letters of caution, the imposition of licence conditions, suspension, revocation, enforcement proceedings seeking administrative monetary penalties, and public warning notices. FSRA will carry out these compliance activities under subsection 35(1) of the MBLAA.

About this guidance Interpretation guidance sets out FSRA’s view of requirements under its legislative mandate (i.e., legislation, regulations, and rules) so that non-compliance can lead to enforcement or supervisory action. Approach guidance describes FSRA’s internal principles, processes and practices for supervisory work, action, and application of CEO discretion. Visit FSRA’s Guidance Framework to learn more: https://www.fsrao.ca/regulation/guidance/fsraguidance-framework

Appendix 1: Mortgage Agent Level 1 scope of work scenarios Can a mortgage agent level 1 job shadow a mortgage agent level 2? Yes. A mortgage agent level 1 can job shadow a mortgage agent level 2 or broker, for the purposes of training. The proposed new licensing classes are not intended to prevent brokerages from training a mortgage agent level 1 on private mortgages, provided only a mortgage agent level 2 or a broker is accountable to clients for these private mortgage transactions. Can a mortgage agent level 1 receive compensation for work completed while job shadowing? Mortgage brokerages are responsible for the remuneration of agents and brokers and, therefore, determine whether a mortgage agent level 1 will receive compensation for work completed while job shadowing. This decision is based on the business model of each mortgage brokerage. The brokerage should outline the specific tasks that are subject to remuneration. Such remuneration should not be perceived as anything other than remuneration for the tasks related to job shadowing.

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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.

Appendix 2: Transition requirement scenarios The following scenarios are provided to help existing and former licensees understand the transition requirements for the new licensing classes. General transition scenarios 1. I obtained my mortgage agent licence in January 2023 and will have three months licensing experience as of April 1, 2023. What class of licence will I obtain from FSRA when the new licensing regime comes into force? When you renew your licence for the April 1, 2023, licensing cycle, you will be issued the mortgage agent level 1 licence because you have less than one year of continuous licensing experience. You can apply for a mortgage agent level 2 licence in February 2024, once you have one year of continuous licensing experience and have successfully completed the Private Mortgages Course. 2. I obtained my mortgage agent licence in April 2019 and will have four years of continuous licensing experience as of April 1, 2023. What class of licence will I obtain from FSRA when the new licensing regime comes into force? When you renew your licence for the April 1, 2023, licensing cycle, you will be issued the mortgage agent level 2 licence because you have at least one year of continuous licensing experience. You must successfully complete the Private Mortgages Course by March 31, 2024, or you will be transitioned to the mortgage agent level 1 licence. You do not need to complete the Private Mortgages Course if you would like to obtain a mortgage agent level 1 licence rather than a mortgage agent level 2 licence. See Table 2 in the Guidance for more information on the transition requirements. 3. I obtained my mortgage agent licence in April 2016 and will have seven years of continuous licensing experience as of April 1, 2023. What class of licence will I obtain from FSRA when the new licensing regime comes into force? When you renew your licence for the April 1, 2023, licensing cycle, you will be issued the mortgage agent level 2 licence. Since you have at least five years of continuous licensing experience, you can successfully complete the Private Mortgages Course or the Challenge Exam. You must successfully complete the Private Mortgages Course or Challenge Exam by March 31, 2024, or you will be transitioned to the mortgage agent level 1 licence. If you would like a mortgage agent level 1 licence rather than a mortgage agent level 2 licence, you do not need to complete the Private Mortgages Course or Challenge Exam. See Table 2 in the Guidance for more information on the transition requirements. 4. I have mortgage broker qualifications, but I am currently licensed as a mortgage agent. Can I apply for a mortgage broker licence during the transition period? Yes. You can apply for a mortgage broker licence if you have been licensed for a total of at least 24 of the 36 months as a mortgage agent, agent level 1 or agent level 2 immediately before applying for the broker licence. You will need to confirm that you have successfully completed the Mortgage

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Chapter 3: Role of the Regulators Broker Course. You must also successfully complete the Private Mortgages Course by March 31, 2024. See Table 2 in the Guidance for more information on the transition requirements.

5. I obtained my mortgage broker licence in April 2016 and will have seven years of continuous licensing experience as of April 1, 2023. What are the requirements to obtain a mortgage broker licence when the licensing regime comes into force? When you renew your licence for the April 1, 2023, licensing cycle, you will be issued the new mortgage broker licence. Since you have at least five years of continuous licensing experience, you can successfully complete the Private Mortgages Course or the Challenge Exam. You must successfully complete the Private Mortgages Course or Challenge Exam by March 31, 2024, or you will be transitioned to the mortgage agent level 1 licence. See Table 2 in the Guidance for more information on the transition requirements. 6. I am currently a principal broker and have seven years of continuous licensing experience as a mortgage broker. What happens if I fail the Private Mortgages Course or Challenge Exam during the transition period? If you fail the Private Mortgages Course or Challenge Exam, you will be issued the mortgage agent level 1 licence. FSRA will work with the mortgage brokerage to obtain another principal broker. Licence reinstatement scenarios 7. I was previously licensed as a mortgage agent from February 2018 to April 2022 and have four years of continuous licensing experience. What are the requirements to re-instate my licence when the new licensing classes come into force? If you apply on April 1, 2023, to reinstate your licence, you will be issued the mortgage agent level 2 licence, because you have at least one year of continuous licensing experience. You must successfully complete the Private Mortgages Course by March 31, 2024, or you will be transitioned to the mortgage agent level 1 licence. If you choose to reinstate as a mortgage agent level 1 rather than a mortgage agent level 2, you do not need to complete the Private Mortgages Course. See Table 2 of the Guidance for more information on the transition requirements to reinstate a licence. 8. I was previously licensed as a mortgage broker from February 2016 to April 2021 and have five years continuous licensing experience as a broker. What are the requirements to reinstate my licence when the new licensing classes come into force? If you apply on April 1, 2023, to reinstate your licence, you will be issued a mortgage broker licence. Since you have at least five years of continuous licensing experience, you can successfully complete the Private Mortgages Course or the Challenge Exam. You must successfully complete the Private Mortgages Course or Challenge Exam by March 31, 2024, or you will be transitioned to the mortgage agent level 1 licence. If you choose to reinstate as a mortgage agent level 1 rather than a mortgage broker, you do not need to complete the Private Mortgages Course or Challenge Exam. See Table 2 for more information on the transition requirements to reinstate a licence. 9. I was previously licensed as a mortgage agent from February 2015 to April 2019. What are the requirements to reinstate my licence when the new licensing classes come into force?

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Individuals must have been licensed at any time during the last 24 months before applying to reinstate a licence. You cannot reinstate your licence if you apply on April 1, 2023, because it has been more than two years that your licence has expired. Reference MBRCC Code of Conduct, https://www.fsrao.ca/media/4371/download MBRCC Private Lending Competencies and Curriculum, https://www.mbrcc.ca/Documents/View/1059 Canadian Free Trade Agreement, https://www.cfta-alec.ca/wp-content/uploads/2021/09/CFTAConsolidated-Version-September-24-2021.pdf

3.4.2 Licensure

Pause for clarification – Licensure Licensure can be defined as permission granted by an agency of government to an individual or entity to engage in a given profession or occupation.

Five Licenses In order to regulate, the MBLAA provides for five types of licenses to be issued by FSRA: 1. Mortgage brokerage license 2. Mortgage broker’s license 3. Mortgage agent’s license, Level 1 4. Mortgage agent’s license, Level 2 5. Mortgage administrator’s license (discussed in chapter 12) Each is described in the Act, sections 7 – 12 and discussed in more detail later in this chapter. Mortgage brokers’ and mortgage agents’ licenses are issued to individuals. Corporations, partnerships, sole proprietorships, and prescribed entities that carry on the business of dealing in mortgages, trading in mortgages or lending money on the security of real property are required to have a brokerage license or a mortgage administrator’s license.

Pause for clarification – Corporations, partnerships, and sole proprietorships A corporation is a legal business entity created under federal or provincial statutes. A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested. A sole proprietorship consists of a sole owner, also called a proprietor, of an unincorporated business. The MBLAA states that, to enforce compensation for any of its licensed activities, the person or business must be licensed. Simply stated, if a person arranges a mortgage for another party and expects to be compensated by a lender, that lender may refuse to do so if the person is not appropriately licensed at the time of the transaction and the person would not be able to sue the lender for payment.

Restrictions O. Reg. 187/08: MORTGAGE BROKERS AND AGENTS: STANDARDS OF PRACTICE restricts the use of the titles “mortgage brokerage,” “mortgage broker,” “mortgage agent level 1,” “mortgage agent level 2,” “mortgage administrator” and their French equivalents to persons and entities licensed as such under

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the MBLAA. This prohibition includes using abbreviations such as mtg. broker, or their equivalents in another language. If you are licensed, you can use these titles and abbreviations.

Exemptions to Licensure Regulation 407/07 details the circumstances under which certain people or entities are exempt from obtaining a license under the MBLAA. Exemptions from obtaining a license under the Act are indicated in various circumstances and for various entities which are spelled out in detail in the Regulation (simple referrals, lawyers, and so on). Following is a summary. Simple Referral A simple referral (described in sections 1 – 2 of the Regulation) is a term used to describe the act of referring a potential borrower to a potential lender, or vice versa, if the referrer informs the other party, in writing, that a fee will be received for the referral, the nature of the relationship between the parties, and as long as the only other information provided is the name, address, telephone number, fax number, email address or website address of the individual being referred. For simple referrals a person or entity does not have to be licensed. In addition, if no fee is payable, a person or entity does not have to be licensed. An example of this situation could be a real estate salesperson who refers a client to a bank mortgage representative. In this case, if the real estate salesperson abides by these rules, they do not have to be licensed under the MBLAA. Lawyer A lawyer (as per sections 3 – 5) is exempt from prescribed activities if they are acting solely on behalf of their client and is not holding him or herself out to be trading, dealing, or administering mortgages to the general public. An example of this scenario could be a divorce lawyer who has a client who requires a mortgage to pay his spouse a settlement. In this case it would be legal for this lawyer to arrange this financing for that client without being licensed under the MBLAA. However, this lawyer could not advertise, for example in a newspaper, that he brokers mortgages. Lender If a person or entity only lends through a mortgage brokerage or other exempt person or entity, they are not required to have a mortgage brokerage license (section 15 on Mortgage Lending). Vendor take-back Registered real estate brokerages, brokers or agents are exempt when they are arranging or attempting to arrange a vendor take-back mortgage for a client, if they are not holding themselves out to the public as dealing in mortgages.

Pause for clarification – Vendor take-back A vendor take-back, also known as a VTB, is where the seller of the property provides all or some of the financing to the purchaser in order to sell the property. Securities Act A person or entity registered under the Securities Act is exempt, as per sections 12 – 14, under certain circumstances, as long as they are not holding themselves out to the public as trading in mortgages. In addition, those involved in the securitization of mortgages are also exempt.

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Other exemptions Other exemptions from licensing include trustees in bankruptcy, those acting under a court order, statutory corporations, a personal corporation of a broker or agent, motor vehicle dealership financing companies, directors and employees of Crown agencies or other exempted persons or entities. As per section 11 of Regulation 407/07, consumer reporting agencies are exempt if they are only providing information on prospective borrowers to prospective lenders and are not otherwise dealing in mortgages. Mortgage Administrator exemptions A person or entity is not required to have a mortgage administrator’s license if they are administering mortgages on behalf of the Crown, a financial institution, a collection agency registered under the Collection Agencies Act, or if they are only administering mortgages that constitute mortgage-backed securities as per sections 16 – 19, Exemptions for Administering Mortgages.

Having a License Issued by FSRA FSRA is empowered to: 1. issue or refuse to issue a license 2. impose or amend conditions on a license, and 3. renew or refuse to renew a license

FSRA's Public Registry Regulation 190/08 created the requirement of a public registry for licensees (brokerages and Administrators) which maintains the following information: • each name in which it is licensed and its licence number • the type of licence that it holds and whether the licence is in good standing or is suspended • its mailing address in Ontario as it appears in the records maintained by FSRA • its telephone number as it appears in the records maintained by FSRA • any conditions that apply to the licence • for a brokerage, the name of its principal broker For two years after a brokerage or mortgage administrator ceases to be licensed, the register must contain the following information about the former brokerage or mortgage administrator: • each name in which it was licensed and its former licence number • the type of licence that it held • the date on which it ceased to be licensed • whether the licence was surrendered or revoked Similarly, the public register of mortgage brokers and agents that is to be maintained under subsection 28 (1) of the Act must contain the following information about each broker and agent: • the name in which they are licensed and the licence number • the type of licence that they hold, its expiry date and whether the licence is in good standing or is suspended • the name of the brokerage on whose behalf they are authorized to deal or trade in mortgages • any conditions that apply to the licence, other than conditions relating to educational requirements Again, if a broker or agent ceases to be licensed, the register must contain the following information about the former broker or agent: • the name in which they were licensed and their former licence number

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the type of licence that they held the name of the brokerage on whose behalf they were authorized to deal or trade in mortgages immediately before ceasing to be licensed the date on which they ceased to be licensed whether the licence expired, renewal of the licence was refused, the licence was surrendered or the licence was revoked

The information required must be kept on the register until two years after the expiry date of the individual’s licence or, if the licence was surrendered or revoked before the expiry date, until two years after the date on which the licence would have expired if it had not been surrendered or revoked.

For your information… FSRA’s public registry FSRA’s searchable public registry of licensed mortgage brokerages, agents, brokers and mortgage administrators is located at http://mbsweblist.FSRA.gov.on.ca/agents.aspx

3.5 Public Relations Materials and Private Mortgages The activities available to attract an investor are numerous, but many are impacted by legislation and other industry guidelines. Legislation and industry guidelines are designed to prevent such practices as misleading advertising, the bait and switch (providing a consumer with an attractive offer to obtain him or her as a client but being unable to provide the product or service at the indicated price), false advertising and so on. Before addressing the methods used to attract a client, the industry guidelines and legislation that affect these methods must be discussed. The first set of guidelines that need to be explored is called the Canadian Code of Advertising Standards.

3.5.1 The Canadian Code of Advertising Standards 31 The Canadian Code of Advertising Standards was created by the advertising industry in 1963 to promote the professional practice of advertising. This Code is regularly updated by Advertising Standards Canada, (ASC), which was founded in 1957. This not-for-profit, self-regulatory body regulates the advertising industry and handles consumer complaints related to advertising. The Code promotes truth, honesty, fairness, and accuracy in advertising and is comprised of fourteen clauses that set the criteria for acceptable advertising. The following is a condensed version of those clauses: 1. Accuracy and Clarity Advertisements must not contain inaccurate or deceptive claims, statements, illustrations, or representations, either direct or implied, with regard to a product or service. In assessing the

31

Advertising Standards Canada, The Canadian Code of Advertising Standards, http://www.adstandards.com/en/standards/canCodeOfAdStandards.aspx

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truthfulness and accuracy of a message, the concern is not with the intent of the sender or precise legality of the presentation. Rather, the focus is on the message as received or perceived, i.e., the general impression conveyed by the advertisement. 2. Disguised Advertising Techniques No advertisement shall be presented in a format or style that conceals its commercial intent. 3. Price Claims No advertisement shall include deceptive price claims or discounts, unrealistic price comparisons or exaggerated claims as to worth or value. 4. Bait and Switch Advertisements must not misrepresent the consumer’s opportunity to purchase the goods and services at the terms presented.

Pause for clarification – Bait and switch Merriam-Webster defines this as “a sales tactic in which a customer is attracted by the advertisement of a low-priced item but is then encouraged to buy a higher-priced one.” Enticing a client with a lower than possible interest rate is one example. 5. Guarantees No advertisement shall offer a guarantee or warranty, unless the guarantee or warranty is fully explained as to conditions and limits and the name of the guarantor or warrantor is provided, or it is indicated where such information may be obtained. 6. Comparative Advertising Advertisements must not unfairly discredit, disparage or attack other products, services, advertisements, or companies, or exaggerate the nature or importance of competitive differences. 7. Testimonials Testimonials, endorsements or representations of opinion or preference, must reflect the genuine, reasonably current opinion of the individual(s), group or organization making such representations, and must be based upon adequate information about or experience with the product or service being advertised, and must not otherwise be deceptive. 8. Professional or Scientific Claims Advertisements must not distort the true meaning of statements made by professionals or scientific authorities. 9. Imitation No advertiser shall imitate the copy, slogans, or illustrations of another advertiser in such a manner as to mislead the consumer. 10. Safety Advertisements must not without reason, justifiable on educational or social grounds, display a disregard for safety by depicting situations that might reasonably be interpreted as encouraging unsafe or dangerous practices, or acts.

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11. Superstition and Fears Advertisements must not exploit superstitions or play upon fears to mislead the consumer. 12. Advertising to Children Advertising that is directed to children must not exploit their credulity, lack of experience or their sense of loyalty, and must not present information or illustrations that might result in their physical, emotional, or moral harm. Child-directed advertising in the broadcast media is separately regulated by the Broadcast Code for Advertising to Children, also administered by ASC. Advertising to children in Quebec is prohibited by the Quebec Consumer Protection Act. 13. Advertising to Minors Products prohibited from sale to minors must not be advertised in such a way as to appeal particularly to persons under legal age, and people featured in advertisements for such products must be, and clearly seen to be, adults under the law. 14. Unacceptable Depictions and Portrayals It is recognized that advertisements may be distasteful without necessarily conflicting with the provisions of this clause; the fact that a particular product or service may be offensive to some people is not sufficient grounds for objecting to an advertisement for that product or service. Advertisements shall not: a) condone any form of personal discrimination, including that based upon race, national origin, religion, sex or age; b) appear in a realistic manner to exploit, condone, or incite violence; nor appear to condone, or directly encourage, bullying; nor directly encourage, or exhibit obvious indifference to, unlawful behaviour; c) demean, denigrate, or disparage any identifiable person, group of persons, firm, organization, industrial or commercial activity, profession, product, or service or attempt to bring it or them into public contempt or ridicule; d) undermine human dignity; or display obvious indifference to, or encourage, gratuitously and without merit, conduct or attitudes that offend the standards of public decency prevailing among a significant segment of the population.

3.5.2 Legislation Advertising and marketing, referred to by the MBLAA and its Regulations as public relations materials, is discussed in four specific locations: section 27 of the MBLAA, sections 7 to 9 of Regulation 187/08, sections 5 to 7 of Regulation 188/08 and sections 18 to 20 of Regulation 191/08. The sections of Regulation 187/08 and Regulation 188/08 deal with the use of names in public relations materials as well as a prohibition on the usage of false, misleading, or deceptive information. Public Relations Materials: Agents and Brokers To begin, 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).

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This Regulation also regulates the use of an agent’s and broker’s name in the following sections of Regulation 187/08. Use of licensee name 6. A mortgage broker or agent shall not deal or trade in mortgages in a name other than his or her licensee name. O. Reg. 187/08, s. 7. This means that a broker or agent can only do business by using their name as it is registered with FSRA. FSRA does allow an agent or broker to be registered in his or her full legal name as well as an also known as, so that if your legal name is, for example, William and you are known as Bill, you can do business using either name. Use of name, etc., in public relations materials 8. (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: 1. The broker’s or agent’s licensee name. 2. Whether the individual has a Mortgage Agent Level 1 licence or a Mortgage Agent Level 2 licence. 3. 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: 1. When referring to a broker, the title “mortgage broker”, “broker”, “courtier en hypothèques” or “courtier” or an abbreviation of any of those titles. 2. 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. Prohibition re public relations materials 9. A mortgage broker or agent shall not include false, misleading or deceptive information in his or her public relations materials. O. Reg. 187/08, s. 9. Public Relations Materials: Mortgage Brokerages Regulation 188/08 defines “public relations materials”, in relation to a brokerage as: (a) any advertisement by the brokerage in connection with its business as a brokerage that is published, circulated or broadcast by any means, or (b) any material that a brokerage makes available to the public in connection with its business as a brokerage; This Regulation also regulates the use of the brokerage’s name in the following sections of Regulation 188/08. Use of authorized name 5. A brokerage shall not carry on business in a name other than its authorized name. O. Reg. 188/08, s. Use of name, etc., in public relations materials 6. (1) A brokerage shall disclose its authorized name and its licence number in all of its public relations materials and the name and number must be clearly and prominently disclosed. O. Reg. 188/08, s. 6 (1).

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(2) If the authorized name of a 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. 188/08, s. 6 (2). (3) If, in its public relations materials, a brokerage identifies a broker or agent by name, the brokerage shall use the name in which the broker or agent is licensed. O. Reg. 188/08, s. 6 (3). (4) If, in its public relations materials, a brokerage refers to a broker or agent, the materials must include at least one reference to the broker or agent that includes one of the following titles, and the materials may also include an equivalent title in another language: 1. When referring to a broker, the title “mortgage broker”, “broker”, “courtier en hypothèques” or “courtier” or an abbreviation of any of those titles. 2. When referring to an agent, the title “mortgage agent”, “agent” or “agent en hypothèques” or an abbreviation of any of those titles. O. Reg. 187/08, s. 8 (3).

Pause for clarification – Regulation 188/08 MORTGAGE BROKERAGES: STANDARDS OF PRACTICE While section 6(4)2. of Regulation 188/08 does not reflect the new licensing classes, it is a requirement under Regulation 187/08 that references to agents include their level 1 or level 2 license. Misleading, Deceptive and False Advertising As section 9 of Regulation 187/08 states, “A mortgage broker or agent shall not include false, misleading or deceptive information in his or her public relations materials”. To fully understand the scope of this section requires a fuller understanding of the terms misleading, deceptive and false. Misleading can be defined as deceptive or tending to create a false impression. Misleading advertising occurs when a representation related to a product or service is deceptive or materially false in order to persuade the consumer to buy it. Deceptive can be defined as the act of convincing another to believe information that is not true, or not the whole truth as in certain types of half-truths, while false can be defined as deliberately deceptive. False advertising is the use of false or misleading statements in advertising. As advertising has the potential to persuade people into commercial transactions that they might otherwise avoid, many governments around the world use regulations to control misleading, deceptive or false advertising. Brokerages must be keenly aware of the definitions of the terms used in this Regulation, especially in this climate of financial turmoil and the increase of oversight of lending and brokering practices. Several other jurisdictions have already deemed phraseology currently used by some Ontario brokerages as deceptive or misleading. For example, the Australian Securities and Investment Commission penalized a brokerage for using the phrases, “independent and impartial” and “we work for most of the lenders,” when this was proven factually incorrect. The context is an important factor when advertising. These same statements may be considered true when made by one brokerage and false when made by another.

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Advertising Tips – Competition Bureau of Canada32

Pause for clarification – Competition Bureau of Canada The Competition Bureau is an independent law enforcement agency that advocates for and protects Canadian consumers and works to foster a competitive and innovative marketplace in which Canadian businesses can prosper. They are the “watchdog” of competition. They enforce the Competition Act, Consumer Packaging and Labelling Act, Textile Labelling Act and Precious Metals Marking Act, and will not hesitate to take action when business is not carried out in ways that are truthful, fair, and legal. When a brokerage is developing policies and procedures that ensure its public relations materials are compliant, it may wish to include some of the following advertising tips from the Competition Bureau of Canada. Do: • Do avoid fine print disclaimers. They often fail to change the general impression conveyed by • an advertisement. If you do use them, make sure the overall impression created by the ad and the disclaimer is not misleading. • Do fully and clearly disclose all material information in the advertisement. • Do avoid using terms or phrases in an advertisement that are not meaningful and clear to the ordinary person. • Do, when conducting a contest, disclose all material details. • Do ensure that your sales force is familiar with these "Dos and Don'ts." Advertisers may be held responsible for representations made by employees. Don't • •

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Don't confuse "regular price" or "ordinary price" with "manufacturer's suggested list price" or a like term. They are often not the same. Don't use "regular price" in an advertisement unless the product has been offered in good faith for sale at that price for a substantial period of time, or a substantial volume of the product has been sold at that price within a reasonable period of time. Don't use the words "sale" or "special" in relation to the price of a product unless a significant price reduction has occurred. Don't run a "sale" for a long period or repeat it every week. Don't increase the price of a product or service to cover the cost of a free product or service. Don't make a performance claim unless you can prove it, even if you think it is accurate. Testimonials usually do not amount to adequate proof. Don't sell a product above your advertised price. Don't unduly delay the distribution of prizes when conducting a contest.

Competition Bureau, False or Misleading Representations and Deceptive Marketing Practices, http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03133.html

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Don't forget that no one actually needs to be misled for a court to find that an advertisement is misleading.

3.6 FSRA’s Monitoring and Enforcement33 To protect consumers and plan members and enhance public confidence in the regulated sectors, FSRA monitors, investigates and when there is non-compliance with legislation and regulations, takes appropriate enforcement action against the sectors it regulates and persons who are illegally engaged in those sectors. Steps in the Process 1. Monitoring, checks, reviews, and audits 2. Investigations 3. Enforcement

3.6.1 Monitoring, checks, reviews, and audits FSRA undertakes several monitoring activities as part of its regulatory functions. It conducts criminal record checks on prospective agents and paralegals and reviews complaints against agents, paralegals, health care providers, insurance companies, and other financial services sectors. In addition, FSRA audits life agent renewal applications to ensure they meet continuing education (CE) and errors & omissions insurance (E&O) requirements. Paralegals are also subject to E&O audits. These checks, reviews and audits are the first step in the enforcement process. A significant number of matters are resolved at this first step.

3.6.2 Investigations As a follow up to its regular monitoring activities – criminal record checks, the reviews of complaints received and audits of compliance with CE requirements and E&O compliance - FSRA may decide that some matters need to be investigated. An investigation is the second step in the enforcement process. It is used where prosecution or administrative action may be contemplated.

3.6.3 Enforcement FSRA has several enforcement tools that can be used to address non-compliance including: 1. Warning or cautionary letters 2. Compliance order: FSRA may order the regulated individual or company to take or to cease an action. 3. Administrative monetary penalty (AMP): FSRA can impose financial penalties on regulated individuals or companies. 4. Licence suspension or revocation: FSRA may suspend, revoke, or refuse the individual’s or company’s licence due to misconduct. 5. 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 6. Prosecution in the courts

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Example Mortgage brokerages are required to pay fees every year (previously every two years) to maintain a brokerage license, and these fees must be paid on or before March 31st and every year thereafter. ABC Mortgages Inc. failed to pay its licensing fees before the March 31st, 2021 deadline. As per Section 22 (1) of the MBLAA, FSRA may revoke the mortgage brokerage license. This type of example has happened, resulting in a mortgage brokerage’s license being revoked. For more examples of actual cases, please refer to https://www.fsrao.ca/enforcement-and-monitoring/enforcement-actions

FSRA’s

website

at

3.6.4 Prohibited Activities The MBLAA (sections 43 – 50) clearly lays out what are considered to be prohibited activities under the legislation. These include a prohibition on: • counselling or advising anyone to give false or deceptive information in a transaction • obstructing FSRA from performing its duties or withholding anything relevant to an inquiry • providing false or misleading information to FSRA • a person or business taking adverse employment action against an employee because the • employee provided information or documents to FSRA.

Pause for clarification – Prohibited activities The Mortgage Brokerages, Lenders and Administrators Act, 2006 and Regulations, prohibit: • Trading or dealing in mortgages without a licence: As of July 1, 2008, all mortgage brokerages, administrators, brokers, and agents must be licensed with FSRA to carry on business in Ontario, unless an exemption applies. • Using an unauthorized name: You can only use the name in which you are licensed.

3.6.5 Penalty Types The MBLAA (sections 43 – 50) gives FSRA two types of enforcement tools: 1. administrative penalties, and 2. charges for an offence under the legislation.

Pause for clarification – Administrative penalties This is a penalty assessed by FSRA for less serious contraventions of or failures to comply with the MBLAA.

3.6.5.1 Administrative Penalties Regulation 192/08 spells out rules and procedures related to administrative penalties. This Regulation (sections 1 – 4) prohibits FSRA from imposing penalties on those covered in section 46 of the MBLAA (which prohibits reprisals against those who provide information to FSRA). Administrative penalties are either “general” or “summary” and are covered in detail in Regulation 192/08 sections 1 – 6. The same timeframes apply to both. FSRA may impose administrative penalties for contraventions of or failures to comply with the MBLAA in amounts determined in accordance with

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the Regulations. If FSRA proposes to impose an administrative penalty, the affected party may request a hearing before the Financial Services Tribunal.

Pause for clarification – Financial Services Tribunal The Financial Services Tribunal is an independent, adjudicative body composed of at least nine members, including the Chair and two Vice-Chairs. The Tribunal has exclusive jurisdiction to exercise the powers conferred under the Financial Services Tribunal Act, 2017 and other Acts that confer powers on or assign duties to the Tribunal. It also has exclusive jurisdiction to determine all questions of fact or law that arise in any proceeding before it. As well, the Tribunal has authority to make rules for the practice and procedure to be observed in a proceeding before it and to order a party to a proceeding before it to pay the costs of another party or the Tribunal's costs of the proceeding.

3.6.5.2 Administrative Penalties: Amounts 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. 1. Mortgage Brokerage or Administrator, up to a maximum of $500,000 2. Broker or agent, up to a maximum of $100,000, and 3. Anyone else not licensed, up to a maximum of $500,000 If FSRA proposes to impose an administrative penalty the licensee has the right to appeal this proposal to the Tribunal within 15 days of receiving it. If the penalty is not paid, it is considered a debt to the Crown and can be enforced as such. Those assessed a penalty must pay the penalty within thirty days of being assessed the penalty or once a hearing has been conducted, or longer if provided for in the penalty or order made from the hearing. Example 1: Dealing in Mortgages for more than one brokerage Judy obtained a mortgage agent license on June 14, 2015, and has been brokering mortgages for ABC Mortgages Inc., a licensed brokerage in Ontario, since that time. In March of 2022 Judy was approached by GiGi Mortgages Inc., another licensed mortgage brokerage, to broker mortgages on their behalf. Since Judy liked working for ABC Mortgages Inc., she kept her license there while also brokering mortgages for GiGi Mortgages Inc., thereby working for two mortgage brokerages at the same time. Because an agent can only be authorized to deal in mortgages for one mortgage brokerage, GiGi Mortgages Inc. was in contravention of section 43(2) of Regulation 188/08 for authorizing Judy to broker mortgages on behalf of that brokerage, knowing that Judy was already authorized to deal in mortgages for ABC Mortgages Inc. In this case FSRA could impose an administrative penalty in an amount that it feels is appropriate up to $100,000. Example 2: Accepting fees from a person or entity other than the licensee’s brokerage This is an actual order in a situation where an agent accepted fees from a party other than their brokerage, although the personally identifiable information has been changed to protect the privacy of those involved. IN THE MATTER OF the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29, as amended (the “Act”), in particular sections 38 and 39;

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AND IN THE MATTER OF Agent. ORDER IMPOSING ADMINISTRATIVE PENALTIES Mortgage Agent (“Agent”) is licensed as a mortgage agent under the Act (licence # 00000). On January 21, 2020, and by delegated authority from the Chief Executive Officer of the Financial Services Regulatory Authority of Ontario (the “Chief Executive Officer”), the Executive Vice President, Market Conduct, issued a Notice of Proposal to impose administrative penalties on Agent for receiving, directly or indirectly, a fee or other remuneration for dealing or trading in mortgages, from a person or entity other than the brokerage on whose behalf Agent was authorized to deal or trade in mortgages, contrary to section 4(1) of Ontario Regulation 187/08 under the Act. A Request for Hearing (Form 1), dated February 2, 2020, was delivered to the Financial Services Tribunal (the “Tribunal”) in accordance with section 39(5) of the Act respecting the Notice of Proposal. On November 12, 2020, Agent withdrew the Request for Hearing, and on November 25, 2020, the Registrar of the Tribunal confirmed that the Tribunal closed its file in respect of this matter. This Order is made pursuant to a settlement entered into by Agent and the Head, Licensing and Risk Assessment Branch. Therefore, pursuant to section 39(7) of the Act, and by delegated authority from the Chief Executive Officer, the Head, Licensing and Risk Assessment Branch, makes the following Order. ORDER Administrative penalties in the total amount of $19,500 are hereby imposed on Agent. TAKE NOTICE THAT the Financial Services Regulatory Authority of Ontario will deliver an invoice to Mortgage Agent, with information as to where and how to pay the administrative penalties. Agent must pay the administrative penalties no later than twelve (12) months after the date of this Order. If Mortgage Agent fails to pay the administrative penalties in accordance with the terms of this Order, the Chief Executive Officer may file the Order with the Superior Court of Justice and the Order may be enforced as if it were an order of the court. An administrative penalty that is not paid in accordance with the terms of the order imposing the penalty is a debt due to the Crown and is enforceable as such. DATED at Toronto, December 7, 2020. Original signed by Wendy Horrobin Head, Licensing and Risk Assessment Branch By delegated authority from the Chief Executive Officer

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3.6.5.3 Charges for an offence under the legislation Offences are more serious contraventions of the MBLAA. Anyone who contravenes or fails to comply with any of the following provisions of this Act is guilty of an offence: 1. Subsection 2 (2) or (3) (Dealing in mortgages). 2. Subsection 3 (2) or (3) (Trading in mortgages). 3. Subsection 4 (2) (Mortgage lending). 4. Subsection 5 (2) (Administering mortgages). 5. Subsection 11 (1), (2), (3), (4), (5), (6), (7) or (8) (Prohibitions re use of title, etc.). 6. Section 27 (Prohibition re disclosure in advertising). 7. Subsection 30 (6) (Inquiries and examinations). 8. Subsection 43 (1) or (2) (Prohibition re false or deceptive information). 9. Subsection 44 (1) or (2) (Prohibition re obstruction). 10. Subsection 45 (1) or (2) (Prohibition re false or misleading information) In addition, anyone who fails to comply with a standard of practice or a condition of their license, as well as failing to comply with an order made under the Act is guilty of an offence.

3.6.5.4 Charges for an offence under the MBLAA: Amounts As of February 1, 2022, there are two separate penalties that may be imposed. 1. Individuals charged with an offence, a fine up to $500,000 and imprisonment for up to one year, or both 2. Corporations charged with an offence, a fine of up to $1,000,000 It is important to note that directors and officers of a corporation that has committed an offence are also liable. Section 48.2 of the MBLAA also dictates that any contraventions of applicable Standards of Practice are an offence under the MBLAA and liable to the fines as previously discussed. Additional order for compensation or restitution 50 (1) 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. 2006, c. 29, s. 50 (1). Example 3: Accepting falsified documents from a borrower In O. Reg. 187/08: MORTGAGE BROKERS AND AGENTS: STANDARDS OF PRACTICE, section 3.1, it states that, “Dishonesty, fraud, etc. 3.1 A mortgage broker or agent shall not act, or do anything or omit to do anything, in circumstances where he or she ought to know that by acting, doing the thing or omitting to do the thing, he or she is being used by a borrower, lender, investor or any other person to facilitate dishonesty, fraud, crime or illegal conduct. O. Reg. 152/15, s. 1”. John is a mortgage broker whose client, Samantha, is applying for a $50,000 private mortgage on her residential property, at a total loan to value of 50%. In taking her application, Samantha told John that she was currently employed. When John contacted her employer to verify her employment, he was told that she was recently fired from her job, but that he would provide a job letter stating she was currently employed, to help her out if she needed it. John has the perfect private lender in mind for Samantha, but this private lender requires the borrower to be employed. John decided that, since he felt private lending relied solely on the property and this applicant was requesting a mortgage at a low loan to value, that Samantha’s income was not relevant. John submitted the application to the investor who approved the mortgage based on John’s Investor/Lender Disclosure. In this example, John has clearly contravened Regulation 187/08, S. 3.1, and would be liable for prosecution by FSRA. John could be subject to several enforcement actions, including a fine, conditions

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being imposed on his license, license suspension or revocation. In addition, John could be subject to civil liability by the private investor. Example 4: Not having a suitable email address In O. Reg. 187/08: MORTGAGE BROKERS AND AGENTS: STANDARDS OF PRACTICE, section 11.1, it states that, “Required addresses 11. (1) A mortgage broker or agent shall maintain a mailing address in Ontario that is suitable to permit service by registered mail. O. Reg. 187/08, s. 11 (1)”. Section 11.2 states that, “(2) A mortgage broker or agent shall maintain an e-mail address. O. Reg. 187/08, s. 11 (2).” Karim is a very successful licensed mortgage broker in Ontario who has decided that he wants to take a break from brokering for the next twelve months and travel the world. He has sold his condominium and plans on renting upon his return while he looks for a new property to purchase. While travelling, he still wishes to maintain his license as his plan is to return to brokering after his sabbatical. During this period, Karim intends to go off the grid, detaching from his electronic devices so that he can be free of distractions, cancelling his cell phone, social media, and other forms of communication. Unfortunately, while Karim is travelling there is a complaint filed against him by one of his previous clients. Both his brokerage and FSRA attempt to contact him at his last known address, but since his property has been sold the correspondence is returned. Both his brokerage and FSRA attempt to contact Karim via cell phone and email as well, but since Karim is off the grid, there is no way to contact him. In this example, while Karim has every right to take a year off and travel the world, he must still maintain a mailing address and email address. Failure to do so has put Karim in violation of Regulation 187/08, sections 11.1 and 11.2.

3.6.6 Having a License Suspended or Revoked by FSRA FSRA is empowered to: • impose or amend conditions on a license • renew or refuse to renew a license • suspend or revoke a license • allow or refuse to allow the surrender of a license, and • impose conditions on the surrender of a license As per the MBLAA, sections 13 – 22, FSRA has the right, without giving notice, to automatically suspend a license under several circumstances. A mortgage brokerage’s license will be automatically suspended if it fails to have at least one licensed mortgage broker. A mortgage broker’s and mortgage agent’s license will be automatically suspended if the brokerage’s license is lost or suspended, or if that brokerage no longer authorizes the broker or agent to deal in mortgages on its behalf, which in effect is when the brokerage terminates the broker’s or agent’s employment. In other words, only when employed by a brokerage is a mortgage agent or broker licensed. Any of these suspensions will be automatically revoked if the reason for the suspension is rectified. For example, if the broker’s license is suspended due to the brokerage’s suspension, the broker’s license will be reinstated as soon as the brokerage’s license is no longer suspended. If the broker or agent is terminated, as soon as they are employed by another brokerage their license will be reinstated. For suspensions other than those listed above, FSRA must first give notice of its proposal to suspend a license and give the applicant or licensee an opportunity to request a hearing on the proposal before the

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Financial Services Tribunal. If it is in the public interest to act immediately, FSRA may suspend a license before a hearing can be held before the Tribunal. If an applicant or licensee fails to pay a fee or administrative penalty under the MBLAA or if an applicant does not give FSRA information or documents required under the MBLAA, for example, FSRA may revoke or refuse to issue or renew a license without making a proposal first or giving the licensee or applicant an opportunity to request a hearing. FSRA may also suspend or revoke a license due to unpaid fees or administrative penalties, the failure to provide FSRA with information or documents required to be submitted, or for other reasons which may be prescribed in the future. Section 4.1 of Regulation 408/07, entitled Surrender of License, details the criteria which FSRA must use to determine whether a brokerage is allowed to surrender its license. In regard to imposing conditions on a licensee, FSRA has several options, as illustrated in the following Order Amending License, which is a continuation of the previous exam whereby the agent accepted fees from outside of their brokerage. This is an actual order, but the personally identifying information has been changed to protect the privacy of those involved. Example 5: (continuation of Example 2); Conditions added to a license IN THE MATTER OF the Mortgage Brokerage, Lenders and Administrators Act, 2006, S.O. 2006, c. 29, as amended (the “Act”), in particular section 15. AND IN THE MATTER OF AGENT. ORDER AMENDING LICENCE Mortgage Agent (“Agent”) is licensed as a mortgage agent under the Act (licence # 00000). On January 21, 2020, and by delegated authority from the Chief Executive Officer of the Financial Services Regulatory Authority of Ontario (the “Chief Executive Officer”), the Executive Vice President, Market Conduct issued a Notice of Proposal to revoke the mortgage agent licence issued to Agent. A Request for Hearing (Form 1), dated February 2, 2020, was delivered to the Financial Services Tribunal (the “Tribunal”) in accordance with section 21(3) of the Act respecting the Notice of Proposal. On November 12, 2020, Agent withdrew the Request for Hearing, and on November 25, 2020, the Registrar of the Tribunal confirmed that the Tribunal closed its file in respect of this matter. This Order is made pursuant to a settlement agreement entered into by Broker and the Head, Licensing and Risk Assessment Branch. Therefore, pursuant to section 15(1) of the Act, and by delegated authority from the Chief Executive Officer, the Head, Licensing and Risk Assessment Branch, makes the following Order. ORDER The mortgage agent licence (licence # 00000) issued to Agent is amended to include the following conditions:

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a) Agent’s work as a mortgage agent will be supervised by a licenced mortgage broker acceptable to the Financial Services Regulatory Authority of Ontario (“FSRA”), with at least ten years of experience as a mortgage broker; b) The period of supervision shall end on November 5, 2021; c) Throughout the period of supervision, Agent and the Supervising Broker shall submit quarterly written reports regarding Agent’s mortgage agent activities to FSRA; d) The Supervising Broker shall notify both Agent and FSRA, immediately, in writing, if the Supervising Broker is unable or unwilling to supervise Agent. Agent agrees to stop all mortgage agent activities until a new Supervising Broker is approved by FSRA and submits a signed undertaking in a form satisfactory to FSRA; e) Agent may be subject to spot audits of his mortgage files from time-to-time at FSRA’s discretion; f) If Agent ceases to be a mortgage agent with Mortgage Brokerage, Agent will notify FSRA in writing within five (5) business days and Agent agrees to stop all mortgage agent activities until: g) Agent informs FSRA, in writing, of his new mortgage brokerage; and h) a new Supervising Broker is approved by FSRA and submits a signed undertaking in a form satisfactory to FSRA; i) The licence issued to Agent may be suspended immediately if he fails to comply with these conditions. TAKE NOTICE THAT every person who fails to comply with a condition of his, her or its licence is guilty of an offence under the Act. Every individual convicted of an offence under the Act is liable to a fine up to $100,000, imprisonment for a term up to one year or both a fine and imprisonment. Every corporation convicted of an offence under the Act is liable to a fine up to $200,000. DATED at Toronto, December 7, 2020. Original signed by Wendy Horrobin Head, Licensing and Risk Assessment Branch By delegated authority from the Chief Executive Officer

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3.7 External Resources Mortgage Brokerage Application Form, FSRA Purpose: Used to apply for a mortgage brokerage licence https://www.fsrao.ca/mortgage-brokerage-application-form Mortgage Brokerage Declaration of Compliance, FSRA Purpose: Declaration of compliance under section 45 of the Mortgage Brokerages, Lenders, and Administrators Act, 2006 https://www.fsrao.ca/mortgage-brokerage-declaration-compliance Request for Licensee Information from FSRA, FSRA Purpose: Used to request a certificate confirming the licence status of an individual, partnership, corporation, company; or 2. request the licensing history of an individual, partnership, corporation, company; or 3. request the licensing history of a mortgage agent or mortgage broker be submitted to another regulator for the purpose of reciprocal licensing. https://www.fsrao.ca/request-licensee-information-fsra-0

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3.8 Key Terms and Definitions Competition Bureau of Canada The Competition Bureau is an independent law enforcement agency that advocates for and protects Canadian consumers and works to foster a competitive and innovative marketplace in which Canadian businesses can prosper. They are the “watchdog” of competition. They enforce the Competition Act, Consumer Packaging and Labelling Act, Textile Labelling Act and Precious Metals Marking Act, and will not hesitate to take action when business is not carried out in ways that are truthful, fair and legal. Labour mobility The Canadian Free Trade Agreement and the Ontario Labour Mobility Act, 2009 make it easier for individuals licensed in another Canadian province or territory to apply for and receive a licence for the same occupation in Ontario. Licensee name The name of a licensee as registered with FSRA. Licensure Licensure can be defined as permission granted by an agency of government to an individual or entity to engage in a given profession or occupation. Mortgage agent level 1 Mortgage agent level 1 licence authorizes licensees to deal and trade in mortgages provided by: • financial institutions, as defined in section 1 of the MBLAA • lenders approved by Canada Mortgage and Housing Corporation (“CMHC”) under the National Housing Act (“NHA”). Mortgage agent level 2 Mortgage agent level 2 licence authorizes licensees to deal and trade in mortgages provided by: • financial institutions, as defined in section 1 of the MBLAA • lenders approved by CMHC under the NHA • all other lenders, such as mortgage investment companies, syndicates, private individuals, agents, brokers, and brokerages Mortgage broker Mortgage broker licence authorizes licensees to deal and trade in mortgages provided by: • financial institutions, as defined in section 1 of the MBLAA • lenders approved by CMHC under the NHA • all other lenders, such as mortgage investment companies, syndicates, private individuals, and brokerages Office of the Superintendent of Financial Institutions (OSFI) The Office of the Superintendent of Financial Institutions (OSFI) is an independent federal government agency that regulates and supervises more than 400 federally regulated financial institutions and 1,200 pension plans to determine whether they are in sound financial condition and meeting their requirements. Ontario Securities Commission (OSC) The Ontario Securities Commission is an independent Crown agency that regulates Ontario’s capital markets by making rules that have the force of law and by adopting policies that influence the

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behaviour of capital markets participants. Prohibited activities The MBLAA (sections 43 – 50) clearly lays out what are considered to be prohibited activities under the legislation. They are subject to enforcement actions by FSRA. Public registry FSRA’s only database of licensees at http://mbsweblist.FSRA.gov.on.ca/agents.aspx Public relations materials 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). The Canadian Code of Advertising Standards The Code, updated regularly by Advertising Standards Canada (ASC) promotes truth, honesty, fairness, and accuracy in advertising and is comprised of fourteen clauses that set the criteria for acceptable advertising. Vendor take-back A vendor take-back, also known as a VTB, is where the seller of the property provides all or some of the financing to the purchaser in order to sell the property.

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3.9 Review Questions Answers to the Review Questions are found at www.REMIC.ca

3.9.1 Short Answer Questions 1. Lenders are regulated in Ontario by three bodies. What are they? 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? 3. Can a mortgage agent level 1 conduct suitability assessments for 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? 5. What constitutes public relations materials as defined by the MBLAA? 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? 7. FSRA has several enforcement tools that can be used to address non-compliance. List three of them. 8. What is the maximum administrative penalty that can be imposed by FSRA? 9. What is the maximum penalty that can be imposed by FSRA for an offence under the legislation? 10. If a person is convicted of an offence, what additional action can a court take?

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Chapter 4: Lenders 4.1 Learning Outcomes Successful understanding of the concepts presented in this chapter will enable the learner to: 1. List the different classifications of lenders 2. Understand how lenders are regulated 3. Define a mortgage investment corporation 4. Describe private lending vehicles 5. Explain the regulatory regime that applies to the different private lending vehicles 6. Understand the importance of a Know Your Investor form 7. Complete a Know Your Investor form 8. Define a syndicated mortgage 9. Explain the different types of syndicated mortgages 10. Compare the differences between private lending vehicles and financial institutions

4.2 Introduction As the cornerstone of the mortgage industry, it is necessary to understand the different types of lenders, their differences and when to use each type. In this chapter we will be discussing several types of lenders, including mortgage investment entities such as MICS and syndicates, while focusing on the individual private lender. This focus includes getting to know the investor, their circumstances, including their risk tolerance and what types of investments they are interested in funding.

4.3 Lender Classifications The Ontario mortgage industry, the largest in Canada, has dozens of lenders from which the mortgage agent may choose. It is important for the mortgage agent to know who those lenders are, and the products, services and rates offered by each to determine the best lender for their client. Lenders are broken down into 4 main classifications by CMHC.34 1. Chartered Banks 2. Credit Unions 3. Mortgage Finance Companies (MFCs) 4. Mortgage Investment Entities (MIEs), which include MICs and private lenders

4.3.1 Chartered Banks Description

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Banks are the dominant players in the mortgage lending landscape in Canada. These depository institutions offer a complete variety of banking and financial services in person through their branch network and online. Bank customers can combine all finances under one institution. Under the Bank Act, banks are defined as:

CMHC, https://assets.cmhc-schl.gc.ca/sites/cmhc/professional/housing-markets-data-and-research/housingresearch/research-reports/housing-finance/residential-mortgage-industry-report/2021/residential-mortgageindustry-report-2021-10-en.pdf?rev=e269b608-9ebc-4e28-ae3e-1629f9a5a674

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• Schedule 1 (banks that are Canadian owned) • Schedule 2 (branches or subsidiaries of foreign banks) • Schedule 3 (foreign owned banks operating in Canada) A list of current Schedule 1, 2 and 3 banks is located in the Appendix Federally regulated by the Office of the Superintendent of Financial Institutions (OSFI) Bank Act All types of funding but mostly deposits While they are widespread across the country, they tend to have greater shares in urban and metropolitan areas. Bank of Montreal, Bank of Nova Scotia (Scotiabank), Canadian Imperial Bank of Commerce (CIBC), National Bank of Canada, Royal Bank, Toronto Dominion Bank, etc.

4.3.2 Credit Unions Description

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Credit unions (or caisses populaires in Quebec) are the second largest players in the mortgage lending landscape. They are depository institutions that have a “co-operative” business model, meaning they are owned by their members (every member has an equal vote). They offer an entire range of financial services in terms of banking, lending, and investment products. They are generally known for more personalized customer service. Most are provincially regulated, with some moving to federal jurisdiction. In Ontario they are regulated by FSRA. Credit Unions and Caisses Populaires Act, 2020 (the Act) All types of funding but mostly deposits Tend to have a higher presence in non-metropolitan areas than other financial institutions. Alterna Savings and Credit Union, Desjardins Ontario Credit Union, Conexus Credit Union, etc.

4.3.3 Mortgage Finance Companies (MFCs) Description

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MFCs only offer mortgage loan products and are usually only accessible via the brokerage lending channel. They are non-depository lenders. MFCs generally have more competitive rates than larger lenders. Quasi-regulated—While not explicitly subject to regulation, they still comply with regulation as they fund their mortgages with public securitization programs and wholesale funding. Depends on their structure. For example, Paradigm Quest is overseen by FSRA and regulated by the MBLAA and its regulations, as described in more detail in MIEs below. NHA securitization programs and wholesale funding As they make use of the broker channel, they are generally widespread across the regions. First National, MCAP, Paradigm Quest, Merix, etc.

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4.3.4 Mortgage Structures Description

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MIEs are mortgage lenders that provide products characterized by short-term loans (between 6 to 24 months) and higher interest rates. MIEs include mortgage investment corporations (MICs) and other private lenders. They generally lend to borrowers that don’t qualify with traditional lenders, for either debt consolidation, sickness, bruised/absence of credit, income interruption, financial difficulties, and real estate investments. When approving a loan, the main objective is to facilitate exit strategies for customers allowing them to eventually return to the traditional lending space. In many cases, they play an important liquidity role by providing funds to individuals in need of immediate cash to avoid defaulting on their mortgage payments, acting as a buffer in the mortgage landscape Unregulated in the lending spectrum. However, some MIEs, including MICs, are regulated on the funding portion of the business and some private lenders, such as brokerages lending their own funds, are regulated by FSRA. MICS Registration requirements under Ontario securities law are set out in the Securities Act and National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). Guidance on how these requirements apply to MIEs and entities that invest their assets in mortgages can be found in the following Notices: • CSA Staff Notice 31-323 Guidance Relating to the Registration Obligations of Mortgage Investment Entities35; and, • OSC Staff Notice 81-722 Mortgage Investment Entities and Investment Funds.36 Businesses with questions about securities law requirements that may apply to MIEs in Ontario are encouraged to contact the OSC’s Contact Centre at 416-5938314 or 1-877-785-1555 (Toll Free). MICs offer shares for sale to investors via an Offering Memorandum, a document that provides investors with certain information about the issuer of the securities, its business and the securities being offered Mortgage Brokerages MBLAA • The Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA) is the principal legislation governing this industry. It is commonly referred to simply as the “MBLAA” or “the Act.”

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OSC, https://www.osc.ca/en/securities-law/instruments-rules-policies/3/31-323/csa-staff-notice-31-323guidance-relating-registration-obligations-mortgage-investment-entities 36 OSC, https://www.osc.ca/en/securities-law/instruments-rules-policies/8/81-722/osc-staff-notice-81-722mortgage-investment-entities-and-investment-funds

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Regulations Mortgage Brokerages • 408/07 Mortgage Brokerages: Licensing • 188/08 Mortgage Brokerages: Standards of Practice Principal Brokers • 410/07 Principal Brokers: Eligibility, Powers and Duties Mortgage Brokers and Agents • 409/07 Mortgage Brokers and Agents: Licensing • 187/08 Mortgage Brokers and Agents: Standards of Practice Cost of Borrowing and Disclosure • 191/08 Cost of Borrowing and Disclosure to borrowers Mortgage Administrators • 406/07 Regulated Activities: Additional Prescribed Activities • 411/07 Mortgage Administrators: Licensing • 189/08 Mortgage Administrators: Standards of Practice Licensing Exemptions • 407/07-Exemptions from the Requirement to be Licensed Reporting Requirements • 193/08 Reporting Requirements for Licensees General • 190/08 General

Funding Regional Concentration Examples

Penalties • 192/08 Administrative Penalties MICs generally fund their mortgages by pooling money from a group of investors. Private lenders either lend their own money or professionally managed funds. While MIEs are present in all provinces, MIC loans are more concentrated in B.C. and Ontario, which represent 78% of their lending with the majority concentrated in Vancouver and Toronto. MICs: Atrium, CMI, MCAN, AP Capital, Timbercreek Financial, etc. Private lenders: individual investors and syndicated mortgages

4.3.5 MBLAA Financial Institutions For the purposes of the regulation by FSRA, the MBLAA has a classification of financial institutions. This is particularly important as an Agent Level 1 may only conduct business with MBLAA defined financial institutions and lenders approved by CMHC under the National Housing Act (NHA). The MBLAA defines a financial institution as, “a bank or authorized foreign bank within the meaning of section 2 of the Bank Act (Canada), a credit union to which the Credit Unions and Caisses Populaires Act, 2020 applies including a central within the meaning of that Act, an insurer licensed under the Insurance Act, a corporation registered under the Loan and Trust Corporations Act or a retail association as defined under the Cooperative Credit Associations Act (Canada); (“institution financière”)

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4.4 Mortgage Investment Corporations 4.4.1 What is a MIC? Established by the federal Residential Mortgage Financing Act in 1973, a mortgage investment corporation, referred to as a MIC, is a company created to invest in mortgages in Canada. Individual investors purchase shares in the corporation, and the corporation uses the capital raised through the sale of those shares to invest in mortgages. Shares are qualified investments under the Income Tax Act, meaning that they can be purchased using RRSPs, RDSPs, RRIFs, TFSAs or RESPs. The benefit of investing in a MIC is that the investor’s money is being used to invest in a pool of mortgages. This mitigates the risk associated with lending in one mortgage (see the section on material risks associated with a private mortgage for more information on these risks). In other words, each share is an undivided interest in the MIC which has invested in numerous mortgages, therefore the share’s exposure, if a single mortgage defaults, is limited because that default is diluted amongst all of the other investments. This also poses a risk for the investor, however, as he or she has no control over the types of mortgages that are invested in by the MIC. In addition, because the investment is in a share there is no direct collateral attached to that investment for the investor.

4.4.2 Characteristics of a MIC According to the Income Tax Act, Section 130.1(1) and widely accepted interpretations of the Act, the following criteria must be met for a corporation to meet the legal definition of a MIC. 1. A MIC must have at least 20 shareholders. 2. A MIC is a tax-exempt corporation. 3. No shareholder may hold more than 25% of the MIC's total capital. A shareholder exceeding this amount is referred to as a specified shareholder. 4. At least 50% of a MIC’s assets must be residential mortgages, and/or cash and insured deposits at Canada Deposit Insurance Corporation member financial institutions. 5. A MIC may invest up to 25% of its assets directly in real estate, but may not develop land or engage in construction. This ceiling on real estate holdings does not include real estate acquired as a result of mortgage default. 6. A MIC must distribute 100% of its net income to its shareholders as dividends. This is referred to as a flow through investment. 7. All MIC investments must be in Canada, but a MIC may accept investment capital from outside of Canada. 8. Dividends received with respect to directly held shares, not held within RRSPs or RRIFs, are taxed as interest income in the shareholder’s hands. Dividends may be received in the form of cash, or additional shares. 9. A MIC’s annual financial statements must be audited. 10. A MIC may employ financial leverage by using debt to partially fund assets. Research indicates that there are currently over 250 MICs operating in Canada, many of which are privately held in Western Canada. In fact, it is estimated that there are fewer than 10 publicly traded MICs. In general MICs generate between 5% - 10% rates of return for their investors, depending on their lending criteria and portfolio performance.

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4.4.3 MICs as investments With attractive returns and registered fund eligibility, MICs are an attractive investment. There are, however, a few considerations for investors before deciding to invest in a MIC. 1. 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. 2. 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 wrongi. 3. Track record – just like mortgages, not all MICs are created equal. A MIC is only as good as its management team and underwriting process, which determines the success of its investments and the overall success and longevity of the MIC. This is important for two reasons: the first being that the investment is in a security, as discussed above, and the second is that it will determine the success of the MIC’s business and therefore the overall rate of return. Therefore, an investor should carefully look at the MIC’s track record of past performance. While not a guarantee of future performance, it should provide an indication of what to expect. 4. 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.

4.5 Individual Lenders and Investors Individual lenders and investors consist of people and entities that have money to invest.

Pause for clarification – Investor Regulation 188/08: MORTGAGE BROKERAGES: STANDARDS OF PRACTICE defines an investor as, “a person or entity who makes an investment in a mortgage through the purchase or exchange of a loan or an interest in a loan on the security of real estate; (“investisseur”)”

Pause for clarification – Lender The Mortgage Brokerages, Lenders and Administrators Act, 2006 states that, “a person or entity is a mortgage lender in Ontario when he, she or it lends money in Ontario on the security of real property or holds themself out as doing so.

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Let’s begin by defining the two types of investors dealt with by mortgage brokerages. There is a designated class of investors, as follows, and everyone else. Everyone else consists of individuals or entities that are not in a designated class but that have money to lend. The designated class of investors is defined in Regulation 188/08, Section 2, as follows:

4.5.1 Designated classes of lenders and investors 37 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 investor/lender disclosure (section 31.(2)) forms. Members of this class are described in section 2. (1) of this regulation. 2. (1) 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: 1. The Crown in right of Ontario, Canada or any province or territory of Canada. 2. A brokerage acting on its own behalf. 3. A financial institution. 4. A corporation that is a subsidiary of a person or entity described in paragraph 1, 2 or 3. 5. A corporation that is an approved lender under the National Housing Act (Canada). 6. An administrator or trustee of a registered pension plan within the meaning of subsection 248 (1) of the Income Tax Act (Canada). 7. 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. 8. 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. 9. 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.

37

O. Reg. 188/08, Section 2, https://www.ontario.ca/laws/regulation/080188/

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10. 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. 11. 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. 12. 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. 13. 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). As mentioned previously, as per Regulation 188/08, Section 31, Subsection 2, a brokerage is not required to provide a disclosure form or other documents as detailed in this section to an investor or lender if they are a member of a designated class. The precise legislation is as follows: Disclosure form for lenders and investors re mortgages38 31. (1) A brokerage shall give each lender or investor the following information and documents with respect to a mortgage or a trade in a mortgage that the brokerage presents for the consideration of the lender or investor: 1. A completed disclosure form, in a form approved by the Chief Executive Officer, signed by a broker. 2. If the investment is in an existing mortgage, a copy of the mortgage instrument. 3. If an appraisal of the applicable property has been done in the preceding 12 months and is available to the brokerage, a copy of the appraisal. 4. If an appraisal of the applicable property is not available as described in paragraph 3, documentary evidence of the value of the property, other than an agreement of purchase and sale.

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Chapter 4: Lenders 5. If an agreement of purchase and sale in respect of the property has been entered into in the preceding 12 months and is available to the brokerage, a copy of the agreement of purchase and sale. 6. Documentary evidence of the borrower’s ability to meet the mortgage payments. 7. A copy of the application for the mortgage and of any document submitted in support of the application. 8. If the mortgage is a new mortgage, documentary evidence of any down payment made by the borrower for the purchase of the property. 9. A copy of any agreement that the lender or investor may be asked to enter into with the brokerage. 10. All other information, in writing, that a lender or investor of ordinary prudence would consider to be material to a decision about whether to lend money on the security of the property or to invest in the mortgage. O. Reg. 188/08, s. 31 (1); O. Reg. 171/19, s. 1.

(2) Subsection (1) does not apply if the lender or investor is a member of a designated class of lenders and investors. O. Reg. 188/08, s. 31 (2). However, it is considered a best practice to provide full disclosure to individual investors, regardless of this exemption. This ensures that the investor has access to all of the information an investor of ordinary prudence would require.

4.5.2 The Importance of knowing your investor/lender Consumer protection is the underlying theme of the MBLAA and its Regulations. Suitability deals with the appropriateness of a transaction in regard to the investor/lender’s needs and circumstances. The underlying belief that a client knows what is in his or her best interests and what he or she can afford is no longer an acceptable assumption. The MBLAA and its Regulations, in section 24.1 of Regulation 188/08, Mortgage Brokerages: Standards of Practice, states that, “A brokerage shall take reasonable steps to ensure that any mortgage or investment in a mortgage that it presents for the consideration of a borrower, lender or investor, as the case may be, is suitable for the borrower, lender or investor having regard to the needs and circumstances of the borrower, lender or investor.” Furthermore, in its October 24, 2008, webinar, FSRA clearly stated that it will respond to all complaints by borrowers, lenders, and investors regarding the suitability of a transaction, and that it will be the brokerage’s responsibility to prove that the mortgage or investment was suitable, putting the burden of proof for disclosure and suitability on the brokerage and its principal broker. This requirement clearly necessitates the need for the brokerage and its principal broker to have the proper policies and procedures in place for its brokers and agents to determine if those suitability requirements are met in every transaction. In addition to ensuring that the transaction is suitable, the question that a brokerage must be able to answer for every transaction is, “Does the completed mortgage file contain the requisite proof to convince a reasonable person that this transaction was suitable for the parties involved?” The rationale behind this question is that if FSRA were to view the mortgage file six months or a year after its

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completion, without having the broker or agent to interview, would FSRA’s auditor (the “reasonable person” at this stage) be able to determine, based on the documentary evidence contained within the file, that it was suitable for the borrower, lender and/or investor? Even if FSRA’s auditor had access to the broker or agent who brokered the transaction, would he or she be able to remember the circumstances of that particular file with enough certainty to be able to prove that the transaction was suitable? The answer to the latter question is most likely no and should be irrelevant if the brokerage has the proper policies and procedures in place that ensure documentary evidence of suitability is in every completed mortgage file. Before being able to determine if a product is, for example, suitable for an investor/lender, the broker/agent must be able knowledgeably to assess the transaction in its entirety. This means that the broker/agent must have a complete understanding of the risks associated with each proposed investment, understand the investor/lender’s risk tolerance, and understand the potential conflicts of interest and how to disclose them.

4.5.3 How to know your investor/lender A mortgage brokerage has a responsibility to ensure that the mortgage it is recommending to an investor/lender is suitable with regard to his or her needs and circumstances unless, as stated in section 24.2, Regulation 188/08, Mortgage Brokerages: Standards of Practice, the investor/lender is another brokerage or financial institution. In addition, the material risks must be disclosed in writing to the investor/lender unless the investor/lender is a member of a designated class of lenders and investors as listed in section 2 of Regulation 188/08, Mortgage Brokerages: Standards of Practice.

Pause for clarification – Know Your Client (KYC) form A form used to verify a client's identity and know their investment knowledge and financial profile. To ensure that this responsibility is met, the brokerage should have policies and procedures in place that require all investors to complete a Know Your Client (KYC) form and ensure that this form is kept in an investor file that can be reviewed, if requested, by FSRA. KYC for investor/lenders While many brokers/agents like to keep their private investor’s information confidential to prevent others from accessing these sources of funds, the protection of the brokerage makes this policy unacceptable. If an investor files a complaint with FSRA regarding the suitability of a mortgage that he or she has funded, the brokerage is required to prove that the transaction was suitable for that investor. Failure to consider the investor’s risk tolerance, needs, and circumstances will indicate that, at the very least, the brokerage did not know if the investment was suitable, and at worst, that the investment was in fact unsuitable for the investor. Identification To meet the KYC requirements, the brokerage must verify the identity of the investor. This should be accomplished by requiring the investor to provide photo identification in the form of a driver’s license or another document deemed acceptable by the regulator and industry. In Ontario, as in Manitoba and PEI, provincial health cards cannot be used for identification purposes.

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Social insurance number cards have specific restrictions on how they may be used39, and although an investor may be asked to provide his or her social insurance number card as proof of identity, this cannot be mandatory unless the brokerage is administering a mortgage on behalf of the investor and providing a T5. In this scenario, it must obtain the investor/lender’s social insurance number for income reporting purposes40. The original of identification provided should be viewed by the broker/agent and a photocopy obtained and kept in the investor/lender’s file. The document number, such as the driver’s license number, should be recorded on the KYC form. If the investor/lender’s identity cannot be verified, the brokerage should have a policy in place that prohibits the broker/agent from doing business with that investor. Refer to chapter 6, Identity Verification for more information. If the investor/lender is a corporation, the brokerage should have policies and procedures in place that require the broker/agent to obtain the corporation's certificate of corporate status; a record that has to be filed annually under provincial securities legislation; or any other record that confirms the corporation's existence. Examples of these include such other records as the corporation's published annual report signed by an independent audit firm, or a letter or a notice of assessment for the corporation from a municipal, provincial, territorial, or federal government. If the investor/lender is not physically present and his or her identity cannot be verified by the broker/agent, the brokerage should have policies and procedures in place to deal with this, such as the guidelines as set out by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) for Real Estate Brokers41. Risk Tolerance Risk tolerance for an investor/lender is viewed differently than that of a borrower and takes different factors into account. The securities industry has several risk assessment tools, including online quizzes and paper-based forms; however, determining an investor’s risk for mortgage investments should include understanding the investor’s income, net worth, and knowledge of mortgage investments, investment liquidity requirements, and investment objectives. Needs and Circumstances The brokerage must have policies and procedures in place that adequately assess the needs and circumstances of an investor/lender. Information of particular importance is anything that might impact the investor/lender’s short and long-term needs, such as the need to liquidate the investment on short notice, which is often problematic in mortgage investments. By completing a KYC form on the investor/lender and determining his or her needs, the brokerage can protect itself from allegations that it did not provide an investment that was suitable for the investor/lender.

39 Office of the Privacy Commissioner of Canada, Fact Sheet on the use of Social Insurance Numbers in the private sector, http://www.privcom.gc.ca/fs-fi/02_05_d_21_e.asp 40 Ibid 41 FINTRAC, Guideline 6B: Record Keeping and Borrower Identification for Real Estate Brokers or Sales Representatives, http://www.fintrac-canafe.gc.ca/publications/guide/Guide6/6B-eng.asp#441

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4.6 Syndicated Mortgage Investments (SMI) Another option for a private lender is to invest in a single mortgage with other private lenders. For example, if a borrower requires a $150,000, mortgage two or more investors may combine their money to invest in one mortgage. As of July 1, 2018, syndicated mortgages have been subdivided into two classifications: 1. Qualified syndicated mortgage 2. Non-Qualified Syndicated mortgage

4.6.1 Qualified Syndicated Mortgage (QSMI) These are mortgage investments that can be arranged by a mortgage brokerage. A qualified syndicated mortgage must meet the following criteria: 1. It is arranged through a mortgage brokerage. 2. It secures a debt obligation on property that, a. is used primarily for residential purposes, b. includes no more than a total of four units, and c. if used for both commercial and residential purposes, includes no more than one unit that is used for commercial purposes. 3. 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. 4. It is limited to one debt obligation whose term is the same as the term of the syndicated mortgage. 5. The rate of interest payable under it is equal to the rate of interest payable under the debt obligation. (3) A syndicated mortgage that secures a debt obligation incurred for the construction or development of property is not a qualified syndicated mortgage.

4.6.2 Non-Qualified Syndicated Mortgage (NQSMI( NQSMIs are syndicated mortgages that do not meet the definition of “qualified syndicated mortgage”. Effective July 1, 2021, responsibility for regulation of NQSMI transactions is split between the Ontario Securities Commission (“OSC”) and FSRA. 42 Key for determining the division of oversight over NQSMI transactions are two elements: 1. Whether the investors / lenders are Permitted or non-Permitted Clients; and 2. Whether the borrower is a Permitted or non-Permitted Client. Regulatory oversight of NQSMI transactions is as follows: 1. Dealing or trading in NQSMIs with Permitted Client investors / lenders can be overseen by FSRA or the OSC

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Chapter 4: Lenders 2. Dealing or trading in NQSMIs with non-Permitted Client investors / lenders is primarily overseen by the OSC. 3. Dealing or trading in NQSMIs with both Permitted and non-Permitted Client investors / lenders can be overseen jointly by FSRA and the OSC or by the OSC only, in accordance with their respective regulatory regimes. 4. When dealing or trading in NQSMIs, a dealer registered with the OSC can deal or trade with all types of investors and borrowers who are Permitted Clients.

Figure 5 – NQSMI oversight evolution43

Pause for clarification – Permitted Clients 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

Pause for clarification – Non-Individual Permitted Clients FSRA’s Interpretation of Non-Individual Permitted Clients typically includes, for example, financial institutions, regulated pension plans, governments or government agencies, dealers or advisers registered under the securities regime and high-net-worth companies (net assets of at least $25 million). Non-Individual Permitted Clients may be Mortgage Investment Vehicles (MIEs) whose: (a) units are sold only to Permitted Clients investors; and, (b) units' distribution is regulated under another regulatory regime such as the Securities Act. For more information, visit www.remic.ca/permitted-clients

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FSRA, https://www.fsrao.ca/industry/mortgage-brokering/regulatory-framework/supervision/evolution-nonqualified-syndicated-mortgage-investments-nqsmis-supervision

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4.6.3 Tips before investing in a syndicated mortgage 44 The Financial Services Regulatory Authority of Ontario (FSRA) has taken considerable action in the syndicated mortgage investment (SMI) marketplace to help consumers. While there are many legitimate SMI opportunities, FSRA warns consumers to be wary of SMIs with advertisements promoting a high return or ‘fully secured’ investment. FSRA considers mezzanine-style SMIs to be high risk and notes they may not be suitable for the average investor. Before you hand over your hard-earned money, make sure you are aware of your rights and responsibilities.

The risks: •

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.

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44

•

Check for a license. Only mortgage brokers and agents licensed with FSRA can engage in syndicated mortgage transactions, and only licensed mortgage brokers (not agents) can sign the required forms. Find a licensed broker, agent, or brokerage by checking FSRA’s list.

•

Ask where you are in line for payments. If something goes wrong with the project, you need to know which lenders and investors the borrower will repay, and in what order. Ask whether the syndicated mortgage is a first, second or subsequent mortgage; this is important because if the

FSRA, https://www.fsrao.ca/consumers/how-fsra-protects-consumers/mortgage-brokering/before-investingsyndicated-mortgage

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Chapter 4: Lenders project fails, the first mortgage would receive any proceeds from the liquidation first. Second and subsequent mortgages only receive payments if and when the first mortgage has been fully paid off.

45

•

Ask about the property value. Your security is only as good as the value of the property. Ask to see the appraisal the brokerage used to determine the value. You want to ensure the appraiser has valued the property in its current "as is" state without any assumptions concerning the successful completion of the property. If the appraiser has made such assumptions, the sale price of the undeveloped property would likely be lower than the value indicated in the appraisal. This would create more risk in terms of recovering your investment. For more complex SMIs as of July 1, 2018, your mortgage broker must provide you with a property appraisal prepared by a member of the Appraisal Institute of Canada in accordance with the Canadian Uniform Standards of Professional Appraisal Practice.

•

Get independent advice. You are strongly advised to obtain independent financial and legal advice from someone not connected to the investment, before investing in a syndicated mortgage. This includes getting professional advice on how your investment could impact your income tax.

•

Investment limits. 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.45

•

Read and understand all associated paperwork. Your mortgage broker must complete investor/lender disclosure Form 1 and provide it to you. The brokerage must also keep appropriate documentation on file, including records that detail discussions with you. For more complex SMIs as of July 1, 2018, your mortgage broker must complete investor/lender Forms 3.0, 3.1 and 3.2 and provide them to you. Form 3.0 collects information about you that will help the mortgage broker determine if a particular investment is suitable for you. Form 3.1 documents your broker’s analysis of why the investment is suitable for you. Form 3.2 provides you with important information about the proposed investment. You must sign all three forms. Before you sign, ask questions, and make sure you understand everything.

•

Ensure full disclosure. Mortgage brokerages must take reasonable steps to ensure that the mortgage investment they recommend is suitable based on your needs and circumstances. They must also advise you of the material risks of the investment, disclose potential conflicts of interest, and provide evidence of the borrower’s ability to meet the mortgage payments. For more complex SMIs as of July 1, 2018, your mortgage broker must complete investor/lender disclosure Form 3.2 and provide a copy to you.

FSRA, Changes to Syndicated Mortgage Transactiions, https://www.fsrao.ca/industry/mortgagebrokering/syndicated-mortgage-investments-information-and-resources/changes-syndicated-mortgagetransactions

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Inspect the project. Consider going to inspect the actual property. Ensure you have sufficient documentation to support the property valuation. Keep in mind, property values in commercial developments are subject to market forces and can decrease. Ensure you understand the marketplace in which you are investing.

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4.7 Key Terms and Definitions Chartered Banks Banks are the dominant players in the mortgage lending landscape in Canada. These depository institutions offer a complete variety of banking and financial services in person through their branch network and online. Bank customers can combine all finances under one institution. Under the Bank Act, banks are defined as: • Schedule 1 (banks that are Canadian owned) • Schedule 2 (branches or subsidiaries of foreign banks) • Schedule 3 (foreign owned banks operating in Canada) Credit Unions Credit unions (or caisses populaires in Quebec) are the second largest players in the mortgage lending landscape. They are depository institutions that have a “co-operative” business model, meaning they are owned by their members (every member has an equal vote). Designated classes of lenders and investors 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. 2. (1) 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: 1. The Crown in right of Ontario, Canada or any province or territory of Canada. 2. A brokerage acting on its own behalf. 3. A financial institution. 4. A corporation that is a subsidiary of a person or entity described in paragraph 1, 2 or 3. 5. A corporation that is an approved lender under the National Housing Act (Canada). 6. An administrator or trustee of a registered pension plan within the meaning of subsection 248 (1) of the Income Tax Act (Canada). 7. 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. 8. 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. 9. 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. 10. 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. 11. 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. 12. 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

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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. 13. 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). Financial Institution MBLAA defines a financial institution as, “a bank or authorized foreign bank within the meaning of section 2 of the Bank Act (Canada), a credit union to which the Credit Unions and Caisses Populaires Act, 2020 applies including a central within the meaning of that Act, an insurer licensed under the Insurance Act, a corporation registered under the Loan and Trust Corporations Act or a retail association as defined under the Cooperative Credit Associations Act (Canada); (“institution financière”) Know Your Client (KYC) form A form used to verify a client's identity and know their investment knowledge and financial profile. Lender The Mortgage Brokerages, Lenders and Administrators Act, 2006 states that, “a person or entity is a mortgage lender in Ontario when he, she or it lends money in Ontario on the security of real property or holds themself out as doing so. Mortgage Finance Company (MFC) MFCs only offer mortgage loan products and are usually only accessible via the brokerage lending channel. They are non-depository lenders. MFCs generally have more competitive rates than larger lenders. Mortgage Investment Corporation (MIC) A company created to invest in mortgages in Canada. Individual investors purchase shares in the corporation, and the corporation uses the capital raised through the sale of those shares to invest in mortgages. Mortgage Investment Entity (MIE) MIEs are mortgage lenders that provide products characterized by short-term loans (between 6 to 24 months) and higher interest rates. MIEs include mortgage investment corporations (MICs) and other private lenders. Non-Individual Permitted Clients FSRA’s Interpretation of Non-Individual Permitted Clients typically includes, for example, financial institutions, regulated pension plans, governments or government agencies, dealers or advisers registered under the securities regime and high-net-worth companies (net assets of at least $25 million). Non-Qualified Syndicated Mortgage (NQSMI) Syndicated mortgages that do not meet the definition of “qualified syndicated mortgage”. Permitted Clients 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

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Qualified Syndicated Mortgage These are mortgage investments that can be arranged by a mortgage brokerage. A qualified syndicated mortgage must meet the following criteria: 1. It is arranged through a mortgage brokerage. 2. It secures a debt obligation on property that, a) is used primarily for residential purposes, b) includes no more than a total of four units, and c) if used for both commercial and residential purposes, includes no more than one unit that is used for commercial purposes. 3. 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. 4. It is limited to one debt obligation whose term is the same as the term of the syndicated mortgage. 5. The rate of interest payable under it is equal to the rate of interest payable under the debt obligation. (3) A syndicated mortgage that secures a debt obligation incurred for the construction or development of property is not a qualified syndicated mortgage. Syndicated Mortgage A mortgage with two or more investors.

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4.8 Review Questions Answers to the Review Questions are found at www.REMIC.ca

4.8.1 Short Answer Questions 1. Lenders are broken down into several main classifications based on their type. Name them. 2. This classification of mortgage lender includes lenders that provide products characterized by shortterm loans (between 6 to 24 months) and higher interest rates. They include mortgage investment corporations (MICs) and other private lenders. 3. In order to sell its shares, a MIC must provide potential investors with this document. Name it and explain its purpose? 4. When investing in a MIC, what security does the investor get? 5. Can an investor redeem their shares any time, or are there restrictions? Explain your answer. 6. What determines if a person or entity is a member of a designated class of investors? 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? 8. As of July 1, 2018, syndicated mortgages have been subdivided into two classifications. Name them. 9. What are the five requirements needed to deem an investment a qualified syndicated mortgage? 10. Define the term “permitted client”. 11. Name and explain at least three risks associated with syndicated mortgages. 12. What is the maximum amount that may be invested in a NQSMI over a 12-month period?

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Chapter 5: Transaction Process

Chapter 5: Transaction Process 5.1 Learning Outcomes Successful understanding of the concepts presented in this chapter will enable the learner to: 1. List and explain the steps in a brokered mortgage transaction 2. Explain the differences between the steps in an institutional mortgage vs. a private mortgage

5.2 Introduction Brokering a mortgage transaction is similar in process for both institutional and private mortgages, however there are differences. This chapter lists the steps and reveals those differences.

5.3 The Steps in the Transaction Process - Borrower A brokered mortgage transaction has a set of typical steps. Generally speaking, the process can be broken down into the following main categories of steps: 1. Attracting a client 2. Application 3. Lender submission 4. Disclosure 5. Meeting conditions 6. Closing These categories can be further broken down into their individual steps. We will list them and then describe each one individually. 1. Attracting a borrower 2. First contact 3. The initial consultation 4. File creation and management 5. Application analysis: Borrower income and GDS/TDS ratios 6. Application analysis: Borrower Credit 7. Application analysis: The property and LTV ratio (includes ordering an appraisal if applicable) 8. Choosing a lender 9. Submitting the application 10. Investor/Lender Disclosure 11. Obtaining the commitment 12. Preparing disclosure documents 13. Preparing the Commitment 14. Presenting the commitment and disclosure documents 15. Meeting conditions 16. Instructing the lawyer 17. The lawyer/client meeting 18. Funding the transaction 19. Reporting to the Lender 20. File submission to the brokerage 21. Receiving commissions 22. Record keeping 23. Ongoing Communication

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The following is a description of each of these steps. 1. Attracting a borrower Attracting a client refers to any activity that result in a licensee obtaining a potential borrower. This can be achieved by marketing, advertising, or referral. 2. First contact This is the first time that the potential borrower and the mortgage agent have contact, be it on the phone, through email or face to face. Depending on the business model, this step may include determining the type of mortgage that the borrower requires, such as an institutional or private mortgage. 3. The initial consultation The Initial Consultation is the part of the process in which the agent/broker completes several important steps: a. 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. b. completes the borrower’s application, either in paper format or using their origination software c. 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 d. obtains consent to obtain a credit report and verify information, such as employment e. obtains consent to order an appraisal, if for a private mortgage f. discusses options g. explains the process, including who the agent/broker is working for h. 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 4. File creation and management The mortgage agent creates the borrower’s file, typically in both paper format and/or using their origination software. 5. Application analysis: borrower income and GDS/TDS ratios The mortgage agent analyzes the borrower’s income to determine the amount of the mortgage for which the borrower can qualify based on the available borrower documentation and the income ratios, the GDS and TDS. 6. Application analysis: borrower credit The mortgage agent will obtain a credit report using their origination software. The industry jargon for this is referred to as “pulling a credit report”. The mortgage agent will then 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. 7. Application analysis: the property and LTV ratio The mortgage agent begins a preliminary analysis of the property to determine which lender will accept this property type and the maximum loan amount that can be approved based on the value of the property, referred to as the loan to value or LTV. While the agent/broker may wait for a full

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appraisal to be completed, if required, they may also obtain a Purview report or other analysis to assist in determining the appropriate value. 8. Choosing a lender Based on the analysis completed so far, the mortgage agent/broker will now decide on an appropriate lender to which to submit the application. The mortgage agent requires significant knowledge regarding the numerous lenders’ guidelines to determine the appropriate lender for the borrower. In choosing a private lender, the agent/broker must be aware of the potential investor’s suitability for such an investment. 9. Submitting the application Using the origination software, the mortgage agent electronically submits the application. If the lender cannot accept electronic submissions, the mortgage agent may be required to print the application using the origination software and fax it to the lender. There is no legal requirement on how an application is submitted to a lender. It is solely up to the lender on how it will accept a mortgage application: by email, fax, paper format or electronically via the origination software. In a private transaction the mortgage agent may choose to submit a summary of the transaction before creating the Investor/Lender Disclosure. This is to prevent wasting the potential investor’s time by having to go through the entire Form 1. If the investor is interested in seeing full details about this investment opportunity the licensee will then present the full package, including Form 1 and the application. It is important to note that the licensee should have some form of agreement with the investor that protects the borrower’s personal information. This can be in the form of a written agreement that the investor will destroy or return information if they decide not to invest, and that they agree to keep information provided confidential and securely stored at all times to prevent any type of information breach. 10. Investor/Lender disclosure If using a private lender, this is the step when the appropriate investor/lender disclosure forms are provided to that lender, as discussed in more detail in a latter chapter. 11. Obtaining the commitment If approved, the lender will send the mortgage agent a commitment letter. A commitment letter is an offer from the lender to the borrower to fund the mortgage based on the borrower’s ability to meet certain conditions that are listed in the commitment letter.

Pause for clarification – Commitment letter Before signing the full mortgage contract with the lawyer, the applicant will receive a commitment letter (also known as a commitment, conditional commitment, or approval letter). It 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. 12. Preparing disclosure documents In every brokered transaction in Ontario, the mortgage agent must provide the borrower with a borrower disclosure. This document discloses the terms of the mortgage as well as the associated

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costs involved in it being obtained. Typically, this document is produced by the origination software based on the lender’s commitment letter in addition to other information from the borrower’s application. There are several legal requirements to be met in completing this document, including ensuring the risks, terms, conflicts, etc. of this specific mortgage are adequately disclosed and understood by the borrower to meet the requirements of the MBLAA and its Regulations. Disclosure documents are not legally binding contracts. 13. Preparing the commitment letter For private lenders who are not familiar with lending, it will be the role of the agent/broker or investor/s lawyer to prepare the commitment letter. This requires specific knowledge of enforceable terms and conditions, as well as referencing the appropriate standard charge terms. For these reasons many agents/brokers prefer to have the investor’s lawyer prepare the commitment. 14. Presenting the commitment and disclosure documents The mortgage agent must then present the commitment letter, borrower disclosure, and an amortization schedule to the borrower for signing. The mortgage agent must leave a copy of both the amortization schedule and signed borrower disclosure with the borrower. Once complete, the signed commitment letter is sent by the mortgage agent to the lender. 15. Meeting conditions 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.

Pause for clarification – Conditions In relation to a commitment letter, these are the lender’s requirements that must be fulfilled before the lender will agree to fund the proposed mortgage. 16. Instructing the lawyer Once satisfied that all the conditions have been met, the lender will send a package of instructions (often referred to as “Instructions to Lawyer”) to the lawyer who is closing the transaction on behalf of the lender. These instructions advise the lawyer on what the lender requires to be done, including what the lender will accept as valid proof of identification. In many private transactions the investor will simply advise the closing lawyer to proceed, as the closing lawyer will have processes in place for closing a private mortgage. In cases where the mortgage is $75,000 or higher46, it is a legal requirement that two lawyers be involved: a lawyer closing on behalf of the investor and a lawyer

46

Law Society of Ontario, https://lso.ca/about-lso/legislation-rules/rules-of-professional-conduct/chapter3#ch3_sec4-12-borrower-lender

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acting on behalf of the borrower. It is important to note that while the borrower pays the lender’s lawyer’s fee, the lawyer is working primarily on behalf of the lender. 17. The lawyer/borrower meeting The lawyer will contact the borrower and arrange for an appointment for the borrower to sign the closing documents at the lawyer’s office. The lawyer will also inform the borrower of the documents required to be brought with the borrower to this meeting. Once the lawyer has completed the appropriate tasks, funds will be requested from the lender for deposit into the lawyer’s trust account. 18. Funding the transaction Once the lawyer has completed the appropriate tasks, the mortgage will be registered, and the funds will be requested from the lender to the lawyer’s trust account or disbursed by the lawyer from the lawyer’s trust account if they have already been received. Depending on the transaction, requesting of funds may be done before the mortgage is registered, or after. 19. Reporting to the lender Within 60 days of the registration of the mortgage, or within such other time period as instructor by the lender, the lawyer must provide a final report on the transaction, together with the duplicate registered mortgage47. 20. File submission to the brokerage Before an agent will receive their commission, the completed mortgage file must be submitted to the brokerage for a compliance review. This will ensure that the transaction complied with applicable legislation and that all appropriate documents are in the file. The brokerage will then store this file. Based on legislation the regulator has the right to inspect these files for compliance. 21. Receiving commissions Upon receipt of the required documentation from the lawyer indicating that the transaction has been successfully funded, the lender will forward the finder’s fee or commission to the brokerage. This fee must be payable to the mortgage brokerage. Under no circumstances can this fee be paid directly to the mortgage agent or broker. In the case where there is no finder’s fee, the mortgage agent will typically have charged the borrower a fee for arranging the mortgage. This fee is typically taken from the mortgage advance on closing and is sent to the mortgage agent’s brokerage by the lawyer. The mortgage agent’s brokerage will then pay the mortgage agent the finder’s fee based on the contract that the mortgage agent has with the brokerage. 22. Record keeping By regulation the brokerage is required to keep certain documentation on file for a set number of years. These files may be periodically audited by FSRA. It’s also a good practice for the agent to make electronic copies of the file documents and keep them securely stored in case needed in the future.

47

Ibid, https://lso.ca/about-lso/legislation-rules/rules-of-professional-conduct/chapter-3#ch3_sec2-9-8-reportingon-mortgage-transactions

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23. Ongoing communication Ongoing communication is vital in the process of ensuring the applicant can make an informed to decision on their mortgage options before funding, as well as providing appropriate service after the mortgage has funded. The following are best practices when communicating by email/letter: 1. Respond swiftly – even if you are simply acknowledging receipt of their correspondence; a response time of within one business day is typically a best practice; when receiving a letter, a prompt response by email or phone acknowledging receipt is a best practice 2. Always keep it professional – include your signature line and address the correspondence to the individual 3. Break up the body of the email/letter to separate points for ease of reading 4. Personalize – be sure to use the recipients name, and include your name as opposed to a generic department (i.e., Sincerely, the Servicing Department) 5. Answer questions honestly and with the appropriate information – whatever the question is, assume that your answer may be shown to others and critiqued. Would you be happy with your response if it was shown on social media? If not, fix it. 6. Ask your principal broker – unsure of the answer to a question? Don’t guess! Ask your principal broker or individual authorized by your principal broker for assistance. 7. Answer only in your professional capacity – if you receive a complaint, follow your brokerage’s complaint handling process. If they question is outside of your area of expertise (such as a question about legal rights or obligations, tax implications, etc.), forward the email to the appropriate person in your brokerage, or advise them to seek the advice of a professional in the field in which they’re inquiring.

5.3 The Steps in the Transaction Process – Investor Some of the steps in dealing with a private investor are similar to those dealing with a borrower. Let’s have a look at some common steps necessary to fund a private mortgage. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Attracting an investor First contact The initial consultation File creation and management Investor Suitability Analysis Providing an investment for consideration – summary Providing an investment for consideration – full package Obtaining/Creating a Commitment Instructing the lawyer The lawyer/client meeting Funding the transaction Ongoing Communication

The following is a description of each of these steps. 1. Attracting an investor Attracting an investor refers to any activity that results in obtaining a potential investor. This can be achieved through the use of public relations materials, such as marketing, advertising, or referral. It is important to note that there are restrictions on the types of claims that can be made in public relations materials, so a licensee must ensure that any claims (for example, rates of return, investment risks, etc.) are compliant.

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2. First contact This is the first time that the potential investor and the licensee have contact, be it on the phone, through email or face to face. Depending on the business model, this step may include determining the type of investment that the investor is interested in, and if the next step, the initial consultation, is warranted. 3. The initial consultation In this step the licensee is on a fact-finding mission. There are several important steps that must be completed: a) Identity Verification: see chapter 6.4 for details b) 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 (discussed 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. c) Gathering documents 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. d) Confidentiality agreement A confidentiality agreement/non-disclosure 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. e) Lawyer’s information 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. 4. File creation and management Creating a file on the potential investor is necessary to ensure that if requested, the licensee can provide FSRA with appropriate documentation that illustrates how the brokerage met its regulatory requirements, including verifying identity, ensuring suitability, etc. The brokerage should have policies and procedures to deal with the creation, storage, and access to these files to ensure that they are safeguarded at all times. 5. Investor suitability analysis In this step, the licensee will, using Form 3 or other documentation deemed appropriate by the licensee, such as a Know Your Client (KYC) form, determine what types of mortgages may be suitable for this particular investor, both now and in the future. It’s important that the licensee have this analysis updated regularly (annually, for example), to ensure the information is up to date and accurate. This step will also ensure that the licensee is only contacting potential investors that may

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be suitable for a particular investment. This saves time and unnecessary disclosure of borrower information. 6. Providing an investment for consideration - summary At this stage, the licensee has an application, has determined if it is suitable for the specific investor, and wishes to present it for the investor’s consideration. This can be done in several ways, depending on the investor’s preference. For example, an investor may wish to have a phone call to discuss the investment opportunity before seeing the full package, or have a summary sent by email. However, the investor wishes to proceed, it is important that the licensee summarize the investment opportunity before providing the full application package. This will save time and unnecessary dissemination of the borrower’s personal information. The summary should include the licensee’s recommendation on how and why it is suitable for the potential investor, and a summary of risks, conflicts, etc. that will be provided in the full investor/lender disclosure document(s). 7. Providing an investment for consideration – full package In this step the licensee will be providing the investor with all documentation required to meet their regulatory requirements to ensure that the potential investor can make an informed decision to lend. These documents consist of several forms and supporting document, as discussed in Chapter 8.

Success Tip – Provide disclosure documents to all investors This includes investors who belong to a designated class of lenders and investors. This is a best practice to ensure that full disclosure was provided and that the investor can make a fully informed decision. 8. Obtaining/creating a commitment Depending on the sophistication of the investor, they may provide a commitment or may require the licensee to create the commitment. Refer to Chapter 8 for more details. 9. Instructing the lawyer Using a lawyer familiar with private lending will help ensure that this step is properly completed. The lawyer acting on behalf of the investor can provide a list of steps that need to be completed to ensure the investor is adequately protected, such as verifying identity, ensuring that the borrower has adequate home insurance, etc. 10. The lawyer/client meeting In cases where the mortgage is $75,000 or higher48, 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

48

Law Society of Ontario, https://lso.ca/about-lso/legislation-rules/rules-of-professional-conduct/chapter3#ch3_sec4-12-borrower-lender

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11. Funding the transaction The lawyer will request that funds be transferred to their trust account from the investor, and will advance funds as per the commitment letter, such as paying off debts, remitting the brokerage fee, etc. They will take their fee, any other fees, such as title insurance, and remit the balance to the borrower or to whomever the borrower has directed to receive the proceeds. If a mortgage administrator is involved, loan documents will be forwarded to that entity for loan servicing (if they haven’t already been – the administrator may be involved in closing the transaction if contracted earlier in the process). 12. Ongoing communication Ongoing communication with the investor should include (if the mortgage is being administered by a licensee, see section 12.2.3): a) 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.) b) 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. c) 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.

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5.4 Key Terms and Definitions Commitment letter Before signing the full mortgage contract with the lawyer, the applicant will receive a commitment letter (also known as a commitment, conditional commitment, or approval letter). It 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. Conditions In relation to a commitment letter, these are the lender’s requirements that must be fulfilled before the lender will agree to fund the proposed mortgage. Disclosure documents Documents providing information to the recipient that assists them in making an informed decision. They include borrower and investor disclosure documents, as prescribed by appropriate regulatory authorities. Instructions to lawyer A document sent to the lawyer closing the mortgage transaction on behalf of the lender that contains specific instructions on what the lender expects the lawyer to do before advancing funds. Many lawyers have their instructions available online for public viewing.

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5.5 Review Questions Answers to the Review Questions are found at www.REMIC.ca

5.5.1 Short Answer Questions 1. In your opinion, what is one of the most important steps in the transaction process for the borrower? 2. What are the main steps in the initial consultation? 3. What is the importance of analyzing the borrower’s credit? 4. In addition to an appraisal, what tool can a licensee use to determine an approximate value of an 5. A borrower has just signed the borrower disclosure, which includes a broker fee. If the borrower backs out of this transaction before closing, does this document mean they are liable for those fees? 6. What does the term “meeting conditions” mean? 7. What are several important step in the initial consultation with a potential private investor? 8. What document is helpful to determine the suitability of a potential investor? 9. Under what circumstances must both the borrower and private investor have their own lawyer? 10. What types of ongoing communication should a licensee have with the investor about their investment?

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Chapter 6: Underwriting the Application 6.1

Learning Outcomes

Successful understanding of the concepts presented in this chapter will enable the learner to: 1. Understand the importance of taking notes 2. Verify the identity of the applicant 3. Complete an application form 4. Determine the applicant’s needs 5. Analyze the strength of the applicant’s personal covenant

6.2

Introduction

Underwriting an application for a mortgage is one of the most important steps in the mortgage brokering process. The licensee must get to the know the borrower, their needs and circumstances, and in a later step be able to assess which lender is best able to meet those needs and circumstances. Therefore, only by knowing, in detail, the borrower’s needs and circumstances can a licensee have the requisite information to make an informed recommendation about which lender to use. This chapter discusses best practices when meeting the potential borrower, including creating a file worksheet, verifying their identity, taking the application, determining their needs and underwriting the application with regard to their personal covenant. In chapter 7 we will discuss how to value the security being offered in the application.

6.3

File Creation

The initial consultation with your potential client is a major step in the mortgage application process. There are several considerations for this step, including: • The location of the meeting • Preparing the client for the meeting, including advising him or her of the time involved, who should attend and what documents to have available • Preparing for the meeting, including creating a blank file • Verifying the client’s identity • Completing the application • Determining the borrower’s needs. A well-prepared mortgage agent will find that the meeting will usually proceed smoothly resulting in the potential client transforming into a client. Many mortgage agents often miss the difference between a potential client and a client since it can occur rather subtly. However, there is a major difference. A potential client is one who is not yet dedicated to completing the transaction with this particular mortgage agent. A client is an individual(s) who has made the decision to complete the transaction with the mortgage agent, usually based on several factors, including trusting the mortgage agent, developing a personal relationship with the agent, believing in the agent’s technical proficiency, and having the agent satisfy the four borrower expectations found in chapter 7, which are that the mortgage agent will: 1. Act in the borrower’s best interests 2. Completely analyze the borrower’s needs 3. Make appropriate recommendations based on the borrower’s needs

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4. Facilitate the transaction to its successful completion.

6.4

File Worksheet

A file worksheet is a key component used for recording notes and more importantly providing a quick summary of the file. This can be particularly important if more than one person is working on the file if the mortgage agent is working on several files simultaneously or if the file hasn’t been worked on in some time. The following figure is a sample of a mortgage worksheet, which may be reproduced in whole or in part. In the top section is a brief summary of the mortgage request, including the amount, the rank, the purpose of the mortgage, the GDS and TDS, the credit score, and the date the credit report was obtained. This date should be changed whenever a new credit report is pulled on the client. If there are several credit reports in the file, the most current will be readily known. The next section is used as a prompt for the mortgage agent to check whether the client is working with or has been working with another mortgage agent or lender. This is important to identify quickly as it will help determine how serious the client is in dealing with the mortgage agent.

Success Tip – Is your client working with someone else? To determine if your client is working with another broker or lender, use the following question, preferably before you meet with the client: “Mr. Client, I need to ask you if you are currently working with any other broker or lender on your financing needs as most lenders will look negatively on and not deal with an applicant who is dealing with several sources at the same time. Are you dealing with any other sources Mr. Client?” This question is short and to the point and will help the client understand that they should only be dealing with you and no one else! The Client Objectives section of the Worksheet ensures that the mortgage agent has clearly identified what is important to the client. This is particularly useful if, for example, a client wishes to consolidate debts to lower their payment and the mortgage agent is able to accomplish this, but at a higher rate than the client was expecting. By understanding the client’s main objective, the mortgage agent can focus on the fact that this main objective was achieved. The Application Challenges section is designed to clearly articulate any challenges the client’s application may have, quickly and clearly so that the mortgage agent can easily identify these issues on reviewing the file or in discussions with the lender or the client. The next two sections are available for notes on the first contact, the initial consultation or any other notes that may be relevant. It is a best practice to summarize the first contact and initial consultation as soon as they have occurred to allow the capture of all relevant information. This can be important for future conversations.

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Figure 6 – Residential Mortgage Worksheet

Residential Mortgage Worksheet Client Names (First, Last) Mortgage Amount: $ Purpose of Mortgage: Loan to Value: Credit Score:

Rank: 1

st

2

nd

3

rd

Source: Other:

GDS: TDS: Credit Bureau Date:

Is the client working with any other broker or lender? Yes / No If yes, whom? Client Objectives (e.g., improve cash flow; lower the interest rate)

Application Challenges: GDS/TDS, Credit, Employment, Property, etc. (explain)

List of Potential lenders (explain why for each) 1 2 3

First Contact Notes

Date of Inquiry

Initial Consultation Notes

Date of Meeting:

Additional Notes (include date of note entry)

Note: This form may be reproduced without permission, in whole or in part

6.5

Identity Verification

In today’s mortgage market, identity theft and impersonation are a significant concern, making it necessary for the mortgage agent to verify the identity of their client at the initial consultation. Regardless of whether the appointment is conducted at the client’s residence or elsewhere, the mortgage agent must obtain photo identification for all clients. Where possible a photocopy should be taken of this identification, or a picture taken, either using a camera or smartphone, but if not possible then an attestation to the fact that the identification was viewed must be made and put in the file.

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Pause for clarification – Identity verification Identity verification ensures that there is a real person in a transaction and proves that they are who they claim to be. This helps prevent anyone from obtaining a mortgage, for example, on someone else’s behalf without authorization, as well as creating false identities, or committing fraud.

6.5.1 Acceptable forms of identification 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, as listed below. Lenders typically require the applicant, co-signer, guarantor, etc. to be present with their identification and this identification to be:49 1. be authentic, valid, and current 2. be issued by a federal, provincial, or territorial government (or by a foreign government if it is equivalent to a Canadian document) 3. indicate the person's name 4. include a photo of the person 5. include a unique identifying number, and 6. match the name and appearance of the person being identified. It is the solicitor’s responsibility to meet these requirements; however, the lender is also responsible for meeting these requirements as described in the Act. The following lists are examples of documents that may be acceptable by lenders; however, requirements may be different from lender to lender. Primary Identification • Certificate of Canadian Citizenship (containing your photograph) or Certification of Naturalization (containing your photograph) • Federally issued Firearms Licence • Certificate of Indian Status issued by the Government of Canada • Nexus/CANPASS card • Valid driver's licence issued in Canada • Current Canadian Passport • Federally issued Permanent Resident Card • Provincial Government issued Photo ID Card. Secondary Identification • 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

49

FINTRAC, Methods to verify the identity of persons and entities, https://fintrac-canafe.canada.ca/guidancedirectives/client-clientele/Guide11/11-eng#s2

Chapter 6: Underwriting the Application • • • • • • •

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.

6.5.2 Samples of acceptable identification

Citizenship Card

Firearms License

Indian Status card

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140

NEXXUS Card

Passport

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Permanent Resident card

Photo ID card

As per FSRA, “Each Mortgage Brokerage has a duty to take reasonable steps to verify the identities of its clients/borrowers and other parties in mortgage transactions. If a Mortgage Brokerage is not able to identify the identity of another party, it must advise the client/borrower. The mortgage brokerage’s principal broker is responsible for developing policies and procedures on verifying clients’/borrowers’ identities, and in ensuring that the mortgage brokerage is able to show that it took reasonable steps to verify clients’/borrowers’ identities. To determine what types of identification are acceptable for verifying a client’s/borrower’s identity, consult with your principal broker”.50 A helpful resource on checking ID is the Responsible Service Tip Sheet by the Alcohol and Gaming Commission of Ontario at https://www.agco.ca/sites/default/files/3056_2.pdf

50

FSRA, https://www.FSRA.gov.on.ca/en/mortgage/Pages/reqforsup.aspx#q9

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For FINTRAC guidance on its requirements for all reporting entities (REs), refer to the “Methods to verify the identity of persons and entities” at https://fintrac-canafe.canada.ca/guidance-directives/clientclientele/Guide11/11-eng#s2. Note that this is for reference only as mortgage brokerages are not reporting entities under FINTRAC51.

Pause for clarification – FINTRAC The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is Canada's financial intelligence unit. Its mandate is to facilitate the detection, prevention and deterrence of money laundering and the financing of terrorist activities, while ensuring the protection of personal information under its control.

Driver’s License Disclaimer: The following information has been checked for errors, inaccuracies and omissions, however it should not be relied upon as definitive. This information and these tips should be used in conjunction with other identification verification methods.

Ontario Driver’s License sample

Ontario Driver’s License The most frequently used photo ID is the driver’s license. The difference between an enhanced driver’s License (EDL) and regular Ontario driver’s license is that the enhanced license has the symbol CAN on the top right which denotes Canadian citizenship (the Ontario license has ON), the title is Enhanced Driver’s License while the Ontario license is “Driver’s License” and there is an additional Machine Readable Zone (MRZ) on the back of the card. As of 2022 EDLs are no longer being issued, however they are still valid until their expiry date. Tips for reading an Ontario Driver’s License • Has 1D and 2D barcodes on the back • Number: The number is 15 characters long. For example: W3512-41007-11120. “W” is the first letter of the last name, followed by “3512” which is a code for the remainder of the last name.

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FINTRAC, Who must report, https://fintrac-canafe.canada.ca/reporting-declaration/info/re-ed-eng

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• • • • • • • •

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“4100” is a code for the first name and middle initial. “7-1” or 71, is the year of birth. “1120” is the month and day of birth. 50 is added to the birth month number for women. Term: It is typically 5 years, expiring on the person’s birthday. There is a maximum 6 years from the date of the original application to phase a person into the 5 year renewal cycle. 90 day to a maximum of 6 month extensions are available. The license will show if a driver has in excess of 4 years’ of driving experience with 4 vertical black dots to the left of the second image The photo should match the person in front of you Card should be laminated Magnetic strip on the back of the card should not be laminated Ensure there are no pictures under the picture of the person in the DL – feel for extra thickness around the photo and the edge of the lamination Look for consistency between numbers and letters, including font type, bold/italics and size Ensure the date of birth is the same in the lower left, in the protected secondary photo and signature at the bottom right corner and the DL Number

Ontario Driver’s License – person under age 19 (aged 16 to 18) In addition to the information contained in the previous section, a DL for a person aged 16 to 18 years will have an additional banner on the bottom center of the card, “AGE 19/ANS (date)”.

Attestations The following are three forms of typical attestations, based on differing circumstances, that a mortgage agent should include in their file submission: 1. “I have / have not met the client before however I have viewed photo identification in the form of (driver’s license, passport, etc.,) and attest to the fact that it appears to be an accurate representation of the client”, or 2. “The client is a previous client of mine and I have viewed photo identification in the form of (driver’s license, passport, etc.) and attest to the fact that it appears to be an accurate representation of the client”, or In the case of taking an application by email or through the Internet where personal contact is not possible, 3. “I have/have not met the client before and have not personally met the client in this transaction and therefore cannot verify the client’s identify through photo identification”. While obtaining photo identification is not legally mandated as of the date of publication of this book, it is a best practice to confirm identity, and should be followed without fail to protect the integrity of the transaction and the security of all parties involved. In so doing the mortgage agent affirms their professionalism to both of their clients: the lender and the borrower. If the borrower protests, inform him or her that it is for their protection. If the client continues to protest this should be taken as a red flag for fraud and the mortgage agent should refuse to continue with the transaction until the client agrees to produce valid identification.

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The Application Form

The mortgage application form is the document that is used to obtain all of the information required to qualify the borrower. There is no standard application; many brokerages have their own form. However, all forms request the same information from the borrower and therefore require the same explanation. Example Bob Clark has decided that he wants to buy a new home. He’s found a house currently under construction and would like to see if he qualifies for a mortgage. You have met with Bob and have taken his application, as illustrated in the following figure. Figure 7 – Application Form, example

REMIC Mortgages Inc.

Source: Flyer

123 Anywhere Street, Suite 100 Toronto, ON, M1S 5B2 Tel: (416) 555-1212

Mortgage Application Form APPLICANT(S) Name of Applicant in Full Bob Clark Contact Information Tel: 416-555-9999 Cel: 647-555-1212 Name of Co-Applicant in Full N/A Contact Information Present Address 1155 Renter Boulevard, Toronto, ON, M1S 1N1 Previous Address

DOB (MM/DD/YYYY) 03/22/1970

SIN 555-121-121

Email: [email protected] DOB (MM/DD/YYYY) SIN

No of Years 4 No. of Years

DETAILS OF MORTGAGE REQUEST Purpose of Mortgage Purchase a new home currently under construction Amount Rate Term Frequency Amortization Date Required Rank (1st, 2nd) th $500,000 4.5% 5 Years Monthly 25 years February 20 , 2023 1st PARTICULARS OF SECURITY Lot # Plan # Municipality Occupancy Rental Income 99 W1234 Toronto Applicants $N/A Civic Address (if different from Present Address) Lot size 1234 borrower Lane, Toronto, ON, M1S 1M1 50ft. X 150 ft. PROPERTY TYPE AND CONSTRUCTION Down Payment Present Value Annual Taxes Date Acquired Purchase Price $500,000 $0.00 $500,000 $3,200.00 (MM/DD/YYYY) N/A Detached Duplex Triplex Semi Condo (Mtc Fee: $__________) Townhouse Other Age of Building: New Construction: Brick Storeys: 2 # of Bedrooms: 3 Zoning: Residential

Chapter 6: Underwriting the Application Garage: Single - Attached

145

Heating: Forced Air/Gas

Property Extras (Describe) Finished Basement, central air, central vac, outdoor Jacuzzi DETAILS OF EXISTING FINANCING Rate Rank Current Balance Payment Lender (%)

Renewal Date

To Remain?

1st Mtg

N/A

N/A

N/A

N/A

N/A

N/A

2nd Mtg

N/A

N/A

N/A

N/A

N/A

N/A

EMPLOYMENT INFORMATION APPLICANT’S EMPLOYER’S NAME: FastDelivery Inc. Address: 600 Freight Lane, Toronto, ON CO-APPLICANT’S EMPLOYER’S NAME:

Check if self-employed Position: Truck Driver

TEL. 416-888-9999 FAX: 416-999-0000 No. of years: 4

Check if self-employed Position:

TEL: FAX: No. of years:

Address: OTHER INCOME (SPECIFY SOURCE AND AMOUNT) N/A ASSETS AND LIABILITIES ASSET TYPE AMOUNT LIABILITY TYPE AMOUNT PAYMENT TO REMAIN? BANK ACCOUNT $ 50,000.00 2007 Ford F150 $ 25,000.00 MasterCard $ 0.00 $ 0.00 Y Personal Effects $ 40,000.00 $ $ RRSP $ 25,000.00 $ $ TOTAL $140,000.00 $ 0.00 $ 0.00 NET WORTH ASSETS ($140,000.00) – LIABILITIES ($0.00) = NET WORTH $140,000.00 NOTES Mr. Clark would like a 25-year amortization with a loan to value of 100%. CONSENT IN CONNECTION WITH MY APPLICATION FOR CREDIT, I/WE HEREBY AGREE TO YOU PROCURING ANY CREDIT OR OTHER REPORTS TO DETERMINE MY ABILITY TO OBTAIN MORTGAGE FINANCING AND SHARE THIS INFORMATION WITH OTHER CREDIT GRANTORS OR CONSUMER REPORTING AGENCIES. I/WE FURTHER AGREE THAT YOU MAY ASSIGN THIS APPLICATION TO THE LENDER OF YOUR CHOICE AND MAY DESIGNATE THE CLOSING LAWYER. I/WE ACKNOWLEDGE THAT YOU MAY RECEIVE A FINDERS FEE FROM THE LENDER. I/WE FURTHER STATE THAT THE INFORMATION CONTAINED IN THIS APPLICATION IS ACCURATE TO THE BEST OF MY/OUR KNOWLEDGE. I/WE AUTHORIZE YOU TO USE THE INFORMATION CONTAINED WITHIN THIS APPLICATION AND AS OBTAINED THROUGH THIS TRANSACTION TO PROVIDE ME/US WITH INFORMATION THAT YOU BELIEVE MAY BE OF INTEREST TO US IN THE FUTURE.

DATE: Jan 20, 2023

APPLICANT’S SIGNATURE:

Bob Clark

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6.6.1 Section-by-section application analysis Applicant(s) Information Figure 8 – Borrower Application: Information Section

REMIC Mortgages Inc.

Source: Flyer

123 Anywhere Street, Suite 100 Toronto, ON, M1S 5B2 Tel: (416) 555-1212

Mortgage Application Form APPLICANT(S) Name of Applicant in Full Bob Clark Contact Information Tel: 416-555-9999 Name of Co-Applicant in Full N/A Contact Information

DOB (MM/DD/YYYY) 03/22/1970 Cel: 647-555-1212

Present Address 1155 Renter Boulevard, Toronto, ON, M1S 1N1 Previous Address

SIN 555-121-121

Email: [email protected] DOB (MM/DD/YYYY) SIN

No of Years 4 No. of Years

• Source Source refers to how the applicant heard about the mortgage agent. Examples might be a referral, in which case it is necessary to ask who referred the applicant, or an advertisement, in which case it is necessary to ask which advertisement the applicant viewed. • Borrower’s Name The applicant must provide their full legal name, as it will be used to complete the credit inquiry as well as on all other loan documentation, including the legal documentation to register the mortgage. It is a best practice to view photo identification at this stage to ensure that the applicant is the person that they are applying as. • Applicant Date of Birth and Co-App Date of Birth Document the applicant’s and co-applicant’s date of birth. Use the application’s format. If no format is shown, use a format that is easily identifiable. For example, using 3/7/1980 may be misinterpreted. Instead use the format March 7, 1980. • Social Insurance Number (SIN) It is helpful to have the social insurance number when completing a credit inquiry; however, it is not mandatory. If the applicant does not wish to provide their social insurance number, then the mortgage agent cannot demand it. An applicant may legally refuse to provide this information.

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• Contact Information Record the applicant’s contact information, including their email address. The email address will be especially useful in the future when corresponding and marketing to the applicant. Ensure that the main contact number is clearly indicated. • Applicant’s Present Address Document the applicant’s current address with postal code and indicate the length of time that the applicant has resided at this location. The postal code is of particular importance for the default insurer as the insurer has automated valuation systems that use this information to assist in determining if the value noted on the application is consistent in the area in which the property is located. • Previous Address If the applicant has resided at their present address for three years or less, the mortgage agent should document the applicant’s previous address. The total of all addresses should be at least three years. • Co-Applicants, Co-signors and Guarantors Co-applicant spouses are included in the same application. All other applicants’ names should be listed in the application; however, each applicant should have a separate application completed on him or her to ensure that all information is captured and that information relevant to each applicant is separate. For example, if there is a brother who is a co-applicant his name should be included in the application to enable anyone viewing the application to know that they must refer to the brother’s application as well. Co-signors and guarantors will complete a separate application.

Pause for clarification – Co-applicants, co-signers, and guarantors 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.

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Details of Mortgage Request Figure 9 – Borrower Application: Details of Mortgage Request

DETAILS OF MORTGAGE REQUEST Purpose of Mortgage Purchase a new home currently under construction Amount Rate Term Frequency Amortization $500,000 4.5% 5 Years Monthly 25 years

Date Required February 20th, 2023

Rank (1st, 2nd) 1st

• Purpose of the mortgage This section must be as detailed as possible, indicating the purpose or reason for the requested financing. For example, if it is an equity take-out, the use of the proceeds must be indicated. • Amount Requested Enter the total amount that the applicant is requesting based on the preliminary consultation. This amount may change once it has been determined if a mortgage default insurance premium is being added and/or any other fees need to be added to the mortgage amount. • Term of Mortgage Document the term that the applicant and mortgage agent have decided is appropriate for the applicant. This requires the mortgage agent to discuss the applicant’s future plans. • Amortization The amortization period is the total number of years it will take to fully repay the mortgage, as decided upon after a discussion between the mortgage agent and the applicant. A shorter amortization period will result in a higher payment while a longer amortization period will result in a lower payment. • Date Required If the application is for the purchase of a home, document the closing date of the purchase. If it is for a switch or renewal, document the date that the term expires. If it is for a refinance, document the date on which the applicant requires the funds or the date that the mortgage agent expects the transaction to fund. Do not use “ASAP” or “As Soon As Possible” without discussing the time frame with the applicant. It is important to manage the applicant’s expectations regarding the time that the process will take from application to funding. • Type of Mortgage Document the type of mortgage that the applicant is requesting, such as a VRM or variable rate mortgage, FRM or fixed rate mortgage, LOC, or line of credit, etc. • Accelerated Payment Document if the applicant would like to accelerate the mortgage payment to repay the mortgage in a shorter period of time, which will save the applicant money over time. The applicant must understand that an accelerated mortgage payment is higher than a regular mortgage payment. • Rank Document whether the requested mortgage is a 1st, 2nd, 3rd or another rank.

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Particulars of Security Figure 10 – Borrower Application: Particulars of Security

PARTICULARS OF SECURITY Lot # Plan # Municipality 99 W1234 Toronto Civic Address (if different from Present Address) 1234 borrower Lane, Toronto, ON, M1S 1M1

Occupancy Applicants

Rental Income $N/A Lot size 50ft. X 150 ft.

• Lot and Plan Number (Part of the Legal Description) A lot refers to a tract or parcel of land and each parcel is assigned a lot number, as well as a plan number which refers to the plan. This information is typically found on the Purchase and Sale Agreement, Transfer/Deed and Charge/Mortgage and sometimes on the MLS. • Municipality (part of the Legal Description) Document where the property is located. This information is typically found on the Purchase and Sale Agreement, Transfer/Deed and Charge/Mortgage and sometimes on the MLS. • Occupancy If the property will be occupied by the owner alone, check the applicant box. If the property will be rented to a tenant, check the tenant box. If the property will be occupied by the owner and a tenant, check both boxes. • Rental Income If the property is being rented or leased to tenants, how much is the rent? • Civic Address of The Property to Be Mortgaged This is the standard address of a property, including the street name and number, city, province, and postal code. Complete this section if the property to be mortgaged is different from the applicant’s current address. For example, if the applicant is currently renting and this application is to purchase another property, the current address will be their rental address while the property to be mortgaged address will be the new home address. • Lot Size Include the lot specifications here. Property Type and Construction Figure 11 – Property Type and Construction

PROPERTY TYPE AND CONSTRUCTION Down Payment Present Date Acquired Purchase Price $500,000 $0.00 Value (MM/DD/YYYY) $500,000 N/A Detached Duplex Triplex Semi Condo (Mtc Fee: $_______) Age of Building: New Construction: Brick Storeys: 2 # of Bedrooms: 3 Zoning: Residential Garage: Single - Attached Heating: Forced Air/Gas Property Extras (Describe)

Annual Taxes $3,200.00 Townhouse

Other

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Finished Basement, central air, central vac, outdoor Jacuzzi

• Date Property Acquired or Purchased Document the date that the property was originally purchased. • Purchase Price (If less than 2 Years Ago) Document the price paid for the property. • Down Payment Document the amount of down payment that the applicant originally provided. • Present Value Document the value that the applicant feels their house is currently worth. • Annual Taxes Document the amount of taxes that are paid on the property annually. • If Condo, Condo Mtc. Fee If the property to be mortgaged is a condominium unit, it will have a maintenance fee. This amount must be recorded in this section, including what items are including in the fee. • Check the boxes that apply regarding the type and description of the building(s) • Property Extras List any property extras of interest such as a finished basement, indoor or outdoor pool, etc. Details of Existing Financing This section is designed to document any and all existing financing currently on the property to be mortgaged. If the application is for a purchase, this section may be left blank. Figure 12 – Borrower Application: Details of Existing Financing

DETAILS OF EXISTING FINANCING Rate Rank Current Balance (%)

Payment

Lender

Renewal Date

To Remain?

1st Mtg

N/A

N/A

N/A

N/A

N/A

N/A

2nd Mtg

N/A

N/A

N/A

N/A

N/A

N/A

• Mortgage(s) Document the current outstanding balance of the mortgage, the current rate of interest, the amount of the payment, including the frequency of the payment (e.g., monthly, weekly), which institution or private lender the first mortgage is currently held by, the contact information for that lender and if the mortgage is to be paid off from the proceeds of the new mortgage being applied for, or if it will remain in place. Complete this process for all mortgages on the property, including any Lines of Credit.

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Employment Information Figure 13 – Borrower Application: Employment Information

EMPLOYMENT INFORMATION APPLICANT’S EMPLOYER’S NAME: FastDelivery Inc. Address: 600 Freight Lane, Toronto, ON CO-APPLICANT’S EMPLOYER’S NAME:

Check if self-employed Position: Truck Driver

TEL. 416-888-9999 FAX: 416-999-0000 No. of years: 4

Check if self-employed Position:

TEL: FAX: No. of years:

Address: OTHER INCOME (SPECIFY SOURCE AND AMOUNT) N/A • Employer’s Name, Address/Tel# Document the applicant’s current employment information. • Self-Employed? If the applicant is self employed • Position Document the applicant’s position or title with their current employer.

• # of Years Document the number of years that the applicant has been employed by their current employer. • Salary Document the salary or income of the applicant before taxes are deducted. • Per Year or Month Document whether the salary or income from the previous section is an annual or monthly amount. • Other Income Document any other income that the applicant has ensuring that full details are provided. • Previous Employer’s Information Complete the fields attached to this section in the same fashion as for the current employer. • Co-Applicant’s Employer Complete the fields attached to this section in the same fashion as for the applicant. Financial Information Figure 14 – Borrower Application: Assets and Liabilities

ASSETS AND LIABILITIES ASSET TYPE AMOUNT BANK ACCOUNT $ 50,000.00 2007 Ford F150 $ 25,000.00 Personal Effects $ 40,000.00 RRSP $ 25,000.00 $

LIABILITY TYPE

AMOUNT

PAYMENT

TO REMAIN?

MasterCard

$ 0.00 $ $ $

$ 0.00 $ $ $

Y

152 OTHER:

TOTAL NET WORTH

Chapter 6: Underwriting the Application $ $ $ $ $ $ $ $ $ $ $ $ $140,000.00 $ 0.00 $ 0.00 ASSETS ($140,000.00) – LIABILITIES ($0.00) = NET WORTH $140,000.00

• Assets Document all assets owned by the applicant. Include an addendum if there is not enough space to list all of them. All personal effects can be totaled and listed as Personal Effects. If this mortgage is a refinance, switch or equity take-out, be sure to include the value of the property in this section as well. Add up all assets and document this as Total Assets. • Liabilities Document all liabilities for which the applicant is responsible. Include an addendum if there is not enough space to list all of them. If this mortgage is a refinance, switch or equity take-out, be sure to include the outstanding balance of the mortgage in this section as well. Add up all liabilities and document this as Total Liabilities. • Payments Document the payment totals for each listed liability as a monthly amount. Document the total monthly obligations of the applicant in the space provided. • To Remain? Document which, if any, of the liabilities will be paid off from the proceeds of the proposed mortgage. • Net Worth List the Assets and Liabilities. Subtract the liabilities from the assets and list this amount as the Net Worth. Notes Detail anything of importance that may impact the applicant’s ability to obtain an approval and/or that may add to or clarify information in the application. Authorization This section, once signed by the applicant(s), allows the mortgage agent to perform the required investigations and provide required information to potential lenders.

6.6.2 Tips for a complete application Complete all fields Ensure that all fields of the application are completed, whether or not information is obtained for that field. For example, if the field does not apply to the application, it is best to enter “N/A” or “not applicable” in the field. If the field is left blank someone viewing the application in the future will be unable to determine if the information was missed being entered or if it was not applicable to this applicant.

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Compare Information with documentation When taking an application verify that what the applicant is saying matches the information found in the supporting documentation. Some applicants may inadvertently provide inaccurate information such as employment income or outstanding balances on their mortgage or other debts. Signature When completing a paper application, ensure that the applicant(s) sign(s) the application. By having the client’s signature on the application, the mortgage agent has consent to complete the necessary investigations to obtain a commitment from a lender. Although verbal authorization is acceptable, some applicants may dispute providing authorization at some point in the future. For example, if an applicant is declined and six months later attempts to obtain financing, they may not recall the reason for the inquiry on their credit report. The applicant may then contact Equifax or Transunion (whichever credit reporting agency the inquiry was found through) and request that the inquiry be removed. Equifax or Transunion will contact the mortgage agent or mortgage brokerage to request the authorization for that credit inquiry. If there is no signed application, the applicant may have a case that the mortgage agent initiated the credit inquiry without the applicant’s authority, which is a breach of the contract between the credit reporting agency and the brokerage. In this case the mortgage agent would be required to provide additional details about how the authorization was given and when it was given to be able to prove that it was a legitimate credit inquiry. Notes The mortgage application form itself does not provide space for explanatory notes. The mortgage agent should use a separate piece of paper or a Notes page, such as the Worksheet, to make notes relevant to the application. For example, if the applicant indicates that they have had past credit issues, the mortgage agent must document that information and include it in the loan submission to the lender. A best practice is to include explanatory notes for any potential questions that a lender may have about the application.

6.7

Determining the Applicant’s Needs

Determining the applicant’s needs is a very important step in completing the application. To determine the applicant’s needs, specific questions must be asked. The following form, which may be reproduced without permission, assists in determining those needs. Once the form has been completed the licensee can search for specific products that meet the applicant’s needs. After underwriting the application, the licensee should have a strong understanding of the options available to the applicant based on the information the applicant has provided in the needs assessment. Those options can then be discussed with the applicant, and a decision made on the best option to be presented for consideration. The following figure is a sample of an Applicant Needs Assessment form. Figure 15 – Applicant Needs Assessment

Applicant Needs Assessment 1. What are your goals with regards to this mortgage? Purchase:

Price Range from $__________ to $__________

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Chapter 6: Underwriting the Application Down payment Available: $__________________

Obtain a lower rate:

Current Rate: _________%

Obtain a lower payment:

Current Payment: $__________

Consolidate Debt:

Amount: $___________

Renovations:

Amount: $__________ Type of Renovations: __________________________________

Other. Explain:_______________________________________________________________ 2. What is the amount of the mortgage payment that you believe would fit your current lifestyle? From $__________ to $__________ 3. What interest rate range do you expect to obtain? From __________% to __________% 4. Do you plan on moving in the next 5 years? If yes, when? 5. Do you plan on changing employers in the next 5 years? Is yes, when? 6. Do you believe your current home will meet your family’s needs over the next five years? Yes

No

7. Do you typically receive bonus or commission income in addition to your regular income? If yes, how often? Annually

Monthly

8. Do you intend to make a lump sum payment or payments on your mortgage to pay it off faster? Yes

No

9. Which is most important to you? Debt Repayment: Paying your mortgage off as soon as possible? Cash Flow: Having a low or the lowest payment possible? 10. Which is most important to you: Mortgage Payment: Having a mortgage payment that fits your cash flow? Interest Rate: Having a low or the lowest interest rate possible? 11. When it comes to your mortgage payment, would you say that you: Would like a mortgage payment that stays the same month to month?

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Would like a mortgage payment that might increase or decrease if there is the potential to save money? 12. If given the option to have a variable interest rate that is lower than a fixed interest rate, would you: Be willing to watch interest rates on a monthly basis to ensure that your mortgage has the best rate possible? OR Prefer to have a fixed interest rate that did not fluctuate and did not require regular attention? 13. Would you prefer a payment frequency that is: Monthly

Bi-Weekly

Weekly

Additional Notes:

6.8

Underwriting the Application

6.8.1 5 Cs of credit This analysis is generally designed to assess the following criteria, often referred to as the 5 Cs of Credit. It’s of interest to note that these are not formal underwriting criteria, but what are typically regarded as the general areas that a lender will consider when making a decision to lend. In other countries they are referred to slightly differently (in the United States, for example, character is replaced by conditions), but in Canada we typically refer to the following five, although some prefer to focus only on the first three: 1. Credit 2. Collateral/Security 3. Capacity/Affordability 4. Character 5. Capital

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We begin our underwriting analysis with the components that comprise the borrower’s personal covenant, and in chapter 7 we will explore the collateral/security.

6.8.2 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. In the United States most mortgages do not have this personal covenant and are referred to as non-recourse. This means that the lender can only use the collateral to recover a loss. This is a significant difference in how our two countries manage mortgage debt. To determine the strength of an applicant’s personal covenant there are typically four components that are analyzed.

Credit A detailed review of the credit report is required to determine the borrower’s likelihood of future repayment. Unlike an institutional lender, most private mortgage lenders are less concerned with the credit profile of the borrower because the property is considered to be the main piece of collateral.

Capacity/Affordability In all cases affordability is one of the tests for suitability of a mortgage for a borrower. While institutional lenders typically rely on GDS and TDS standards to determine affordability, most private mortgage lenders do not use them. Again, the focus is on the collateral. However, it is if great important to review affordability because this is necessary to determine the level of risk this proposed mortgage presents to the private mortgage lender. In its October 24, 2008, webinar, FSRA clearly stated that a major concern when determining suitability revolves around the borrower’s ability to make the mortgage payments based on his or her financial circumstances, not just the financial components used for approving a mortgage. It should be noted that neither FSRA, in this webinar, nor the MBLAA and its Regulations state or imply that brokers/agents must be financial planners or undertake to offer the advice of a financial planner. However, they must take all financial components of the borrowers’ circumstances into account when making a recommendation. For example, a family with five children will be judged using the same GDS and TDS guidelines as a family with one child. While both families might have identical incomes, their expenses will be vastly different, affecting the affordability of the mortgage. As long as a lender approved the application, the borrower has typically decided whether he or she could afford the mortgage payment. The brokerage now has the responsibility to take this fact into consideration when determining suitability. While there is nothing to prevent the borrower from accepting a mortgage that the broker/agent considers unaffordable, the brokerage has a responsibility to ensure that the borrower knows that the mortgage may be unaffordable. Simply put, the brokerage has a responsibility to provide the borrower with the information necessary for the borrower to make an informed decision and based on information provided by FSRA this includes having the borrowers complete a budget.

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Pause for clarification – Budget 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/financialconsumer-agency/services/make-budget.html Consider the previous example. If a brokerage arranges a mortgage for the family with five children and six months later the borrowers find that they cannot afford the mortgage and file a complaint with FSRA, FSRA will investigate the complaint and the brokerage must prove that the mortgage was suitable given the needs and circumstances of the borrowers. If the broker/agent did not take into account the borrowers’ expenses related to their five children as a factor to be included in determining affordability, FSRA’s auditor (again the “reasonable person” at this stage) may find that the mortgage was unsuitable for the borrowers. One way for the brokerage to prove that it did take this information into account is to have the borrowers complete a budget, and if the mortgage appears to be unaffordable have the borrowers acknowledge this fact and sign a waiver indemnifying the brokerage for any potential future default. While this may seem extreme it would certainly protect the brokerage from possible allegations that it did not properly advise the borrowers. Because a private mortgage investor has the ability to be much more flexible than an institutional lender, he or she may be able to mitigate the affordability risk by prepaying the mortgage payments. This is but one option available to the private mortgage lender to mitigate the borrower’s risk of default. The following case study illustrates the effects of a budget regarding the suitability of a potential mortgage.

Case Study - Budget Bob, a Mortgage Broker, has completed taking an application on Jose and Maria, a married couple with two children, aged 3 and 5. They have recently signed a conditional Agreement of Purchase and Sale for $320,000 to buy their first home and have $32,000 to use as a down payment. In taking their application Bob has learned that they have a combined family income of $95,923 (this amount is based on the average before tax income of a two earner family for Ontario of $80,900 as provided by Statistics Canada52) and have the following obligations: $320 per month for his car loan and $300 per month for her car loan, a Visa card with a $4,000 balance and monthly payments of $120, a MasterCard with a balance of $2,500 and monthly payments of $75, a LOC with a balance of $8,000 and monthly payments of $240; property taxes on this new home of $2,729 per year (based on the 2007 City of Toronto property tax rate of 0.8528434%); heating costs for approval are standardized at $75 per month. Since Jose and Maria have a 10% down payment, they require default insurance. Bob has calculated the premium to be 2%, or $5,760. Based on an interest rate of 4.5%, compounded semi-annually with a 25-

52

Statistics Canada, CANSIM Table 202-0603

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year amortization, Bob has calculated that the monthly mortgage payment will be $1,625.89. Given this information Bob has determined that his clients’ GDS is 24.12% while their TDS is 37.32% and coupled with the additional information that Bob has gathered, he has submitted and obtained a commitment from a lender for these clients. The question that must now be asked is, “Is this mortgage affordable for his clients?” To answer this question Bob has asked Jose and Maria to complete a budget, illustrated in the following figure – Sample Budget. This budget uses information obtained from Statistics Canada on average household spending in Ontario53, as well as assumptions made based on anecdotal evidence for the purposes of illustration. Figure 16 – Sample Borrower Budget

Summary:

Monthly

Total Income Necessary Expenses Discretionary Income Discretionary Spending Amount remaining to save or invest

Yearly

$7,993.58 $6,893.89 $1,099.69 $2,231.67

$95,923.00 $82,726.72 $13,196.28 $26,780.00

($1,131.98)

($13,583.72)

Breakdown of income and expenses Monthly Budget

Annual Amount

$3,996.79 $3,996.79 $7,993.58

$47,961.50 $47,961.50 $95,923.00

$1,251.92 $250.00 $1,625.89 $227.42 $120.00 $180.00 $150.00 $610.00 $265.00 $50.00 $41.67

$15,023.04 $3,000.00 $19,510.68 $2,729.00 $1,440.00 $2,160.00 $1,800.00 $7,320.00 $3,180.00 $600.00 $500.00

Income:

Your Primary Income Your Spouse's Income Total Income Necessary Expenses:

Payroll Taxes Other income deductions Rent or Mortgage Property Taxes Gas & Electric Auto Insurance Auto repairs Food & Groceries (not dining out) Clothing (necessary) Telephone (not mobile phone) Home or Renters Insurance

53

Statistics Canada, CANSIM Table 203-0001

Chapter 6: Underwriting the Application Life Insurance Costs Laundry Childcare (daycare & babysitters) Child & Baby Expenses Total Necessary Expenses

159

$60.00 $20.00 $400.00 $1,642.00 $6,893.89

$720.00 $240.00 $4,800.00 $19,704.00 $82,726.72

$195.00 $620.00 $200.00 $50.00 $100.00

$2,340.00 $7,440.00 $2,400.00 $600.00 $1,200.00 $0.00 $0.00 $0.00 $2,400.00 $3,600.00 $2,000.00 $300.00 $0.00 $600.00

Discretionary Expenses:

Credit Card Bills Auto Loan (s) Gasoline Cable or Satellite TV Mobile Phone (s) Home Improvement Home Security Garden Supplies Entertainment (not dining out) Dining Out Travel & Vacation Pets, Pet Care and Pet Food Clothing (above what's needed) Internet Access Computer Costs Gym membership Beer & Alcohol Cigarettes & Tobacco Total Discretionary Expenses

$200.00 $300.00 $166.67 $25.00 $50.00 $0.00 $35.00 $40.00 $250.00 $2,231.67

$420.00 $480.00 $3,000.00 $26,780.00

Based on this budget, Jose and Maria have a net deficit of $1,131.98 per month. Of course, spending patterns and expenses differ with each client, however in this example two potential futures emerge. If the clients continue with their spending habits as illustrated, they may go further into debt. In an economy where housing prices increase, they may be able to refinance their home in the future and reduce their expenses. However, in an economy where housing prices remain flat or decrease, this is no longer an option and these clients may continue to run up their debt to unmanageable levels, resulting in some or all of the accompanying problems faced by families in financial difficulty. By completing a budget, they have the knowledge to make an informed decision on this mortgage, and if they decide to purchase this home they may decide to curb some of their spending habits and prevent either of those potential futures.

Capital/Equity The amount of capital or equity in the proposed mortgage will be determined by the amount of the loan and the value of the property, referred to as the loan to value. Generally speaking, most private mortgage lenders assume that the lower the ltv the lower the risk of the loan. This is but one factor to be considered in the overall risk assessment of the proposed loan.

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While a lower ltv means that there is an increase in the capital or equity in the property, that capital or equity will only be realized on the sale of the property. Until sold, the ltv is hypothetical and will not necessarily reduce the risk of default by the borrower. I use the phrase “not necessarily” because some will argue that a borrower with significant equity will work harder to prevent a default. However, a desire not to default is not measurable in a specific transaction. While it can be expressed statistically on a large pool of mortgages, that information will only be of benefit to a lender that has a large pool of mortgages.

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. I use the unspecific word “probably” because I’m not aware of any statistics on this matter. In addition, it is important to know if the potential private mortgage investor being considered for this loan has any preference about the character of the applicant. Some experienced private mortgage lenders may not wish to lend to an applicant who has a specific issue, such as outstanding income or property taxes, alimony arrears, specific types of judgments, etc. based on previous experiences, while inexperienced or new private mortgage lenders may not have considered these issues. Therefore, these issues should be discussed when first completing the know your client form and must be discussed as part of the disclosure process with all potential private mortgage lenders.

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6.9

161

Key Terms and Definitions

5 Cs of Credit An underwriting process using credit, collateral, capacity, character and capital as criteria for making a decision to lend. Applicant Needs Assessment In the mortgage industry, this is an assessment of the applicant’s needs for financing used to determine the appropriate solution(s) to be recommended by a licensee. Attest To affirm to be true or genuine. Budget 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-consumeragency/services/make-budget.html Citizenship card A Canadian citizenship certificate is a document that proves your Canadian citizenship. Co-applicant (also referred to as a co-borrower) 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. Co-signer 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 cosigner 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. Driver’s License In Ontario, there are 12 different classes of licenses. Each one qualifies the licensee to drive a different type of vehicle. The class of licence issued must match the type of vehicle the licensee is driving. The licensee needs a Class G licence to drive a car, van, or small truck. FAST ID card The Free and Secure Trade (FAST) program is a commercial clearance program designed to ensure safety and security while expediting legitimate trade across the Canada-United States (U.S.) border. Firearms License A Canadian firearms licence shows that the licence holder can possess and use firearms. Guarantor 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

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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. Identity Verification Identity verification ensures that there is a real person in a transaction and proves that they are who they claim to be. This helps prevent anyone from obtaining a mortgage, for example, on someone else’s behalf without authorization, as well as creating false identities, or committing fraud. Indian Status card An Indian status card (formally known as a Certificate of Indian Status) is an identity document that confirms you are registered as a Status Indian under the Indian Act. NEXXUS Card The NEXXUS program is designed to speed up border crossings into Canada and the United States for low-risk, pre-approved travellers. Passport A passport is an official travel document issued by the government. A passport establishes the holder’s identity and citizenship and entitles the holder to travel under its protection to and from foreign countries. Permanent Resident card (PR card) A permanent resident is someone who has been given permanent resident status by immigrating to Canada but is not a Canadian citizen. Permanent residents are citizens of other countries. The PR card can be used to show that a person has permanent resident status in Canada. Photo ID card The Ontario Photo Card is a wallet sized card that provides government-issued identification to those Ontarians who do not have a driver’s licence, making it easier for them to do things such as open a bank account and any other activities that require official identification.

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6.10 Review Questions Answers to the Review Questions are found at www.REMIC.ca

6.10.1 Short Answer Questions 1. How many pieces of identification are required by lenders to comply with Canada’s Proceeds of Crime (Money Laundering) and terrorist Financing Act (PCMLTFA)? 2. List three forms of identification that meet the definition of “primary identification”. 3. List three forms of identification that meet the definition of “secondary identification”. 4. For identification to be considered authentic for the purposes of identity verification, what criteria must be met? 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? 6. What is the difference between a co-applicant, co-signor, and guarantor? 7. What is a personal covenant? 8. What are the 5 Cs of Credit? 9. Of the 5 Cs of credit, explain character. 10. Explain what a budget is and why it may be important for a potential borrower.

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Chapter 7: Security 7.1

Learning Outcomes

Successful understanding of the concepts presented in this chapter will enable the learner to: 1. Explain the purpose of the real estate appraisal 2. Discuss the different types of properties that may be used as security 3. Understand the factors that affect value now and, in the future 4. Discuss the role of the real estate appraiser 5. Analyze the different the different types of appraisals 6. Understand how market value is calculated 7. Identify the registration and discharge documents used in a mortgage transaction 8. Discuss other types of loan security

7.2

Introduction

The primary and most common security for a mortgage is real property, however the investor may also place a lien against personal property as additional security for the loan. In this chapter we will focus on determining the value of the real property, and briefly discuss how an investor may also use personal property as security.

Pause for clarification – What is an appraisal? As defined in USPAP (Uniform Standards of Professional Appraisal Practice), an appraisal is the act or process of developing an opinion of value. The valuation process is a systematic procedure the appraiser follows to answer a client’s question about real property value. https://www.appraisalinstitute.org/assets/1/7/understand_appraisal_1109_(1).pdf

7.3

Purposes 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. The process in determining value for each reason differs, since the value will differ based on the appraisal’s purpose. This chapter will focus on the appraisal process only as it relates to mortgage financing.

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7.4

165

Property Types

The property types that you will typically be involved with arranging financing for include the following (for examples, please visit www.remic.ca/property-types): 1. Detached: a standalone house, typically with a front and back yard and basement; types include bungalows (one level), two- and three-story houses and split-level houses 2. Semi-detached: two houses joined by one wall 3. Row-townhouses: a row of houses with two shared walls, except for the end units that have only one shared wall; they can be freehold, or condominiums run by a condominium corporation; maintenance fees cover shared amenities, like yards, parking, etc. 4. Condominium unit: a unit in a building that is run by a condominium corporation; maintenance fees cover shared amenities, like hallways, elevators, security, underground parking, etc. 5. Duplexes, triplexes, fourplexes: two-, three- and four-unit buildings, respectively. The owner may live in one unit and rent the others or rent all of the units. 6. Co-operatives (co-ops): a corporate entity, often a non-profit, owns the land and the building, including each of the individual units in the building. A purchaser buys shares in the corporation and does not have individual ownership of their unit. Because there is no real property ownership a purchaser needs to get a loan to purchase the shares instead of a mortgage to purchase the property.

7.5

Factors affecting Value

There are many factors that affect housing prices at any given time. In simplest terms, it is all about supply and demand. When demand is high and supply is low, prices go up. When supply is high and demand is low, prices go down. However, there are several different forces that drive supply and demand.

Factors affecting demand 1. 2. 3. 4. 5.

Demographics Interest rates Government policies The economy Affordability

Factors affecting supply 1. Building permits 2. Listings 3. Land use regulations

7.5.1 Factors affecting demand 1. Demographics Demographics, the statistical characteristics of human populations (such as age or income), used especially to identify markets, affects demand. a) Population: includes the size, age and trend of the population. 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. b) Location: a key factor in driving demand, location to key amenities such as shopping malls, entertainment and most importantly, places of work affect the price of properties. For example, housing prices in major metropolitan areas tend to be higher than in their suburbs due to the proximity to these factors. As public transportation and highways tie developments to major

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Chapter 7: Security metropolitan areas, and ease of access becomes greater, those areas tend to see increases in property values as well.

2. Interest rates Access to inexpensive money tends to drive demand, as purchasers can afford to borrow more money, therefore offer more when making an offer to purchase, driving up prices. As rates increase and borrowing becomes more costly and less affordable, prices tend to increase more slowly, level off, or decrease, depending on the severity of the impact. 3. Government policies As we saw previously, governments create policies that can increase access to funds, or tighten that access, depending on the policy. Policies such as stress tests can have a dampening effect on prices, while an increase in allowable amortization periods can provide more access to money, therefore give buyers more purchasing power, thereby increasing property values. 4. The economy Economic health can affect consumer sentiment or outlook on the future, as well as impacting the cost of living. Generally speaking, when the economy is strong, so is the housing market, and vice versa. 5. Affordability A household typically has a finite amount of income, and that income is used to purchase necessities of life, as well as pay for non-essentials, such as entertainment, travel, etc. The amount left over after necessities is referred to as disposable income. As necessities consume more income, disposable income decreases. As housing prices increase, affordability is affected, potentially causing a decrease in demand as fewer buyers can afford those prices while maintaining their lifestyle. Affordability is also affected by the rise in incomes, number of income earners per household, etc.

7.5.2 Factors affecting supply 1. Building permits A building permit is a document issued by the body responsible for enforcing Ontario's Building Code in your area. A building permit is necessary when you wish to construct, renovate, demolish or change the use of a building. 54 For new home construction, building permits directly impact the supply of new homes when there is a demand for housing. This is how additional supply of housing enters a market. It’s important to note that demand is important in this regard, as builders will not apply for permits in a market that doesn’t need more supply. So, building permits affect supply when they are either slow to be issued, potentially driving up the price of existing stock, or quick to be approved when there is high demand, easing the prices of new homes by increasing the supply.

54

Government of Ontario, https://www.ontario.ca/document/citizens-guide-land-use-planning/building-permits

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2. Listings Generally speaking, the higher the number of listings, the more supply, and therefore pricing may decrease or level off, depending on when the increase in listings occurs. A decrease in listings creates scarcity, which may result in bidding wars and multiple offers on properties for sale, driving prices higher. 3. Land use plans Community or land use planning can be defined as managing land and resources55. 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.

7.6

The Real Estate Appraiser

A lender requires an appraisal to be completed on a property to determine the market value of that property. In addition, an appraisal can provide several other pieces of vital information required to make an informed decision to lend. Since lenders will lend based on an LTV, the lender requires an exact estimation of value to determine the exact mortgage amount available.

7.6.1 The Appraiser The appraiser is the accredited individual who completes the appraisal report. Although a license to conduct appraisals is not required in Ontario, no lender would use a non-accredited appraiser since the decision to lend will typically involve several hundred thousand dollars. The lender must be confident that the appraisal company employs appraisers who are educated in performing appraisals, have proven track records or are supervised by senior appraisers, follow ethical standards as set forth by the industry and are generally known to produce quality reports. Several lenders will have their own list of approved appraisal companies. These are companies that they have dealt with in the past or who have been through an approval process by the lender that typically involves assessing the appraisal company to ensure that it meets the lender’s standards.

7.6.2 Accreditations Appraisal Institute of Canada (AIC) - www.aicanada.ca In Ontario, there are several accreditations provided by professional associations, each granting its own designation. The most widely known and accepted designations are offered by the Appraisal Institute of Canada (AIC), a professional appraisal association. The AIC provides two designations, the AACI and the CRA. Both designations have educational requirements such as a university degree as well as experience and continuing education requirements.

55

Government of Ontario, https://www.ontario.ca/document/ontario-municipal-councillors-guide/10-land-useplanning

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Pause for clarification – Accreditation Accreditation means to give official authorization to or approval of; to provide with credentials • Accredited Appraiser Canadian Institute, Professional Appraiser (AACI, P.App) This designation is the highest designation provided by the AIC. This designation certifies that the holder is qualified to offer valuation and consulting services on all types of properties, including residential, industrial, commercial, and rural. The designee holds an undergraduate degree from a recognized university and has completed the AACI program of studies and has fulfilled all of the professional requirements of the AIC. • Canadian Residential Appraiser (CRA) A common, if not the most common appraiser used by private lenders. The designee holds an undergraduate degree from a recognized university and has completed the AACI program of studies and has fulfilled all of the professional requirements of the AIC. The 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. The Canadian National Association of Real Estate Appraisers (CNAREA) - www.cnarea.ca • DAR (Designated Appraiser Residential) This designation identifies a member who is qualified to perform appraisal and consultation assignments of residential type properties consisting of no more than four housing units and noncomplex commercial properties having a residential component. Requirements for this designation include three thousand hours of full-time appraisal experience and the successful completion of the required Canadian National Association of Real Estate Appraisers educational program or its equivalent. • DAC (Designated Appraiser Commercial) This designation identifies a member who is qualified to perform appraisal and consultation assignments of all types of real property including commercial, industrial, and investment. To attain this designation an individual must have the DAR designation, five years of full-time appraisal experience and complete the required Canadian National Association of Real Estate Appraisers educational program or its equivalent. • DAC (with a Specialty in Agricultural) This designation identifies a member who is qualified to perform appraisal and consultation assignments of all types of real property. The requirements for this specialty include the DAC designation and the completion of the required Canadian National Association of Real Estate Appraisers educational program or its equivalent. • CMAR (Certified Mortgage Appraisal Reviewer) This designation identifies a member who is qualified to perform professional reviews of any residential appraisal report which might be used for mortgage purposes. To attain this designation an individual must have a minimum of 2 years’ experience in the mortgage financing profession and complete the required Canadian National Association of Real Estate Appraisers education program. • CAR (Certified Appraisal Reviewer) This designation identifies a member who is qualified to perform professional reviews of any appraisal report. To attain this designation an individual must have the DAR designation and

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complete the required Canadian National Association of Real Estate Appraisers educational program; or, be a registered mortgage broker, hold the AMP designation of Mortgage Professionals Canada, have 5 years mortgage financing experience, and complete the required CNAREA education program. The Real Estate Institute of Canada - www.reic.ca • Fellow of the Real Estate Institute (FRI) According to REIC, this is Canada's most senior designation for the real estate sales professional, exemplifying the most educated and experienced real estate salesperson.

7.7

Calculating the Market Value of a Real Property

7.7.1 The value of a property It is important to distinguish between market value and price. Price is what may be paid for a property; however, there are many reasons that the price paid for a property may be higher or lower than what someone else may pay for it. For example, if a purchaser is buying a house from a family member the price paid may be lower than the price would be if sold to a non-family member. In addition, a real estate investor may pay more for a property that they believe will provide a high return on their investment.

7.7.2 Market value A lender is interested in knowing what the market will pay for a property under normal circumstances. Therefore, the real estate appraiser must appraise the market value. The market value can be defined as: The amount, in Canadian funds, for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing, where the buyer and seller have each acted knowledgeably, prudently, and without pressure.

7.7.3 Approaches to determining value There are three approaches that appraisers use to calculate the value of a property: • Income approach • Cost approach • Direct comparison approach

The income approach 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.

The cost approach The cost approach of appraisal calculates the value of a property based on the cost of replacing it. This method takes the cost of rebuilding the structure, less depreciation, plus the cost of the land, resulting in a final value. The value produced by this method is ideal for determining the cost of replacing a

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building for insurance purposes but holds little value in determining the market value of a residential property for mortgage financing. 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.

The direct comparison approach This approach in determining the market value of a property is the most appropriate for mortgage financing, including both private and institutional, and is therefore relied heavily upon in the appraisal report. This method calculates the value of a property using the principle of substitution as its basis. The concept is that if an appraiser knows the price that was paid for a comparable property (an appraisal typically uses three comparables) that is similar to the subject property and has recently sold in the same neighbourhood as the subject property, the subject property should have a market value equal to that comparable property. This method would be simple if not for the fact that properties are heterogeneous or unique. While two houses may be located next to each other on the same street each will have differences, from its size to such characteristics as a finished basement, the number of bedrooms and washrooms, the type of heating, appliances, and so on. Because of these differences, the appraiser must make adjustments to the sales price of the comparable property. The following example illustrates this point. Example A 2-bedroom, 2-storey home was recently sold for $400,000. An appraiser is being asked to appraise the house next to it for mortgage financing. The homeowner feels that, as the property next door sold for $400,000, his home should be worth more since he has a larger back yard. The appraiser, while using the recently sold house next door as a comparable property, must also use two other properties that are similar to the subject and have recently sold. In this case the appraiser will determine the characteristics of the comparable property and compare them to the subject property and adjust the value of the comparable property to make it more like the subject property. Once this has been completed the adjusted value of the comparable property should be approximately equal to the market value of the subject property. The following chart provides an example as to how this calculation is completed. In the left column are the characteristics of the properties. In the column to the right is the description of the subject property. The far column describes the comparable property and lists the adjustments to the value necessary to make the comparable property more like the subject property. • If the comparable characteristic is superior to the subject, subtract from the comparable property’s value • If the comparable characteristic is inferior to the subject, add to the comparable property’s value Note that to compare characteristics the appraiser must obtain information from several sources on both the subject and comparable properties. In calculating the adjusted value, the appraiser will add the total adjustments and either add or subtract them from the sale price of the comparable property. In this example the adjustments equal -$15,000 ($5,000 – $20,000 + $5,000 – $5,000) and that amount is therefore subtracted from the sale price of $400,000, resulting in an adjusted value of $385,000.

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Therefore, based on this simplified example, the market value of the subject property should be $385,000. In an actual appraisal, the appraiser will use three comparable properties and will either average the adjusted values or rely more heavily on the most similar property to determine the market value. Figure 17 – Example of How to Use Comparable Properties

Item Address

Subject Property 123 Market Street

Comparable Property 1 125 Market Street

# of days on the market

N/A

45

Date of Sale

N/A

December 18, 2020

Sale Price

N/A

$400,000

Site Size in square feet

40 x 100

35 x 100

Size Livable Floor Area (L.F.A)

1,200

Similar

Age/Condition

35 +/- years

15 +/- years

Building Type and Style

2 story detached

Similar

The subject is inferior

Rooms/Bedrooms/Baths

7/3/2

7/2/2

+$5,000

Basement

Finished

Finished

Garage/Parking

2 car garage/private drive

Similar

Other Total Adjustments Adjusted Value

Central Vac

The subject is superior

+ $5,000

- $20,000

-$5,000 -$15,000 $385,000

Pause for clarification – The number of comparables Three comparables are used in an appraisal. In the example above only one is shown, but in an actual appraisal three similar properties that have recently sold will be compared to the subject property to provide the appraiser with enough data to make an informed estimate of value.

7.7.4 Automated Valuation Models (AVMs) Automated Valuation Models are computer programs that typically use public record data on residential properties to calculate the market value of a property. These models have been gaining in popularity throughout the world and are currently most often used by lenders and mortgage default insurers, as well as municipalities for determining values for property tax purposes. AVMs can also be of significant benefit to real estate appraisers in supporting values calculated in an appraisal.

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The Municipal Property Assessment Corporation’s (MPAC) AVM and Teranet’s “reavs” AVM are examples of AVMs currently used in Ontario. While AVMs can provide quick, basic property values, they are not appraisals and do not involve a physical inspection of the property. Therefore, they do not replace the real estate appraiser or a real estate appraisal. They are prone to producing values that may or may not actually be representative of the subject property since an AVM cannot make adjustments for the physical condition of the 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. If a lender relies on an AVM for determining the value for mortgage financing, the lender may open itself up for abuse. There are several examples of property fraud where the property was mortgaged based on an AVM value when the property was in significant disrepair and therefore not worth what the AVM indicated. This can allow a fraudster to obtain financing on a property in excess of its value, then default on the mortgage while keeping the funds. More information on property and mortgage fraud can be found in the chapter, Mortgage Fraud.

7.7.5 Risk assessment tools 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 decide to approve or decline mortgage default insurance. Part of these programs determines whether the property value, as disclosed in the mortgage application, is appropriate for the area in which the property resides. Since there is no physical inspection of the property, the same risks inherent in AVMs are applicable to these risk assessment tools.

7.8

The Real Property Appraisal Report

An appraisal is a report produced by a designated appraiser that determines the market value of an interest in land using accepted valuation techniques based on the purpose of the appraisal for a specific client. A typical report can cost $350 for a drive by up to $800 for a full appraisal, depending on the location. The client in most cases of mortgage financing is the lender, although the applicant typically pays for the appraisal report. It is an important distinction to make that the client is paying for the service of the appraisal being completed, while the lender owns the report. The report will base the market value on the lender’s specific criteria and include details about the property that the lender may require. In certain circumstances, lenders will require a different emphasis on property characteristics, resulting in the appraisal report being acceptable to one lender while unacceptable to another. If a lender declines the applicant’s request for financing and the applicant wishes to provide the appraisal to another lender, the appraiser must re-address the appraisal to the new lender and the new lender must be willing to accept it. This does not always occur since different lenders have different requirements. There are three basic types of appraisal reports, ranging in scope from basic to highly detailed. 1. Desktop appraisal 2. Drive-by appraisal

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3. Full appraisal

7.8.1 Desktop appraisal The desktop appraisal is typically used when an AVM is unavailable, and the property is located in a marketable area. This report relies on MLS reports, including data on recent sales and data on recent listings. It does not provide detailed information on the property nor is there a physical inspection of the property, which raises the same issues as are applicable to AVMs.

7.8.2 Drive-by appraisal This type of appraisal is based on the same information as the desktop appraisal; however, it also includes an inspection of the exterior of the property. While AVMs and desktop appraisals cannot provide details on whether the property is actually in a physical condition normal for the neighbourhood, a drive-by appraisal can at least indicate that the property’s exterior is typical or conforms to the neighbourhood. In addition, the drive-by appraisal allows the appraiser to view and provide details on the neighbourhood, which is a key element in assessing the marketability of the subject property. The report typically contains exterior photographs of the property as well as the immediate neighbourhood. If the drive-by appraisal results in the determination that the property appears to be in a condition that is not typical of the neighbourhood, a full appraisal should be completed.

7.8.3 Full appraisal A full appraisal expands on the information and techniques used in the desktop appraisal and the driveby 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. The following figures are examples of a drive-by appraisal report and a full appraisal report. They illustrate the differences in the levels of detail contained in the two types of reports.

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7.8.4 Drive-by Appraisal - Example Figure 18 – Drive-By Appraisal Report, blank

Drive-by Appraisal Report RESIDENTIAL APPRAISAL REPORT "DRIVE-BY" FORM Client Ref. #: ................................................. File #: ............................................................. Client: .......................................................... Address of Property: ................................................... Appraiser: ....................................................... Attention: .................................................... ..................................................................................... Company: ....................................................... Address: ....................................................... ..................................................................................... Address: ......................................................... .............................................................. ..................................................................................... ........................................................................ E-mail: .......................................................... ..................................................................................... E-mail: ............................................................ Phone: .......................................................... Province: ..................................................................... Phone: ............................................................ Fax: .......................................... Postal Code: .............................................................................. Fax: Applicant Name: .................................................................................................................................................................................................................. PROPERTY & NEIGHBOURHOOD DATA LEGAL DESCRIPTION: .......................................................................................................................................................................................................... MUNICIPALITY AND DISTRICT: ........................................................................................................................................................................................... ASSESSMENT: LAND $ ............................. IMP $ ................... TOTAL $ .......................... year ................. TAXES $ ................ year .............. PURPOSE OF APPRAISAL: To estimate market value  or Other  (describe) .................................................................................................... INTENDED USE OF APPRAISAL: ........................................................................................................................................................................................... PROPERTY RIGHTS APPRAISED: Fee Simple  Leasehold  Condominium  Cooperative  Other  ....................... Is the subject a fractional interest, physical segment or partial holding? No  Yes  (If yes, see comments elsewhere in this report) OCCUPIED BY: Owner  Tenant  Vacant  HIGHEST AND BEST USE: As improved  or Other  (describe) ................................................................................ Note: If Highest and Best Use is not the current use, or not the use reflected in the report, see comments attached. NATURE OF DISTRICT TREND OF DISTRICT CONFORMITY OF SUBJECT SUPPLY  Residential  Improving AGE: SIZE:  Good  Fair  Poor  Rural  Stable  Newer  Larger  Commercial/Industrial  Transition  Smaller DEMAND  Older  Mixed  Deteriorating  Similar  Good  Fair  Poor  Similar  Other  Other AVERAGE PROPERTY AGE: DISTANCE TO: PRICE RANGE OF PROPERTIES: DISTRICT Elem.School ............... Jr. Secondary ............... IN GENERAL DISTRICT ................ to Years High School ............... Downtown ................... $ ................. to $ IMMEDIATE AREA Public Trans. .............. Shopping Fac. .............. IN IMMEDIATE AREA ................ to Years Other ................................................................. $ ................. to $ SUMMARY: Includes market appeal, apparent adverse influences in area, if any (e.g. railroad tracks, unkempt properties, major traffic arteries, hydro facilities, anticipated public or private improvements, commercial/industrial sites, landfill sites) SUBJECT PROPERTY DESCRIPTION ZONING DES'N: ............ SIZE DIMS: ................................ SITE AREA: .......................... TOPOGRAPHY: PRESENT USE: ........................................................................................... DOES IT CONFORM? Yes  No  (see comments) ESTIMATED AGE OF SUBJECT: ...................... Years PARKING: Garage  Carport  Driveway  CURB APPEAL: Good  Average  Fair  Poor  EXTERIOR CONDITION: Good  Average  Fair  Poor  EXTERIOR FINISH: ROOFING MATERIAL:  Brick Veneer  Solid Brick  Insulbrick  Asphalt Shingle  Wood Shingle  Tar & Gravel  Stone Veneer  Solid Stone  Stucco  Slate  Metal  Other  Wood Siding  Aluminum Siding  Vinyl Siding .....................................................................................................................  Other .............................................................................................................................................................................................................................. COMMENTS: .......................................................................................................................................................................................................................

COMPARABLE SALES DATA ITEM Address MLS Listing #/(if applicable) Days on Market Date of Sale Sale Price Site Size Size L.F.A. Age / Condition Building Type & Style Rooms / Bedrooms / Baths Basement Garage / Parking Other

SUBJECT PROPERTY

NO. 1

NO. 2

NO. 3

/

/

/

/

/

/

/

/

/

/

/

Reconciliation/Conclusions: ................................................................................................................................................................................................

/

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History and analysis of known current Agreements for Sale, prior sales, options, listings or marketing of the Subject in the past year.

Indicated Exposure Time of Similar Properties in the Area: Under 3 months  3-6 months  Over 6 months  This appraisal report represents the following value (if not current, see comments): Current  Retrospective  Prospective   Update of report completed RESIDENTIAL APPRAISAL REPORT "DRIVE-BY" FORM (Cont'd) PURPOSE, SCOPE, DISCLOSURES & DEFINITIONS PURPOSE OF THE APPRAISAL: This "drive-by" report has been prepared for mortgage lending purposes for the exclusive use of the client and other intended users named. The client is aware that, as the degree of departure from a full appraisal report increases, there is a corresponding decrease in the level of reliability of the report, resulting in a higher level of risk for the user of the report. Due to the limitations of this reporting method, it is not intended for use by third parties and liability to any unintended users is expressly denied. The appraiser assumes diligence by all intended users. SCOPE OF THE REPORT 1. The client has specifically requested a "drive-by" appraisal to be reported in an abbreviated report format. The Appraiser has been requested to perform an exterior inspection and not to disturb the occupants by entering the building. Both the client and the appraiser understands that NEITHER A PYSICAL INSPECTION OF THE INTERIOR OF THE SUBJECT PROPERTY NOR A STREET INSPECTION OF THE COMPARIABLES HAS BEEN PERFORMED (unless stated herein). 2. It is acknowledged by both parties that a subsequent physical inspection of the subject property and/or a more in-depth investigation could result in a different conclusion. 3. The physical characteristics used to develop this appraisal are based on documents, records, etc. described below and on other information provided by sources identified below. The subject property was observed only from the public street and it is assumed that the information provided by the sources is accurate. Comments (on the efforts taken to obtain, and the source of, interior and exterior inspection information): .............................................................................................................................................................................................................. 4. Sales and listing information of physically similar properties has been obtained from sources assumed to be reliable and accurate, and/or on information from the appraiser's files. 5. Neither the Income nor the Cost Approaches to value are appropriate methods of valuation for this assignment, considering the limited scope of the type of appraisal requested by the client, and therefore have not been completed. 6. Sales information on physically similar properties has been gathered and analyzed on the assumption that both the interior and exterior condition of the subject property are in average or typical condition for its age and that there are no physical or functional conditions associated with the property that would adversely affect the conclusions contained in this report, unless otherwise stipulated. It is assumed that the subject property is in 100% complete condition unless otherwise stated and the value range contained herein is based on this assumption. OTHER DISCLOSURES, COMMENTS, ETC.: .......................................................................................................................................................................................................................... DEFINITION OF MARKET VALUE The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably and assuming the price is not affected by undue stimulus. Note: If other than market value is being appraised, see comments attached. DEFINITION OF HIGHEST AND BEST USE The reasonably probable and legal use of the property, that is physically possible, appropriately supported, and financially feasible, and that results in the highest value. ASSUMPTIONS AND LIMITING CONDITIONS The certification that appears in the "drive-by" residential appraisal report is subject to the following conditions: 1. The appraiser will not be responsible for matters of a legal nature that affect either the property being appraised or the title to it. No registry office search has been performed and the appraiser assumes the title is good and marketable and free and clear of all encumbrances, including leases, unless otherwise noted in this report. The property is appraised on the basis of it being under responsible ownership. 2. Because market conditions change rapidly and, on occasion, without warning, the estimated market value range expressed as of the date of this appraisal cannot be relied upon as of any other date except with further advice from the appraiser confirmed in writing. 3. The subject property is presumed to comply with government regulations including zoning, building codes and health regulations and, if it doesn't comply, its non-compliance may affect market value. 4. The appraiser will not give testimony or appear in court concerning this appraisal unless required to do so by due process of law. 5. The appraiser has noted in this report any readily apparent adverse conditions that were observed during the street inspection of the subject property or that they became aware of during the normal research involved in performing this type of appraisal. 6. Unless otherwise stated in this report, the appraiser has no knowledge of any hidden or unapparent conditions of the property or adverse environmental conditions that would make the property more or less valuable and has assumed that there are no such conditions and makes no guarantees or warranties, express or implied, regarding the condition of the property. The appraiser will not be responsible for any such conditions that do exist or for any engineering or testing that might be required to discover whether such conditions exist. Because the appraiser is not an expert in the field of environmental hazards, this drive-by appraisal report must not be considered as an environmental assessment of the property. The bearing capacity of the soil is assumed to be adequate. 7. The appraiser obtained information, estimates and opinions that were used in this report from sources considered to be reliable and accurate and believes them to be true and correct. The appraiser does not assume responsibility for the accuracy of items that were furnished by other parties. 8. The appraiser will not disclose the contents of this report except as provided for by the provisions of the Canadian Uniform Standards of Professional Appraisal Practice ("the Standards"). 9. The appraiser has agreed to enter into the assignment as requested by the client named in the report for the use specified by the client, which is stated in the report, which calls for things that are different from the work that would otherwise be required by the Standards. As this is a "drive-by" appraisal, only limited inspections have been undertaken (Extraordinary Limiting Condition). The client has agreed that the performance of this limited scope appraisal and the "drive-by" report format are appropriate for the intended use. 10. Written consent from the author and supervisory appraiser, if applicable, must be obtained before any part of the appraisal report can be used for any purpose by anyone except the client and other intended users identified in the report and, where the client is the mortgagee, its insurer and the borrower, if they paid the appraisal fee. Written consent and approval must also be obtained before any part of the appraisal can be altered or conveyed to other parties, including mortgages other than the client and the public through prospectus, offering memoranda, advertising, public relations, news, sales or other media. 11. Other (including any other Extraordinary Assumptions and Limiting Conditions involved in this appraisal): CERTIFICATION I certify that, to the best of my knowledge and belief: 1. The statements of fact contained in this report are true and correct. 2. The reported analyses, options and conclusions are limited only by the reported assumptions and limiting conditions and are my personal, impartial and unbiased professional analyses, opinions and conclusions. 3. I have no past, present or prospective interest in the property that is the subject of this report and I have no personal interest or bias with respect to the parties involved. 4. My compensation is not contingent upon developing or reporting a predetermined result, value range or direction in value range that favours the cause of the client, the amount of the estimated value range, the attainment of a stipulated result or the occurrence of a subsequent event. 5. My analyses, opinions and conclusions were developed, and this report has been prepared, in conformity with the Canadian Uniform Standards of Professional Appraisal Practice. Please note the Extraordinary Limiting Condition above, indicating the property was not inspected. 6. I have the knowledge and experience to complete this assignment competently. Except as herein disclosed, no other person has provided me with significant professional assistance in the completion of this appraisal assignment. 7. The Appraisal Institute of Canada has a mandatory Recertification Program for designated members. As at the date of this report, the requirements of this program have been fulfilled. SUPERVISORY APPRAISER'S CERTIFICATION: If a supervisory appraiser has signed this appraisal report, they certifies and agrees that "I directly supervised the appraiser who prepared this appraisal report and, having reviewed the report, agree with the statements and conclusions of the appraiser, agree to be bound by the appraiser's certification and am taking full responsibility for the appraisal and the appraisal report.” PROPERTY IDENTIFICATION:

Address: ...................................................................... City: ..................................... Province: .................................. Postal Code: ..................... Legal Description: ............................................................................................................................................................................................................... AS A RESULT OF MY APPRAISAL AND ANALYSIS OF ALL APPLICABLE DATA AND RELEVANT FACTORS THERETO, IT IS MY OPINION THAT THE SUBJECT PROPERTY IS ESTIMATED TO HAVE A VALUE RANGE OF From $ ...................................................................................................... To $ ..................................................................................................................................... As at

(Effective Date of the Appraisal)

APPRAISER:

SUPERVISORY APPRAISER: (if applicable)

176 Signature: ...................................................................................................... Name: ...................................................................................................... Designation: .................................................................................................. Date signed: .................................................................................................. License Info (where applicable): ................................................................... NOTE: For this appraisal to be valid, an original or EDI signature is required.

Chapter 7: Security Signature: ........................................................................................................................... Name: ................................................................................................................................. Designation: ....................................................................................................................... Date signed: ....................................................................................................................... License Info (where applicable): .........................................................................................

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7.8.5 Full Appraisal - Example Figure 19 – Full Appraisal Report, example

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7.9

189

Loan Security: Mortgage Registration and Discharge

As we know, a mortgage is a loan secured by real property. We saw the different types of loans in chapter 3, so it’s now time to discuss how those loans are secured. There are specific documents that are used to register a charge and discharge a charge from the parcel register. The following case study illustrates those documents. Case Study Jack Adams is purchasing a condominium for $625,000 and is putting 20% ($125,000) down. You have arranged a mortgage through SuperBank for $500,000. The Charge/Mortgage shows the new charge/mortgage that is being registered on Jack’s condominium and the Discharge of Charge registered by the SuperBank’s lawyer illustrates how the mortgage would be removed or discharged. If Jack was getting a collateral mortgage, the charge would be registered using the Collateral Charge/Mortgage.

7.9.1 The Charge/Mortgage The Charge/Mortgage is the instrument that is used to register the debt or loan against the borrower’s property. It forms the lender’s security for the debt. In the following example, a mortgage is being registered on behalf of SuperBank for the purchase of a condominium by Jack Adams. The purchase price is $625,000 and Jack is putting 20% down, resulting in a mortgage of $500,000. SuperBank is registering a charge/mortgage in the amount being advanced. Figure 20 – Charge/Mortgage

LRO # 80

Charge/Mortgage

Receipted as AT1101777 on 2022 10 10 yyyy mm dd The applicant(s) hereby applies to the Land Registrar.

at 16:15 Page 1 of 1

Properties Pin

11872-0259 LT

Interest/Estate

Fee Simple

Description

UNIT 6, LEVEL 16, METROPOLITAN TORONTO CONDOMINIUM CORPORATION NO. 811, PT LT 2, PL 1234, CITY OF TORONTO AS DESCRIBED IN SCHEDULE ‘A’ OF DECLARATION D167901 TORONTO, CITY OF TORONTO

Address

1211 SUITE 4727 SHEPPARD AVENUE EAST TORONTO

Chargor(s) The chargor(s) hereby charges the land to the chargee(s). The chargor(s) acknowledges the receipt of the charge and standard charge terms if any Name Address for Service

ADAMS, JACK

4727 Sheppard Avenue East, Suite 1211 Toronto, Ontario, M1S 5B2 I am at least 18 years of age. This document is not authorized under Power of Attorney by this party.

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Chargee(s) Name Address for Service

Capacity

Share

SUPERBANK 5588 King Street East Toronto, Ontario L1L 1L1

Provisions Principal

$500,000.00

Currency CDN

Calculation Period

semi-annually, not in advance

Balance Due Date

2023 10 31

Interest Rate

3.00%

Payments

$2,366.23

Interest Adjustment Date

2022 10 10

Payment Date

Last day of each and every month

First Payment Date

2022 11 30

Last Payment Date

2023 10 31

Standard Charge Terms

200033

Insurance Amount

full insurable value

Guarantor

N/A

Additional Provisions This Charge/Mortgage of Land secures the monies owing by the Chargor to the Chargee from time to time up to the Principal Amount as set out in the Standard Charge Terms. See schedules

Signed By Paul Jonathon Jacobs Tel Fax

55 Main Street Toronto M1M 1K1

acting for Chargor(s)

Signed 2022 10 10

4165559990 4165559991

I have the authority to sign and register the document on behalf of the Chargor(s)

Submitted By Signed 2022 10 10 PAUL JACOBS, BARRRISTOR & SOLICITOR Tel 4165559990 Fax 4165559991

55 Main Street Toronto M1M 1K1

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Fees/Taxes/Payment Statutory Registration Fee Total Paid

$65.30 $65.30

File Number Chargor Client File Number:

08-1823

7.9.2 Collateral Charge/Mortgage Unlike a standard mortgage that places a charge on title for the amount borrowed, a collateral mortgage is a charge that is typically registered for an amount higher than what is borrowed. The collateral mortgage allows for the “re-advancing” of principal as the borrower pays down their mortgage or if their property value increases. In addition, collateral mortgages allow lenders to lend more money to borrowers, based on their qualifications, after closing, without registering a new mortgage since the current mortgage is registered at a higher amount than was originally advanced. The following example is how a collateral charge may be registered against Jack’s property. Note that the principal amount is showing 125% of the value of the property, even though Jack only received $500,000 from SuperBank. The interest rate is set to a maximum that can be charged of 10%, as illustrated in Schedule 1. These maximums allow for future advances at different interest rates without the need for discharging this charge and registering a new one. For a full explanation see chapter 3. There will be no way for someone doing a title search to know the actual amount advanced or rate being charged based on this charge/mortgage. Figure 21 – Collateral Charge/Mortgage

LRO # 80

Charge/Mortgage

Receipted as AT1101888 on 2022 10 10 yyyy mm dd The applicant(s) hereby applies to the Land Registrar.

at 16:15 Page 1 of 1

Properties Pin

11872-0259 LT

Interest/Estate

Fee Simple

Description

UNIT 6, LEVEL 16, METROPOLITAN TORONTO CONDOMINIUM CORPORATION NO. 811, PT LT 2, PL 1234, CITY OF TORONTO AS DESCRIBED IN SCHEDULE ‘A’ OF DECLARATION D167901 TORONTO, CITY OF TORONTO

Address

1211 SUITE 04727 SHEPPARD AVENUE EAST TORONTO

Chargor(s) The chargor(s) hereby charges the land to the chargee(s). The chargor(s) acknowledges the receipt of the charge and standard charge terms, if any Name

ADAMS, JACK

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Address for Service

4727 Sheppard Avenue East, Suite 1211 Toronto, Ontario M1S 5B2

I am at least 18 years of age. This document is not authorized under Power of Attorney by this party.

Chargee(s) Name Address for Service

Capacity SUPERBANK 5588 King Street East Toronto, Ontario L1L 1L1

Provisions Principal

$781,250.00

Calculation Period

See Schedule 1

Interest Rate

See Schedule 1

Payment Date

ON DEMAND

Currency CDN

Interest Adjustment Date Payment Date

Last day of each and every month

First Payment Date Last Payment Date Standard Charge Terms

201027

Insurance Amount

Full insurable value

Guarantor

N/A

Additional Provisions See Schedule 1 Signed By Paul Jonathon Jacobs Tel Fax

55 Main Street Toronto M1M 1K1

acting for Chargor(s)

Signed 2022 10 10

4165559990 4165559991

I have the authority to sign and register the document on behalf of the Chargor(s)

Submitted By PAUL JACOBS, BARRRISTOR & SOLICITOR Tel 4165559990

55 Main Street Toronto M1M 1K1

Signed 2022 10 10

Share

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193

4165559991

Fees/Taxes/Payment Statutory Registration Fee $65.30 Total Paid $65.30

File Number Chargor Client File Number:

08-1823

Schedule 1 Form 5 -Land Registration Reform Act, 1984 Box (9)(b) You will pay interest on the Principal Amount at the following interest rate: • the Bank’s Prime Rate plus 10 % per annum. "Prime Rate" means the annual interest rate (calculated monthly not in advance) that the Bank sets and adjusts at its discretion as the reference interest rate the Bank will charge for customers in Canada for Canadian dollar loans. The current Prime Rate is available from the Bank’s branch offices. Box (9)(c) Interest at this interest rate is calculated and payable monthly, not in advance. You will continue to pay interest at this interest rate until all of the Debt has been paid. If any interest is overdue the Bank will calculate late interest every day at the above interest rate on the full amount that is overdue. You agree to pay this late interest. The Bank will add late interest to the Debt at the end of each month.

7.9.3 The Discharge of Charge/Mortgage This is the instrument used to discharge the debt registered against the borrower’s property. It releases the lender’s interest in the property. Figure 22 – Discharge of Charge

LRO # 80

Discharge of Charge

Receipted as AT1101589 on 2023 10 31 yyyy mm dd The applicant(s) hereby applies to the Land Registrar.

at 16:15 Page 1 of 1

Properties Pin 11872-0259 LT Interest/Estate Fee Simple Description UNIT 6, LEVEL 16, METROPOLITAN TORONTO CONDOMINIUM CORPORATION NO. 811, PT LT 2, PL 1234, CITY OF TORONTO AS DESCRIBED IN SCHEDULE ‘A’ OF DECLARATION D167901 TORONTO, CITY OF TORONTO Address 1211 SUITE 04727 SHEPPARD AVENUE EAST TORONTO

Document to be Discharged Registration No.

Date:

Type of Instrument:

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AT1101777

2022 10 05

Charge/Mortgage

Discharging Party(s) This discharge complies with the Planning Act. This discharge discharges the charge. Name SuperBank Address for Service 5588 King Street East, Toronto, Ontario, L1L 1L1 This document is not authorized under Power of Attorney by this party. This party giving this discharge is the original chargee and is the party entitled to file an effective discharge.

Signed By SuperBank Tel Fax

5588 King Street East, Toronto, Ontario, L1L 1L1

acting for Applicant(s)

Signed 2008 10 01

416 5551255 4165551266

Submitted By LEGALWORKS, INC. 987 Adams Street Toronto M1M 1K1 Tel Fax

Signed 2008 10 05

416 5556547 4165556548

Fees/Taxes/Payment Statutory Registration Fee Total Paid

$60.00 $60.00

7.9.4 Blanket mortgages What we’ve just viewed is how a single property is used as security. But there are situations when a lender will want to use more than one property. One example is when a borrower has enough equity in two properties to borrow a specific amount of money, but not in either individually. In this case the lender will use both properties as security for the loan. Visualize having two properties and placing a blanket over both. Everything under that blanket is security for the loan. Therefore, if the borrower defaults on the loan the lender can take possession of one or both properties and sell them. The following examples illustrate two common instances of when a blanket mortgage is used. Example 1 – Residential Sasha owns two properties, a townhouse in which he lives and a cottage that he received in his parents’ will. He would like to borrow $50,000 to pay off his credit card debt and invest in some crypto currency. His townhouse is worth $600,000 and he has a $490,000 mortgage on it, representing 81.7% loan to value. His cottage is valued at $300,000 and he owes $225,000, representing 75% loan to value. Sasha’s mortgage agent has told him that she has found a private lender who will lend him a total of 85% loan to value, but he wants to use both properties to do so. In doing the calculations she explains to Sasha that:

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•

85% of $600,000 is $510,000, less his current mortgage of $490,000 leaves him with $20,00 that he can borrow on his townhouse.

•

85% of $300,000 is $255,000, less his current mortgage of $225,000 leaves him with $30,00 that he can borrow on his cottage.

Instead of doing a separate mortgage and on each property with two loans, the private lender will place one mortgage on both properties and lend Sasha $50,000 in a single loan. If Sasha defaults, the lender can use one property, or both properties simultaneously to recover their loan. Example 2 – Condominium developer ABC Developments is building a high-rise condominium building that will have 180 units. To finance the construction, they are getting a mortgage from North York Bank, and this bank will be using the entire project, including the land and the building that is being constructed, as security for the mortgage. In other words, they are putting a blanket mortgage on the project. As the project nears completion and individual units are completed, the new unit owners will begin to finalize the purchase of their units, paying the developer the agreed upon purchase price and having the unit ownership transferred from ABC Developments to their names. If they are financing their purchase their lender will register a mortgage on title, but only if North York Bank removes its mortgage from title first. Therefore, it’s standard practice for the original lender, in this case North York Bank, to remove these units from the blanket mortgage as they are purchased.

7.9.5 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. In the case of ABC Developments, as North York Bank removes these units from its blanket mortgage, it is doing a partial discharge each time.

7.10 Judgments, Writs of Seizure and Sale of Land, and Liens 7.10.1 Judgments 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. The writ will encumber any currently owned land in any county or district, or land which is purchased in the future by the debtor, by way of placing a lien against the property. It should be noted that, even though a creditor has obtained a judgment, they do not have to file a Writ of Seizure and Sale and can wait until they know that the debtor owns land. Most lenders will not lend on a property until this debt is paid, unless, with certain lenders, the debt is being paid from the proceeds. The following is an excerpt from “After Judgment – Guide to Getting Results,” © Queen's Printer for Ontario, 2016. The guide in its entirety may be found at https://www.attorneygeneral.jus.gov.on.ca/english/courts/guides/After_Judgement_Guide_

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to_Getting_Results_EN.html

7.10.2 What is a writ of seizure and sale of land? 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). This is a legal process to 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. The writ of seizure and sale of land can be very effective in the long run since it will be difficult for the debtor to sell or mortgage the land until the debt is paid. In addition, if another creditor has a writ filed in the same enforcement office against the same debtor and is actively enforcing it, you will share, on a pro-rata basis (divided on a proportionate basis depending on the amount of each debt), in any money paid into the enforcement office (sheriff) from any enforcement activity taken against the debtor. Note, however, that the enforcement office has a general duty to act reasonably and in good faith towards all parties. The enforcement office can refuse to act if the estimated costs of executing the writ of seizure and sale are greater than the debtor’s equity in the property to be seized. The writ can be filed whether or not the debtor owns land at the time of filing. However, if you prefer not to file until you are certain the debtor owns land, for a fee you can do a name search at the land registry or land titles office (visit the ServiceOntario website for a list of land registry/titles offices) located in the area where you think the debtor may own property. Does the creditor have to wait for the debtor to decide to sell the land? No. Four months after filing the writ with the enforcement office you can direct the enforcement office (sheriff) to seize and sell the land, but the actual sale cannot proceed until the writ has been on file for six months. Contact the enforcement office to determine what will be required to commence with the seizure and sale of land. Note: The enforcement office can only sell the portion of the land that the debtor actually owns. Mortgages, liens and encumbrances may reduce the value of the property that is available to be seized and sold by the enforcement office. Creditors should determine, before proceeding with this process that the debtor actually has equity (difference between what a property is worth and what the owner owes against that property) available to be sold. The sale of land is a complicated and costly process, and commencing this process requires a large initial deposit for expenses associated with the sale. Creditors should consider other less costly enforcement options before directing the enforcement office to proceed with seizing and selling the debtor’s equity in the land. How long does the writ last? The writ will expire six years from the date it is issued, unless you renew it for an additional six-year period. A writ may be renewed before it expires by filing a Request to Renew a Writ of Seizure and Sale

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[Form 20N] with the enforcement office. Each renewal is valid for six years from the previous expiry date. There is a fee to file and renew a writ.

7.10.3 Liens A lien is security against a property, either real or personal, for a debt. Legislation allows for the placing of a lien on a property for construction costs not paid, which is commonly referred to as a mechanic’s lien.

7.11 Loan Security: Personal Property An investor may wish to further secure the investment by registering a lien against a borrower’s personal property.

7.11.1 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. For example, when you borrow money to purchase a car, the lender files a lien on the vehicle. If you default on the loan, the lender can take the car back. Once the debt is fully repaid a release of the lien (also known as a discharge) is provided by the lender. A lien registered under the PPSA (Personal Property Security Act56) is a publicly accessible document. Any company or individual can order a search to determine if another company or individual has any liens against themselves. PPSA is not protected by provincial privacy regulations. What is the process?57 Lenders and borrowers must enter into what are called “security agreements”. The lender registers a “notice” of the agreement in the Personal Property Security Registration (PPSR) system. This is done by completing and submitting a document, electronically, called a “financing statement” to the Companies and Personal Property Security Branch of the Ministry of Government Services. The information is then recorded by the branch in a computer file and is available for searching by potential lenders and buyers. Within 30 days of registering the financing statement, the lender must provide the borrower with details of the registration. Registering in the Personal Property Security Registration (PPSR) system pursuant to these Acts helps to establish priorities between individuals with competing interests in the same personal property, and in the case of a claim for lien will also ensure that the non-possessory lien is enforceable against third parties. To register an account an individual can go to the Service Ontario website at https://www.personalproperty.gov.on.ca/ppsrweb/en/user/account.jsp

56 57

Personal Property Security Act, R.S.O. 1990, c. P.10, https://www.ontario.ca/laws/statute/90p10 Service Ontario, https://www.ontario.ca/page/register-security-interest-or-search-lien-access-now

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7.12 Key Terms and Definitions Accreditation Accreditation means to give official authorization to or approval of; to provide with credentials Appraisal As defined in USPAP (Uniform Standards of Professional Appraisal Practice), an appraisal is the act or process of developing an opinion of value. The valuation process is a systematic procedure the appraiser follows to answer a client’s question about real property value. Appraiser The accredited individual who completes the appraisal report. Automated valuation model (AVM) Computer programs that typically use public record data on residential properties to calculate the market value of a property. Blanket mortgage A single mortgage that covers two or more pieces of real estate used as collateral for the mortgage. The individual properties may be sold without retiring the entire mortgage. Building permits A building permit is a document issued by the body responsible for enforcing Ontario's Building Code in your area. A building permit is necessary when you wish to construct, renovate, demolish, or change the use of a building. Charge/Mortgage The instrument that is used to register the debt or loan against the borrower’s property. It forms the lender’s security for the debt. Collateral Charge/Mortgage a collateral mortgage is a charge that is typically registered for an amount higher than what is borrowed. The collateral mortgage allows for the “re-advancing” of principal as the borrower pays down their mortgage or if their property value increases. In addition, collateral mortgages allow lenders to lend more money to borrowers, based on their qualifications, after closing, without registering a new mortgage since the current mortgage is registered at a higher amount than was originally advanced. Condominium unit A unit in a building that is run by a condominium corporation; maintenance fees cover shared amenities, like hallways, elevators, security, underground parking, etc. Co-operatives (co-ops) A corporate entity, often a non-profit, owns the land and the building, including each of the individual units in the building. A purchaser buys shares in the corporation and does not have individual ownership of their unit. Because there is no real property ownership a purchaser needs to get a loan to purchase the shares instead of a mortgage to purchase the property. Cost approach Calculates the value of a property based on the cost of replacing it.

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Demographics The statistical characteristics of human populations (such as age or income), used especially to identify markets, affects demand. Desktop appraisal An appraisal report that relies on MLS reports, including data on recent sales and data on recent listings. Detached A standalone house, typically with a front and back yard and basement; types include bungalows (one level), two- and three-story houses and split-level houses. Direct comparison approach This method calculates the value of a property using the principle of substitution as its basis. Discharge of Charge/Mortgage The instrument used to discharge the debt registered against the borrower’s property. It releases the lender’s interest in the property. Dry-by appraisal Based on the same information as the desktop appraisal; however, it also includes an inspection of the exterior of the property. Duplexes, triplexes, fourplexes Two-, three- and four-unit buildings, respectively. The owner may live in one unit and rent the others or rent all of the units. Full appraisal A full appraisal expands on the information and techniques used in the desktop appraisal and the driveby appraisal by having a full inspection of the subject property completed. Income approach Calculates the value of income producing properties, such as apartment buildings and other commercial properties. Judgement A judge’s decision that a debt is owed by a debtor to a creditor. Land use plans The management of land and resources. Lien Security against a property, either real or personal, for a debt. Market value The amount, in Canadian funds, for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing, where the buyer and seller have each acted knowledgeably, prudently, and without pressure. Partial discharge When a lender releases a property being used as a security for the loan.

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Risk assessment tools Automated programs that will underwrite an application from a lender and decide to approve or decline mortgage default insurance. Row-townhouses A row of houses with two shared walls, except for the end units that have only one shared wall; they can be freehold, or condominiums run by a condominium corporation; maintenance fees cover shared amenities, like yards, parking, etc. Semi-detached Two houses joined by one wall. Writ of seizure and sale A legal process to 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.

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7.13 Review Questions Answers to the Review Questions are found at www.REMIC.ca

7.13.1 Short Answer Questions 1. What is the purpose of a real estate appraisal? 2. List three of the types of properties that are used as security for mortgage financing. 3. Explain how population affects demand for real estate. 4. Explain how land use regulations affect the supply of real estate. 5. What is the most common designation of appraiser used by private lenders? 6. What is the main difference between a CRA and AACI? 7. Under what circumstances would a private lender accept the income approach for valuing a property? 8. When is the cost approach used? 9. What is the most common approach to determining value for a private lender? 10. What is an AVM and is it suitable for most private lenders? 11. What is a risk assessment tool and is it used by private lenders? 12. What are the three types of appraisal reports? 13. What type of appraisal is most suitable for private lenders? Explain why. 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? 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? 17. Explain the term “partial discharge”. 18. What is a judgment? 19. What is a Writ of Seizure and Sale? 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?

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Chapter 8: Investor/Lender Disclosure & Commitment 8.1 Learning Outcomes Successful understanding of the concepts presented in this chapter will enable the learner to: 1. Define conflict of interest 2. Employ strategies to mitigate real or perceived conflicts of interest 3. Define risk 4. Employ strategies to mitigate real or perceived risks 5. Complete appropriate investor/lender disclosure documents 6. Create a commitment letter for an investor/lender 7. Review a commitment letter for accuracy

8.2 Introduction The process of disclosing information necessary for an investor of ordinary prudence to make an informed decision to lend is a cornerstone of private investing. Without this information and investor is incapable of making an informed decision. To this point, a brokerage that only performs post-completion compliance audits may find that a licensee did not provide the appropriate disclosures to an investor. Since the transaction has already been completed, the brokerage may be liable in civil court if the investor suffers a loss and may be liable for penalties from FSRA for non-compliance with the MBLAA and its Regulations. It is therefore of vital importance that appropriate disclosure always be made before an investor agrees to lend. This requirement is further stated in Form 1, which reads, “Important: The information in this Disclosure Statement must be provided to you at the earliest opportunity and, in any case, no later than two business days before the earliest of the following events: • When the brokerage receives or enters an agreement to receive money from you. • When you enter into a mortgage agreement or an agreement to trade in a mortgage. • The money is advanced to the borrower under the mortgage. • The trade completion date”. An investor/lender may also choose to waive their right to the two business days and reduce it to one business day by completing form 1.2, however in all cases, except if the investor is a member of a designated class, or under specific other exemptions by regulation, they must be provided with disclosure.

Pause for clarification – Business day Business days are Monday to Friday, unless any of those days are statutory holidays. While some investors may provide licensees with their own commitment letter, in certain circumstances, especially with novice investors, a licensee may be required to generate a commitment letter on behalf of the investor. This chapter will address both the disclosure requirements and the commitment letter.

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8.3

203

Disclosing conflicts of interest58

Conflicts of interest are an important factor to consider when recommending a mortgage to a borrower or an investment to an investor or lender. Why? Simply put, every borrower, investor or lender has the right to make an informed decision and to understand if there are other real or perceived motivations behind the recommendation that is being made, aside from earning a commission or fee. And, just as importantly, every brokerage has the legal obligation to ensure that this information is properly disclosed to a borrower, lender, or investor, as the case may be. This section discusses how to ensure that potential conflicts of interest are identified and properly disclosed.

8.3.1 What is a conflict of interest? FSRA states that a conflict of interest is “…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”. In mortgage transactions, real or perceived conflicts of interest often arise due to how brokerages, brokers and agents are compensated for their work, relationships between parties to the transaction, and brokerages, brokers or agents serving multiple roles in the same transaction. Unsure if your compensation structure, relationships, or multiple roles in a transaction result in disclosable conflicts of interest? These scenarios, their identification and their disclosure should be discussed with the Principal Broker. When in doubt, disclose!

8.3.2 Relevant Legislation Legislation: O. Reg. 188/08: MORTGAGE BROKERAGES: STANDARDS OF PRACTICE Disclosure of conflicts of interest or potential conflicts of interest 27. (1) A brokerage shall disclose in writing to a borrower, lender or investor, as the case may be, any conflict of interest or potential conflict of interest that the brokerage or any broker or agent authorized to deal or trade in mortgages on its behalf may have in connection with a mortgage or a trade in a mortgage that the brokerage presents for the consideration of the borrower, lender or investor. O. Reg. 188/08, s. 27 (1); O. Reg. 153/15, s. 3. (2) The brokerage shall obtain the written acknowledgement of the borrower, lender, or investor, as the case may be, that the brokerage made the disclosure required by this section. O. Reg. 188/08, s. 27 (2). (3) Subsection (1) does not apply in the following circumstances: 1. The lender is another brokerage.

58

FSRA, https://www.fsrao.ca/industry/mortgage-brokering/compliance-and-other-resources/mortgagebrokerage-disclosure-requirements

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2. The investor is another brokerage or a financial institution. 3. The borrower, lender, or investor, as the case may be, is a permitted client that is not an individual and the mortgage in question is a syndicated mortgage that is not a qualified syndicated mortgage. O. Reg. 695/20, s. 9 (1). (4) Revoked: O. Reg. 695/20, s. 9 (2).

8.3.3 Conflicts due to compensation It is up to a mortgage brokerage to determine who its client is and disclose its role, regardless of which party it receives compensation from. This applies whether it is acting as a representative of the lender but not the borrower, the borrower but not the lender or both the borrower and the lender. Mortgage brokers and agents must recommend suitable products based on their clients’ needs and circumstances, not which lender pays the highest commission. If you recommend a product that earns you a higher commission (or other monetary or non-monetary benefit) while still meeting the borrower’s needs and circumstances, you should disclose it to the client.

8.3.4 Conflicts due to relationships Relationships between parties in a transaction can sometimes lead to actual or perceived conflicts of interest. In addition to requiring the disclosure of a relationship’s existence, as required by section 26 of O. Reg. 188/08, the brokerage must disclose if the relationship poses an actual or perceived conflict of interest.

Examples of relationships which may result in disclosable conflicts of interest: • • •

The mortgage broker/agent has a family member that works for a lender. If that lender is recommended for the transaction, the relationship and conflict of interest should be disclosed to the borrower. The mortgage brokerage shares ownership (e.g., officers/directors, management) with that of the lender recommended for the borrower. This relationship and potential conflict of interest should be disclosed to the borrower. The mortgage broker/agent is related to the borrower. This relationship and potential conflict of interest should be disclosed to the investor/lender.

8.3.5 Conflicts due to multiple roles in a transaction When the brokerage, broker or agent serves multiple roles in a transaction, there is a higher potential for actual or perceived conflicts of interest. Examples include: • Brokerage is also the lender in the same transaction: If a brokerage is acting as both the brokerage and the lender in a transaction, this potential conflict of interest should be clearly disclosed to the borrower. Clear disclosure of who the brokerage is representing is still required. • Individual broker/agent is also the lender in the same transaction: If the broker/agent is also personally serving as the lender in the transaction, this potential conflict of interest should be clearly disclosed to the borrower. Clear disclosure of whom the brokerage is representing is still required. o An example of a co-brokering scenario would be when a broker/agent is licensed under brokerage A and is serving personally as the lender in a transaction. Brokerage A is representing the broker/agent as the lender. The transaction is being co-brokered with

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brokerage B that is representing the borrower. Since the broker/agent (from brokerage A) is only acting as a lender in the transaction, and not representing the borrower, there is no obligation to disclose that the lender is also the mortgage broker/agent. Nonetheless, it is recommended as a best business practice to disclose this information to the borrower. Real estate agent is also the mortgage broker/agent in the same transaction: If you are acting as both the mortgage broker/agent and the real estate agent for a subject property, you must ensure that this does not jeopardize your integrity, independence, or competence. Your mortgage brokerage is required to disclose in writing to a borrower whether a mortgage broker/agent will receive payment of an incentive from another person, the nature of the incentive (such as mortgage finder’s fee and real estate commission), and the identity of the person. o You cannot use any information that is obtained while working as a mortgage agent for any other purpose without the person or entity subject to the information’s written consent. Note that additional disclosure obligations also apply to real estate agents and borrowers under the Trust in Real Estate Services Act, 2002.

50 percent disclosure rule In all transactions, the brokerage must disclose to the borrower the number of lenders on whose behalf the brokerage has acted during the previous fiscal year. It must also disclose if the brokerage itself was a lender. The “50 per cent disclosure rule” is an additional requirement, if requested by the borrower. It highlights for borrowers if more than 50 per cent of new mortgages and renewals arranged by the brokerage in the last fiscal year were directed to the same lender. What exactly must be disclosed? If a borrower requests the information, the brokerage must disclose: • Whether the brokerage itself was the lender for more than 50 per cent of the total number of new mortgages and renewals completed during the previous fiscal year • The name of the lender, if any, with whom the brokerage arranged more than 50 per cent of the total number of new mortgages and renewals during the previous fiscal year The percentage is based on the total number of new mortgages and renewals (number of deals), not the total dollar amount of those mortgages. The disclosure is only required to be disclosed upon request by the borrower. It is considered a best business practice, however, if the information is disclosed even without a request.

8.4 Identifying actual and/or potential conflicts of interest The following are examples of potential mortgage brokerage conflicts of interest provided by industry members59. Note, some of these examples are governed by specific regulations, e.g., disclosing a

59

FSCO, Potential Conflicts of Interest – Examples (Supplied by Industry Members), https://www.fsco.gov.on.ca/en/mortgage/webinar/Pages/conflict-examples.aspx

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brokerage’s roles, relationships with lenders and fees payable by others. See sections 18, 19 and 21 of O. Reg. 188/08.

8.4.1 Personal conflicts of interest • • • • • • • • • • • •

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.

8.4.2 Business conflicts of interest • • • •

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 investor/lender). 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.

8.5 Disclosure that promotes informed decision making 8.5.1 Disclosure of conflicts of interest or potential conflicts of interest 60 The following is taken from the Compliance Checklist for Mortgage Brokerages, Brokers & Agents61 Disclose potential conflicts of interest. Disclose in writing to a borrower, lender or investor, any conflict of interest that the Mortgage Brokerage, Broker or Agent may have in connection with the mortgage or

60

O. Reg. 188/08: MORTGAGE BROKERAGES: STANDARDS OF PRACTICE, https://www.ontario.ca/laws/regulation/080188#BK36 61 FSRA, Compliance Checklist for Mortgage Brokerages, Brokers & Agents, http://www.FSRA.gov.on.ca/en/mortgage/compliancechecklists/Documents/CompCheck3.pdf

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trade in a mortgage. This does not apply if the lender is another Mortgage Brokerage, or if the investor is another Brokerage or financial institution. Obtain written acknowledgement of the disclosure. The following list, while not exhaustive, describes some of the conflicts that arise and must be disclosed to a potential borrower to promote informed decision making.62

Points programs While points programs have typically been only offered by institutional lenders, it’s important to discuss them as there may be a time that a MIC or other type of mortgage investment entity does offer them. Points programs in and of themselves are simply another form of commission. Points programs that allow a broker/agent to charge a higher interest rate to accumulate points for use in future transactions or that are redeemable for cash or merchandise must be disclosed to a potential borrower. For example, a broker is given a choice between offering a borrower an interest rate of 4% up to a maximum of 4.5%. If the broker charges above 4% they will obtain additional points that will not be used for the current borrower but may be used in the future. The broker knows that these points may be used to buy down a rate for a future borrower below market rates and therefore will give him or her a competitive advantage in that future transaction. While these points may be beneficial to a future borrower, they come at the expense of a higher rate to the current borrower. This is a conflict of interest that must be disclosed, by way of informing the current borrower that they are being charged a rate higher than the lender’s lowest rate, so that the current borrower can then make an informed decision. In British Columbia, the Financial Institutions Commission (FICOM) issued a bulletin in April, 2004 which addressed this conflict. It stated that, “The Registrar considers the banking of points or bonuses to be a conflict of interest that must be disclosed to any borrower to whom the lowest interest rate offered by the lender is not given”. If the broker is not charging the current borrower a higher rate, they must only disclose that they will receive remuneration in the form of points, which is discussed in the disclosure requirements in chapter 11.

Broker/agent related to the lender If a broker/agent is related to the lender this is a potential conflict of interest that must be disclosed. For example, a broker is arranging a second mortgage for a borrower that will be funded by his wife’s self-directed RRSP. In this case the broker/agent could have an incentive to charge the borrower a higher rate to maximize the return for his wife. Although this may not be the case, the broker/agent has a duty to disclose this potential conflict so that the borrower may make an informed decision.

Broker/agent is the lender or a member of a syndicate lender Similar to being related to the lender, in some cases the broker/agent is using their money to fund the mortgage and is the lender. While the broker/agent may be charging the borrower market rates based on their circumstances, the borrower must be informed that the broker/agent is the lender so that they can make an informed decision. In the case of a syndicate lender (where several lenders come together to pool their money into one mortgage), the same logic applies, and disclosure must be made.

62

Joseph White, Mortgage Brokering in Ontario, Broker Edition, First Edition (REMIC, 2009), pg. 312

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Broker/agent will acquire the mortgage after funding In some cases, the broker/agent is also an investor. If they arrange a mortgage that is funded by another investor that they intend to purchase at a future date, this information must be disclosed for the same reasons that disclosure must be made if the broker/agent is the lender.

Broker/agent obtaining a benefit from the borrower In a scenario where the broker/agent is arranging a mortgage in which they will obtain some benefit, such as part of the mortgage proceeds (not a brokerage fee paid from the proceeds), the broker/agent must inform the investor/lender so that they can make an informed decision.

Broker/agent related to the borrower In a scenario where the broker/agent is arranging a mortgage and is related to the borrower, whether by business or family, the broker/agent has a duty to disclose this information to the lender since the broker/agent may be biased in favour of the borrower.

8.6 The impact of inappropriate conflict of interest disclosures Improper disclosure of conflicts of interest can result in a borrower, investor, or lender, as the case may be, making a decision to enter into a mortgage without the proper information to make an informed decision. This has resulted in investors losing money and borrowers obtaining mortgages that were not in their best interests. When this occurs, the brokerage puts itself at risk of being sued by the injured party. In addition, there are regulatory penalties that can and will be levied by FSRA. These contraventions of legislation consist of administrative penalties, and offences under the Act, both of which can have serious consequences for those involved.

8.6.1 Administrative Penalties An administrative penalty is a penalty imposed by FSRA for the following purposes, as per section 38(1) of the MBLAA: 1. To promote compliance with the requirements established under this Act. 2. To prevent a person or entity from deriving, directly or indirectly, any economic benefit as a result of contravening or failing to comply with a requirement established under this Act. 2006, c. 29, s. 38 (1).

8.6.1.1 Maximum administrative penalties As per section 41 of the MBLAA, an administrative penalty shall not exceed the following amounts: For a brokerage or mortgage administrator 41(1). For a contravention or failure to comply by a person or entity who is, or is required to be, licensed as a mortgage brokerage or a mortgage administrator, $500,000 or such lesser amount as may be prescribed for a prescribed requirement established under this Act. For an individual 41(2). For a contravention or failure to comply by an individual who is, or is required to be, licensed as a mortgage broker or agent, $100,000 or such lesser amount as may be prescribed for a prescribed requirement established under this Act.

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For anyone else 41(3). For a contravention or failure to comply by any other person or entity, $500,000 or such lesser amount as may be prescribed for a prescribed requirement established under this Act. 2006, c. 29, s. 41.

Criteria for determining amount of penalty O. Reg. 192/08: ADMINISTRATIVE PENALTIES states that: 3. (1) The Chief Executive Officer shall consider only the following criteria when determining the amount of an administrative penalty to be imposed under section 39 of the Act for a purpose set out in section 38 of the Act: 1. The degree to which the contravention or failure was intentional, reckless, or negligent. 2. The extent of the harm or potential harm to others resulting from the contravention or failure. 3. The extent to which the person or entity tried to mitigate any loss or to take other remedial action. 4. The extent to which the person or entity derived or reasonably might have expected to derive, directly or indirectly, any economic benefit from the contravention or failure. 5. Any other contraventions or failures to comply with a requirement established under the Act or with any other financial services legislation of Ontario or of any jurisdiction during the preceding five years by the person or entity. O. Reg. 192/08, s. 3; O. Reg. 168/19, s. 1. (2) If, after determining the amount of an administrative penalty for the contravention, the Chief Executive Officer determines that the amount is, by its magnitude, punitive in nature having regard to all the circumstances, the Chief Executive Officer shall reduce the amount of the administrative penalty to an amount that is consistent with either or both of the purposes listed in subsection 38 (1) of the Act. O. Reg. 35/22, s. 1.

8.6.2 Offences The relevant section of O. Reg. 188/08: MORTGAGE BROKERAGES: STANDARDS OF PRACTICE, with regards to penalties for conflicts of interest, is found in the section entitled, “Managing the Brokerage,” which requires the brokerage to establish and implement policies and procedures for, as per section 40 (5), “The identification of conflicts of interest or potential conflicts of interest between the brokerage or any broker or agent authorized to deal or trade in mortgages on its behalf and a borrower, lender or investor who is represented by the brokerage, and their disclosure to the borrower, lender or investor, as the case may be, as required by this Regulation. While the preceding refers to the establishment of policies and procedures to deal with conflicts of interest, section 27 of O. Reg. 188/08: MORTGAGE BROKERAGES: STANDARDS OF PRACTICE, requires a brokerage to disclose these conflicts. 27. (1) A brokerage shall disclose in writing to a borrower, lender or investor, as the case may be, any conflict of interest or potential conflict of interest that the brokerage or any broker or agent authorized to deal or trade in mortgages on its behalf may have in connection with a mortgage or a trade in a mortgage that the brokerage presents for the consideration of the borrower, lender or investor. (2) The brokerage shall obtain the written acknowledgement of the borrower, lender, or investor, as the case may be, that the brokerage made the disclosure required by this section. O. Reg. 188/08, s. 27 (2). Failure to meet these requirements may result in FSRA making a determination that an offence has been committed, with the following penalties.

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8.6.2.1 Offence re standards of practice In addition to listing the offences in section 48(1) of the MBLAA, section 48(2) also states that, “Every person who contravenes or fails to comply with a standard of practice that is applicable to his, her or its licence is guilty of an offence. 2006, c. 29, s. 48 (2).” The standards of practice are found in regulations O. Reg. 189/08: MORTGAGE ADMINISTRATORS: STANDARDS OF PRACTICE, O. Reg. 188/08: MORTGAGE BROKERAGES: STANDARDS OF PRACTICE and O. Reg. 187/08: MORTGAGE BROKERS AND AGENTS: STANDARDS OF PRACTICE.

Penalties for offences The MBLAA lists the specific penalties for offences. For an individual 49 (1) Every individual convicted of an offence under this Act is liable to a fine of not more than $500,000 or imprisonment for a term of not more than one year or both a fine and imprisonment. 2006, c. 29, s. 49 (1). For a corporation (2) Every corporation convicted of an offence under this Act is liable to a fine of not more than $1,000,000. 2006, c. 29, s. 49 (2). Additional order for compensation or restitution 50 (1) 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. 2006, c. 29, s. 50 (1). Payment to insurer (2) If an order for compensation or restitution is made in favour of a person or entity who has received an amount from an insurer who is licensed under the Insurance Act in respect of the matter, the person required by the order to pay the compensation or make the restitution shall deliver the amount payable under the order to the insurer. 2006, c. 29, s. 50 (2). Civil remedy (3) No civil remedy for an act or omission is affected by reason only that an order for compensation or restitution under this section has been made in respect of that act or omission. 2006, c. 29, s. 50 (3).

8.7 Practices to help manage conflicts of interest 8.7.1 Conflict of Interest Policies The following list of conflicts of interest policies is taken from Mortgage Brokering in Ontario, Broker Edition63

63

Joseph White, Mortgage Brokering in Ontario, Broker Edition, First Edition (REMIC, 2009), pg. 382

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• All employees, brokers and agents must avoid undisclosed conflicts of interest. A conflict of interest may occur if an employee’s, broker’s or agent’s outside activities or personal interests influence or appear to influence their ability to make objective decisions in the course of their job responsibilities. • Avoid the appearance of a conflict of interest and disclose potential conflicts. Take appropriate steps to avoid both conflicts of interest and situations that may appear to others to present a conflict of interest. Anytime an employee, broker or agent faces a situation that might give rise to questions, the employee, broker, or agent should disclose the potential conflict to their manager or the principal broker. All employees, brokers and agents who are not sure whether a situation presents a conflict should ask first. • Avoid conflicts of interest with family members. Avoid situations in which the interests of an immediate family member or close relative may be at odds with those of the brokerage. •

Disclose all potential conflicts of interest to all parties of a mortgage transaction.

8.7.2 How to Disclose a Conflict of Interest – 3 Simple Steps Step 1: Identify if there is a conflict In considering whether a situation poses a conflict of interest, it may be helpful to ask yourself: “Would I be concerned if other people found out about it?” “How would it look if it was in the newspaper?” and/or “How would I feel if it involved someone else?” Step 2: Disclosure in writing Explain the conflict of interest, either real or perceived, in writing. This is what you’ll present to your client, so be sure to be clear and concise. Accuracy and full disclosure are crucial. Step 3: Present to your client Present your written disclosure to your client, ensuring to explain it and have receipt acknowledged in writing. FSRA has stated that it “will not consider a client's signature on a disclosure document, on its own, as sufficient proof the client was adequately informed about the mortgage and its risks”64 This disclosure may be part of your larger disclosure document, such as the Borrower Disclosure, or Investor/Lender Disclosure, as the case may be, or be a separate document. Be sure to provide the client with a signed copy

64

FSRA, FAQs on FSRA's Checklist on Detecting and Preventing Mortgage Fraud, https://www.FSRA.gov.on.ca/en/mortgage/compliancechecklists/Pages/2015-faqs-checklist-detect-prevent-mortfraud.aspx

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8.8 Disclosing Risks 8.8.1 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.65”

8.8.2 Relevant Legislation For a private mortgage investor/lender, risk tolerance is a concept that identifies the investor/lender’s acceptable level of risk. There are two fundamental requirements when considering risk: understanding the investor/lender’s general level of acceptable risk and disclosing the specific risks associated with the mortgage being recommended by the broker/agent. This requirement is described in section 25.1 of Regulation 188/08, Mortgage Brokerages: Standards of Practice, which states that, “A brokerage shall disclose in writing to a borrower, lender or investor, as the case may be, the material risks of each mortgage or investment in a mortgage that the brokerage presents for the consideration of the borrower, lender or investor.”

8.8.3 Material risks in a private mortgage investment Risks to an investor/lender may include, but are not limited to: • any risks associated with the borrower’s ability to repay the mortgage • potential loss of investment if the property is not adequately insured and is damaged or destroyed • potential loss of investment if the mortgage is fraudulently discharged by another party • potential loss of investment if the property loses value and must be sold for an amount less than the outstanding balance of the mortgage • potential expenses associated with recovering a mortgage due to default • potential expenses associated with recovering a mortgage due to fraud or forgery where title insurance was not required • lack of quick liquidity • investments are not guaranteed, nor can a mortgage brokerage or other licensee guarantee payments to investors if a borrower defaults

8.8.4 Material risks in a syndicated mortgage investment Risks to an investor/lender may include, but are not limited to: • any risks associated with the borrower’s ability to repay the mortgage

65

Ibid, https://www.fsrao.ca/industry/mortgage-brokering/regulatory-framework/guidance/mortgage-brokeragedisclosure-and-suitability-assessments-non-qualified-syndicated-mortgage-investments-nqsmis-responses-marketdisruptions-transactions-prior-july-1-2021

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potential loss of investment if the mortgage brokerage does not do proper due diligence or lacks the knowledge to underwrite properly the proposed mortgage a failure to understand fully the risks involved in the mortgage due to the extreme complexity of the financing terms and conditions failure to understand the impact of certain terms and conditions of the mortgage potential loss of investment due to cost overruns, work stoppages, and other developmental risks potential loss of investment if the property is not adequately insured and is damaged or destroyed potential loss of investment if the development’s proposed use is not approved by municipal licensing authorities potential loss of investment if the development takes longer to complete than anticipated potential misappropriation of funds by the developer if the mortgage does not specify what the funds are to be used for and/or there is no oversight of the use of funds potential loss of investment if the appraisal relies on incorrect assumptions (or if those assumptions do not occur) potential loss of investment if the mortgage is fraudulently discharged by another party potential loss of investment if the property loses value and must be sold for an amount less than the outstanding balance of the mortgage potential expenses associated with recovering a mortgage due to default potential expenses associated with recovering a mortgage due to fraud or forgery where title insurance was not required lack of quick liquidity inability to be able to decide when to force collection activities other risks associated with the development, project, developer, brokerage, etc., not listed here

8.9 Risk Reduction Strategies Risks can vary greatly based on the type of investment and the knowledge and experience of the investor. There are several strategies that can be employed to reduce the risk in a specific transaction. Of course, risk can never be fully eliminated, but for a prudent investor, balancing the risks associated with the investment and the returns it provides can increase the likelihood of a successful investment. 1. Know the borrower: verification of income and identity, as well as debt service ratios to ensure affordability; this will reduce the risk of default 2. 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 3. 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 4. 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 5. 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

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6. Exit strategies: discussed in chapter 9, having and understanding potential exit strategies is a vital strategy in reducing the risk of loss 7. 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. 8. 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. 9. 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. 10. 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.

Pause for clarification – Market disruption A Market Disruption, such as the current declared emergency due to the COVID-19 pandemic, can have an impact on the viability of a project or property that is subject to a mortgage administered by a mortgage administrator. Such a Market Disruption will constitute a significant change in circumstance, where it can reasonably be expected to have a significant effect on the ability of the borrower to continue to make payments under the mortgage.

8.10 Investor/Lender Disclosure Documents The following are the documents that must be used by a licensee, depending on the type of transaction, for disclosure to a potential investor/lender. Form

Number

Last Updated

Form 1 – Investor/Lender Disclosure Statement for Brokered 1153 Transactions

July 2015

Form 1.1 – Investor/Lender Disclosure Statement for Brokered 1324 Transactions: Addendum for Construction and Development Loans

July 2015

Form 1.2 – Investor/Lender Disclosure Statement for Brokered 1325 Transactions: Waiver for Reducing the Waiting Period

July 2015

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Form 2 – Renewal Form

1154

July 2015

Form 2.1 – Renewal Form Waiver: To Reduce the Waiting Period

1326

July 2015

Form 3.0 – Information about Investor/Lender in a Non-Qualified MF-005 Syndicated Mortgage

November 2019

Form 3.1 – Suitability Assessment for Investor/Lender in a Non-Qualified MF-006 Syndicated Mortgage

November 2019

Form 3.2 – Disclosure Statement for Investor/Lender in a Non-Qualified MF-007 Syndicated Mortgage

November 2019

Form 3.2.1 – Supplemental Disclosure for Retail Investors in a High-risk MF-004 Syndicated Mortgage

October 2019

8.11 Form 1 - Investor/Lender Disclosure This form must be completed by a licensed mortgage broker and provided to prospective lenders or investors who are considering an investment in a mortgage other than a non-qualified syndicated mortgage investment (NQSMI). While it does not need to be provided to an investor/lender that is a member of a designated class of lenders and investors (who has provided written confirmation of this to the brokerage), it is a recommended best practice to prepare a Form 1 for all transactions.66 The definition for this designated class of lenders and investors is provided in section 2 (1) of Ontario Regulation 188/08 Mortgage Brokerages: Standard of Practice. Potential investors should be aware of the following advice from FSRA: • Investments in mortgages are not insured by any government agency or other investor protection fund. Potential investors/lenders should always seek independent legal advice. • If an investor/lender does not understand some of the terms/words in the form, they may contact the mortgage brokerage and/or seek independent legal advice to better understand the investment they are considering.

66

FSRA, https://www.fsrao.ca/industry/mortgage-brokering/mortgage-brokering-forms/mortgage-brokeragedisclosure-forms#form1

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8.12 Form 1.1 – Addendum for Construction and Development Loans If a construction or development loan is involved, a mortgage broker must complete both Form 1 and Form 1.1 - Investor/Lender Disclosure Statement for Brokered Transactions: Addendum for Construction and Development Loans and provide them to the potential investor/lender.67

67

Ibid

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8.13 Form 1.2 – Waiver for Reducing the Waiting Period Form 1.2 – Investor/Lender Disclosure Statement for Brokered Transactions: Waiver for Reducing the Waiting Period must be completed by a mortgage broker, on behalf of the mortgage brokerage, if an investor/lender is waiving their right to the minimum two business day disclosure time to reduce it to one business day. It must be used in addition to Form 1. Investors/lenders are not required to waive their right to the minimum two-day waiting period. It is their choice.68

68

Ibid

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8.14 Form 2 – Renewal Form This form must be completed by a licensed mortgage broker and provided to lenders or investors who are planning to renew a mortgage other than an NQSMI. If the mortgage is renewing with the same lender, the existing lender must receive this completed form. This requirement does not apply if the investor/lender is a member of a designated class. If a new investor is replacing the existing lender, then Form 1 must be completed instead of Form 2.69

69

Ibid

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8.15 Form 2.1 – Waiver for Reducing the Waiting Period Form 2.1 – Investor/Lender Disclosure Statement for Brokered Mortgages on Renewal must be completed by a mortgage broker, on behalf of the mortgage brokerage, if an investor is waiving their right to the minimum two business day disclosure time to reduce it to one business day. It must be used in addition to Form 2. Investors/lenders are not required to waive their right to the minimum two-day waiting period. It is their choice. A business day means a day that is not a Saturday or a holiday, as defined in s. 87 of the Legislation Act, 2006. For further clarity, business days are Monday to Friday, unless any of those days are statutory holidays.70

70

Ibid

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8.16 Presenting Disclosure and Discussing the Investment Once the appropriate disclosure documents have been prepared, it is time to present the documents to the potential investor and discuss the investment opportunity. This conversation must include: 1. Presentation of the Investor Lender Disclosure, where applicable, along with any other disclosure document required 2. A discussion about if and why the investment opportunity is suitable for the potential investor 3. How the investment will be serviced (i.e., using a mortgage administrator) 4. The necessary steps to complete the funding of the investment

8.17 The 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. While commitment letters may be presented in different formats, the information contained in them is fairly standard.

8.17.1 Sample Commitment Letter The following is an actual commitment letter used to in a private transaction for a second mortgage, with personally identifiable information changed for privacy of the parties involved.

Commitment letter legend A: Key terms and conditions are detailed here. B: Pre-conditions to advance detail the tasks that the borrower must accomplish before the lender will fund the transaction. C: Authorization by the lender’s representative and acceptance by the borrower D: The Schedule sets out additional terms and conditions of the mortgage E: The additional terms and conditions. Of note is number 4, that states the borrower can’t obtain a further encumbrance (in this case, a third mortgage) without the consent of the lender. Otherwise, the lender has the right to demand repayment in full. The postponement clause prevents the borrower from refinancing the first mortgage without permission from the lender (this is standard), to which the lender is not required to provide. This is in contrast to, for example, mortgage contracts in certain syndicated mortgage investments that allowed the borrower to obtain additional financing by either automatically postponing the investors’ mortgage or by pari-passu. Pari passu means that the additional financing would take the same position as the mortgage it was following. In other words, what should have been a third mortgage would be considered a second mortgage for the purposes of security.

Pause for clarification – Pari-passu 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 8: Investor Disclosure & Commitment MORTGAGE COMMITMENT AND LOAN AGREEMENT LENDER:

ABC Network Inc.

IN CONSIDERATION OF the mutual covenants set out herein, the Lender hereby agrees to provide a mortgage loan to the Borrowers on the following terms and conditions:

A

BORROWER: GUARANTOR(S): SECURITY: PRIOR ENCUMBRANCES: SUBSEQUENT ENCUMBRANCES: TOTAL LOAN AMOUNT: ADVANCE DATE: INTEREST RATE: CALCULATION PERIOD: LENDER FEE: TERM: INTEREST ADJUSTMENT DATE: PRINCIPAL REPAYMENT DATE: PREPAYMENT: AMORTIZATION: PAYMENTS: PAYMENT AMOUNT: OTHER: ASSIGNMENT: CHARGE TERMS: POSTPONEMENT:

M S Borrower N/A 6 Tempo Way, Whitby, ON, L1M0E9 CANADIAN EASTERN TRUST COMPANY None allowed $110,000.00 TBD 12.00% Calculated and compounded monthly, not in advance. $5,000.00 12 months August 1, 2022 August 1, 2023 Open, 3 months penalty Interest only mortgage Monthly $1,100.00 This loan may not be assumed or transferred without the written consent of the Lender. The Lender may assign this loan and the security at any time without the consent of the Borrower. 200033 This mortgage shall not be postponed without the written consent of the lender, which may be arbitrarily withheld.

PRE-CONDITIONS TO ADVANCE: 1. Borrower to provide proof that property taxes for the property is in good standing; 2. Borrower to provide proof of fire insurance coverage on the subject property for full replacement value in favor of the lender and in form and substance approved by the lender; B

3. Borrower to have good and marketable title to the property in fee simple, subject to no outstanding interests, encumbrances, or defects, except as stated herein; 4. Title Insurance in favor of the lender in form and substance approved by the lender; and 5. Such other security as the lender’s solicitor in his/her sole and absolute discretion deems necessary. This commitment is fully revocable by the lender at any time prior to closing.

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Dated this 11TH day of July, 2022. ABC Network Inc.

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Per:________________________________ Name: John Black Title: Director I have authority to bind the corporation

The above terms and conditions are accepted this 14TH day of July, 2022.

________________________________ M S Borrower

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SCHEDULE to Charge of land made between Ms. Borrower, as owner on title for (the “Chargor”) and ABC Lending (the “Chargee”). PROPERTIES SECURED: 6 Tempo Way, Whitby, ON, L1M0E9 ADDITIONAL PROVISIONS NOTWITHSTANDING anything contained in the set of Standard Charge Terms No. 200033, the following provisions apply: 1. TERM THE Charge shall commence on August 1, 2022, and end on August 1, 2023.

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2. PAYMENT PROVISIONS PROVIDED that the Chargor is not in default, this Charge shall be fully open. a. PROVIDED for the purpose of calculation of interest, any payment on account of the money secured under this Charge, received after 1:00 p.m. shall be deemed to have been received on the next following banking day. b. THE monthly instalments shall be paid on the 1st day of each and every month. 3. TRANSFER CLAUSE PROVIDED that in the event that the Chargor shall sell, transfer, convey or otherwise dispose of the within lands, then this charge shall become due and payable immediately upon such sale, transfer, or conveyance. 4. FURTHER ENCUMBERANCES IN the event that the Chargor further encumbers the subject property without the consent of the Chargee, the entire principal then outstanding, together with all accrued interest shall forthwith become due and payable in full on demand, together with and without limitation any related legal, administration and penalty fees.

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5. POST-DATED CHEQUES THE Chargor shall provide the Chargee with a series of personal post-dated cheques on the advance of funds hereunder and on each anniversary date of the interest adjustment date for all the payments in each ensuing year, otherwise the Chargee shall not be obliged to advance any funds hereunder and/or the said Charge shall be deemed to be in default therefore the Chargee may take remedies for default. 6. N.S.F. CHARGE PROVIDED that in the event that any of the Chargor’s post-dated cheques are not honoured when presented for payment to the bank on which they are drawn, the Chargor shall pay to the Chargee for each returned cheque, the sum of $250.00, as a liquidated amount to cover the Chargee's administration costs and not as a penalty, and such sum shall be a charge upon the said land and shall bear interest at the rate hereinbefore mentioned. 7. INSPECTION AND ATTENDANCE UPON DEFAULT IF upon default hereunder, inspections or attendances at the property are required or deemed advisable by the Chargee or its agents or employees, whether done by the Chargee, its agents or employees, for each inspection or attendance at the property the Chargor agrees to pay the Chargee the sum of $500.00 for each such attendance in addition to any other costs due or payable hereunder.

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8. PREPARATION FEE ANY and all costs incurred by the Chargee hereunder for, but not limited to, the collection of overdue interest, principal, taxes, insurance, solicitor fees and disbursements plus HST, or other costs incurred or payments to be made pursuant to the provisions of this Charge are to be paid by the Chargor and shall include all costs whether such are deemed necessary or unnecessary. 9. STATEMENT FEE THE Chargor shall pay for each charge statement prepared and provided by the Chargee, the then current fee of the Chargee for the preparation and providing of such statement. In addition, upon the assumption of this charge the Chargor shall pay to the Chargee the then current fee of the Chargee for amending its records to reflect the assumption of this Charge. The aforesaid fees shall be forthwith payable to the Chargee and if not so paid shall become part of the debt secured and shall bear interest at the interest rate set forth in this Charge. 10. DISCHARGE THE Chargor shall be responsible to pay all expenses for relating to the discharge of the Charge including but not limited to, all legal, administrative and registration fees. 11. REALTY TAXES AND UTILITIES THE Chargor covenants to provide evidence of payment of realty taxes and utilities on demand by the Chargee. 12. FIRE INSURANCE FIRE Insurance payable in favour of the Chargee must be in place prior to advancing. 13. CRIMINAL ACTIVITY THE Chargor acknowledges and agrees that the principal balance owing hereunder together with all accrued and outstanding interest will, at the Chargee’s sole and absolute discretion, become due and payable in full and the Chargee shall be at liberty to exercise all of its rights and

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Chapter 8: Investor Disclosure & Commitment remedies under this Charge, if any person conducts criminal activity of any kind or cultivates and processes marijuana or other substances the possession for distribution of which may be contrary to applicable law on the property.

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14. POSTPONEMENT THIS mortgage shall not be postponed without the written consent of the lender, which may be arbitrarily withheld.

Pause for clarification – Postponement agreement A postponement agreement 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. END OF SCHEDULE

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8.18 External Resources Form 1 – Investor/Lender Disclosure Statement for Brokered Transactions, FSRA https://www.fsrao.ca/form-1-investorlender-disclosure-statement-brokered-transactions Form 1.1 – Investor/Lender Disclosure Statement for Brokered Transactions: Addendum for Construction and Development Loans, FSRA https://www.fsrao.ca/form-11-investorlender-disclosure-statement-brokered-transactions-addendumconstruction-and-development-loans Form 1.2 – Investor/Lender Disclosure Statement for Brokered Transactions: Waiver for Reducing the Waiting Period, FSRA https://www.fsrao.ca/form-12-investorlender-disclosure-statement-brokered-transactions-waiverreducing-waiting-period Form 2 – Renewal Form, FSRA https://www.fsrao.ca/form-2-renewal-form Form 2.1 – Renewal Form Waiver: To Reduce the Waiting Period, FSRA https://www.fsrao.ca/form-21-renewal-form-waiver-reduce-waiting-period Form 3.0 – Information about Investor/Lender in a Non-Qualified Syndicated Mortgage, FSRA https://www.fsrao.ca/form-30-information-about-investorlender-non-qualified-syndicated-mortgage Form 3.1 – Suitability Assessment for Investor/Lender in a Non-Qualified Syndicated Mortgage, FSRA https://www.fsrao.ca/form-31-suitability-assessment-investorlender-non-qualified-syndicatedmortgage Form 3.2 – Disclosure Statement for Investor/Lender in a Non-Qualified Syndicated Mortgage, FSRA https://www.fsrao.ca/form-32-disclosure-statement-investorlender-non-qualified-syndicated-mortgage Form 3.2.1 – Supplemental Disclosure for Retail Investors in a High-risk Syndicated Mortgage, FSRA https://www.fsrao.ca/form-321-supplemental-disclosure-retail-investors-high-risk-syndicated-mortgage

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8.19 Key Terms and Definitions 50 percent disclosure rule If asked by the borrower, the brokerage must disclose whether the brokerage itself was the lender for more than 50 per cent of the total number of new mortgages and renewals completed during the previous fiscal year, and the name of the lender, if any, with whom the brokerage arranged more than 50 per cent of the total number of new mortgages and renewals during the previous fiscal year. Administrative penalty A penalty is a penalty imposed by FSRA for the following purposes, as per section 38(1) of the MBLAA: 1. To promote compliance with the requirements established under this Act. 2. To prevent a person or entity from deriving, directly or indirectly, any economic benefit as a result of contravening or failing to comply with a requirement established under this Act. 2006, c. 29, s. 38 (1). Business day Business days are Monday to Friday unless any of those days are statutory holidays. 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. Form 1 Mandatory disclosure (see the chapter for exceptions) for potential investors/lenders. Form 1.1 Mandatory disclosure (see the chapter for exceptions) for potential investors/lenders for a proposed construction or development loan. Form 1.2 Mandatory disclosure (see the chapter for exceptions) for potential investors/lenders to reduce the waiting period from two business days to one business day. Form 2 Mandatory disclosure (see the chapter for exceptions) for potential investors/lenders for a proposed mortgage renewal. Form 2.1 Mandatory disclosure (see the chapter for exceptions) for potential investors/lenders to reduce the waiting period from two business days to one business day for a proposed mortgage renewal. Form 3.0 Mandatory disclosure (see the chapter for exceptions) for potential investors/lenders in a Non-Qualified Syndicated Mortgage to assist mortgage brokerages with the collection, understanding and documentation of the required information about the client. Form 3.1 Mandatory disclosure (see the chapter for exceptions) for potential investors/lenders to determine the suitability of an investment in an NQSMI.

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Form 3.2 Mandatory disclosure (see the chapter for exceptions) for potential investors/lenders in an NQSMI Form 3.2.1 Mandatory disclosure (see the chapter for exceptions) for potential investors/lenders in an NQSMI; for each investor that is not part of the designated class of investors, who is considering or actually investing in a high-risk syndicated mortgage. Material risk In the mortgage industry, a risk can be described as the possibility of loss. Offence An offence is defined as a contravention of any of the following in the MBLAA: 1. Subsection 2 (2) or (3) (Dealing in mortgages). 2. Subsection 3 (2) or (3) (Trading in mortgages). 3. Subsection 4 (2) (Mortgage lending). 4. Subsection 5 (2) (Administering mortgages). 5. Subsection 11 (1), (2), (3), (4), (5), (6), (7) or (8) (Prohibitions re use of title, etc.). 6. Section 27 (Prohibition re disclosure in advertising). 7. Subsection 30 (6) (Inquiries and examinations). 8. Subsection 43 (1) or (2) (Prohibition re false or deceptive information). 9. Subsection 44 (1) or (2) (Prohibition re obstruction). 10. Subsection 45 (1) or (2) (Prohibition re false or misleading information). 11. Repealed: 2021, c. 40, Sched. 12, s. 3. Offence re standards of practice (2) Every person who contravenes or fails to comply with a standard of practice that is applicable to his, her or its licence is guilty of an offence. 2006, c. 29, s. 48 (2). Offence re conditions of licence (3) Every person who fails to comply with a condition of his, her or its licence is guilty of an offence. 2006, c. 29, s. 48 (3). Offence re orders (4) Every person who fails to comply with an order made under this Act is guilty of an offence. 2006, c. 29, s. 48 (4). Risk reduction strategies These are actions that can be taken to reduce the risk in a specific transaction.

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8.20 Review Questions Answers to the Review Questions are found at www.REMIC.ca

8.20.1 Short Answer Questions 1. What is a conflict of interest? 2. What legislation describes the disclosure requirements for conflicts of interest? 3. List and explain five different types of conflicts of interest that may arise in a transaction. 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? 7. What is the maximum administrative penalty for an individual licensee? 8. What is the maximum administrative penalty for a brokerage? 9. What is a material risk? 10. List and explain ten risk reduction strategies that can be used to reduce the risk in a specific transaction. 11. List the 9 different disclosure forms that FSRA 12. What is the standard form that must be used to provide disclosure to an investor/lender? 13. What is a commitment letter? 14. What is a postponement agreement? 15. Define pari-passu.

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Chapter 9: Exit Strategies 9.1

Learning Outcomes

Successful understanding of the concepts presented in this chapter will enable the learner to: 1. List and explain the typical exit strategies expected by investors 2. Explain the Power of Sale process 3. Discuss judicial sale and foreclosure 4. List other remedies available to investors

9.2

Introduction

A lender’s goal is to advance mortgage financing and have that financing repaid as per the terms and conditions of the mortgage contract. It is not in the lender’s best interest to have the borrower default on their obligations as this results in time and effort spent by the lender in recovering the mortgage debt.

9.3 Typical Exit Strategies The exit strategy is perhaps the most important and least understood aspect of underwriting a mortgage. Regardless of whether the loan is a syndicated or non-syndicated private mortgage, there must be an exit strategy, and the private mortgage investor should understand it. While there are many items that will affect an investment’s overall risk profile, the exit strategy is one of the most important. An exit strategy is the strategy that is planned to be used to repay the private mortgage investor. 1. Sell the property at or before the end of the term 2. Renew at the end of the term 3. Refinance with another investor or institutional lender during the term 4. Refinance with an institutional lender at the end of the term 5. Use a default remedy if the borrower defaults 6. Assign/Sell the mortgage 1. Sell the property at or before the end of the term The investor must be made aware that their rate of return may be affected if the borrower decides to sell during the term and repay the mortgage. An effective way to offset the potential loss of income is to have a prepayment penalty. It must be noted that even if the mortgage is closed a borrower cannot be prevented from selling their house and repaying the mortgage, so the investor should have this contingency included in the loan agreement for closed mortgages. 2. Renew at the end of the term The licensee should contact both the borrower and investor several months prior to the end of the term to discuss the potential of renewing. If the investor doesn’t wish to renew, the licensee should immediately advise the borrower and takes steps to arrange alternative financing to pay out the investor. If the borrower can’t make arrangements to pay out the mortgage, the investor can consider the borrower in default and use appropriate default remedies, discussed later. However, it is typically in the best interests of all parties to arrange alternative financing to pay out the investor. 3. Refinance with another investor or institutional lender during the term If the mortgage is open, this is another good reason to begin the renewal process several months prior to the end of the term. This exit strategy is when the borrower switches to another lender during the term. They may do so if they require more funds, or if they can switch to an institutional

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Chapter 9: Exit Strategies lender at preferential rates. If there is a prepayment penalty, which is always recommended for the benefit of the investor, the licensee must calculate the cost benefit of doing so for the borrower if they are arranging this new financing.

4. Refinance with an institutional lender at the end of the term In certain cases, a licensee may recommend that the investor choose a term that ends at the same time the borrower’s first mortgage is up for renewal, if applicable. In this case the borrower may be able to refinance their institutional mortgage by adding the investor’s mortgage, thereby paying out the investor. The licensee should advise the investor if they feel this will be an option but ensure that the investor is aware of the risk that this option may not be available for the borrower at the end of the term and that they may have to renew the mortgage, if possible, or consider the borrower in default. 5. Use a default remedy if the borrower defaults If the borrower defaults during the term of the mortgage, the investor must be aware of the steps necessary to recover their investment. Depending on the level of sophistication of the investor, they may need the assistance of the licensee to retain a lawyer to handle the process. Using a default remedy increases the likelihood of a loss of expected interest and potentially the loss of some or all of the investor’s principal. 6. Assign/Sell the mortgage An investor can attempt to assign or sell their mortgage to another investor, although there is no secondary mortgage market. In other words, it’s not like selling stocks. An investor would typically have to contract a mortgage brokerage to sell the mortgage on their behalf, and this may result in a loss of all or part of their rate of return, and potentially some of their principal. Investors should be cautioned not to make the investment if they may need their capital back during the term of their investment.

9.3 Default Remedies When a borrower defaults on their mortgage obligations, including any of the covenants contained in the Standard Charge Terms, the lender can consider the borrower to be in default. When this occurs, the lender may commence certain actions to collect the outstanding balance of the mortgage along with costs associated with the default and collection of that amount.

9.3.1 Power of Sale In Ontario, the most common method used is the power of sale process. This process was developed by Ontario lenders as a faster remedy than the typical remedy of foreclosure. Details of this proceeding are normally included in the Standard Charge Terms, but they are also provided through the Mortgages Act, R.S.O. 1990, c.M.40. This process is typically used in: 1. Newfoundland and Labrador 2. New Brunswick 3. Prince Edward Island 4. Ontario This remedy allows the lender to take possession of the property and sell it. Any monies obtained through the sale are then used in a prescribed manner to retire the lender’s mortgage and associated costs as well as other debts associated with the property. Any monies remaining after this process are payable to the borrower. If the property cannot be sold the lender can then sue the borrower for the monies owing or sue for foreclosure. The power of sale process, also referred to as a Sale under Power,

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must follow a process as set out in the Mortgages Act, R.S.O. 1990, c.M.40, as described in the following section.

Power of Sale Process The following is a description of the typical power of sale process. 1. The borrower defaults Borrower defaults or fails to make a regularly scheduled mortgage payment 2. The lender serves notice At least fifteen days later the lender delivers a Notice of Sale Under Mortgage to 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. If this notice is provided by registered mail it is deemed to have been served on the date the notice was mailed. In the following figure we see the prescribed form to be used when providing notice as set out in the Mortgages Act, R.S.O. 1990, c.M.40. 3. The borrower has a 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. Possession of the property by the lender Once the Statement of Claim for Debt and Possession is served to the borrower, they have twenty days to file a Statement of Defence. If the borrower fails to file this notice, the lender will obtain a default judgment from the Court as well as a Writ of Possession. The Writ is then filed with the sheriff in the jurisdiction in which the property is located, and the sheriff arranges for eviction. Once eviction occurs the lender is said to be a mortgagee in possession. 5. Selling the property 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.

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Figure 2371 – Notice of Sale under Mortgage, example

NOTICE OF SALE UNDER MORTGAGE TO: THE PARTIES NAMED IN SCHEDULE “A” ATTACHED HERETO Take notice that default has been made in payment of the money due under a certain mortgage dated the 14TH day of April, 2021, made between JOHN Q. BORROWER -andTHE BANK OF YES which mortgage was registered on the 14TH day of April, 2021, in the Registry Office for the Land Titles Division of Durham (No. 40), as instrument NO. DR1234. AND I HEREBY GIVE YOU NOTICE that the amount now due on the mortgage for principal money, interest, and costs, respectively, are as follows: Principal $439,770.43 Interest at 3% per annum from $ 1,095.19 February 1, 2022 Administration fees $ 2,500.00 Solicitor costs and disbursements $ 2,500.00 $445,865.62 AND UNLESS the said sums are paid on or before the 30TH day of March, 2022, the undersigned shall sell the property covered by the said mortgage under the provisions contained therein. This notice is given to you as you appear to have an interest in the mortgaged property and may be entitled to redeem the same. Dated the 20TH day of February, 2022 THE BANK OF YES by his duly authorized solicitors, POS Lawfirm, 1234 Whitby Lane, Whitby, ON, L1L1L1 Per: POS Lawfirm SCHEDULE “A” PARTIES TO WHOM THIS NOTICE IS SERVED: TO: AND TO:

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JOHN Q. BORROWER 1234 BORROWER LANE, WHITBY, ON, L2L2L2 SPOUSE OF JOHN Q. BORROWER 1234 BORROWER LANE, WHITBY, ON, L2L2L2

© Queen's Printer for Ontario, 2007. This is an unofficial version of Government of Ontario legal materials.

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Figure 2472 – Writ of Possession

Form 60C Courts of Justice Act WRIT OF POSSESSION (General heading) (Court seal) WRIT OF POSSESSION TO the Sheriff of the (name of county or district) Under an order of this court made on (date) in favour of (name of party who obtained order), YOU ARE DIRECTED to enter and take possession of the following land and premises in your county or district: (Set out a description of the land and premises.) AND YOU ARE DIRECTED to give possession of the above land and premises without delay to (name of party who obtained order).

Date ...........................................................................

Issued by ........................................................... Local registrar Address of court office

Renewed by order made on (date).

................................................................................................. Local registrar

RCP-E 60C (November 1, 2005) After sale of the property Once the sale has been completed, the lender must remit monies paid from the sale in the following order, as per section 27 of the Mortgages Act, R.S.O. 1990, c.M.40: 1. In payment of all expenses involved in the sale of the property, including the real estate salesperson’s fee, legal fees, etc. 2. In payment of all interest and costs associated with the mortgage involved in the power of sale 3. In payment of the principal balance outstanding on the mortgage involved in the power of sale 4. In payment to any additional encumbrancers such as mortgage holders and others who had an interest in the property 5. Payment of rental deposits made by any tenants, if applicable 6. Any monies remaining must be paid to the mortgagor

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© Queen's Printer for Ontario, 2007. This is an unofficial version of Government of Ontario legal materials.

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Issues with a Power of Sale If, after the sale of the property, the amount received is not enough to satisfy the borrower’s debt to the lender, the lender may have to sue the borrower for the outstanding balance. Unfortunately for the lender, this may take considerable time and money, and even if the lender is awarded a judgment against the borrower, they may not be able to collect due to the borrower’s financial situation.

Power of Sale with Mortgage Default Insurance In contrast to a private mortgage that will not have the benefit of default insurance, if an institutional mortgage that has been defaulted on is insured through a mortgage default insurance policy and there is still a balance outstanding, the lender will make a claim on this policy and not sue the borrower for the outstanding balance. The mortgage default insurer will pay the lender’s claim and proceed against the borrower to recover the amounts paid.

9.3.2 Judicial Sale and Foreclosure 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: • Alberta • British Columbia • Manitoba • Nova Scotia • Quebec, and • Saskatchewan

Judicial Sale In a judicial sale, the lender may commence an action for sale in which the court oversees the sale and the distribution of proceeds after the sale. There are several components of a judicial sale, including: • Overseen by the Court • The lender must apply to the court for approval to sell the property, and for approval of the sale • The lender files a lawsuit against the borrower and other liable parties • Once ordered, the owner can no longer list the property for sale, and any listing agreement is cancelled • Upon sale, the property is transferred free and clear of debts, which are extinguished by the Court • There is a great deal of Court involvement throughout the process

Foreclosure If a judicial sale is unsuccessful, or if there is no equity in the property, a lender may choose to apply to the Court for a foreclosure. Foreclosure is the process of using the courts to take title to the mortgaged property, thereby extinguishing all rights that the borrower or any other party may have in the property. This process can be time consuming, taking upwards of six months and is also considered to be a harsh remedy since the lender ultimately becomes the owner of the property leaving the borrower with no interest in it. In Ontario, foreclosures are rare due to the ability to use the power of sale process, which the courts deem to be a far more equitable approach to recovering the mortgage debt. However, the foreclosure

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process may be used in Ontario under certain circumstances, typically if the amount recoverable under a power of sale will not be sufficient to recover the mortgage debt. This would allow the lender to take title to the property and, for example, renovate it and sell it at a higher price than might have been possible under a power of sale. 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. Issues with Foreclosures If, after a foreclosure the lender has not sold the property for a high enough price to pay off their mortgage and associated costs, there is no further recourse. In other words, the lender cannot sue or pursue the borrower to recover their loss. In addition, since the borrower will remain in the property until the foreclosure process completes, it has been known to happen whereby the borrower damages the property, resulting in repairs that must be completed before the property can be sold. This may result in costs that prevent the lender from recovering all or part of their investment. While there may be civil remedies available to the lender for this damage, they often take considerable time and additional money with no guarantee of receiving funds from an award by the courts.

9.3.3 Other Remedies While a power of sale is the most common remedy in Ontario and can be commenced after 15 days of default, most lenders will not seek this remedy immediately. Lenders have a variety of choices, dependent on the situation: 1. Demand letter 2. Quit claim 3. Appointment of a receiver 4. Assignment of rents 5. Action on the covenant

1. Demand Letter In most cases the process will begin with a letter sent from the lender’s collection department advising the borrower of the default and requesting that the missed payment be sent to the lender immediately. The lender may also require the borrower to pay a non-sufficient funds (NSF) fee and may also require the borrower to pay an administrative fee. This letter is also sent to any co-borrowers and guarantors as an attempt to recover the defaulted payment and costs before proceeding with a legal process. If this letter does not obtain the desired results, the lender may then use a Demand Letter, which is a letter sent from the lender’s lawyer demanding the payment of the outstanding amount. If neither of these remedies are successful, the lender will then proceed with the power of sale process.

2. Quit Claim A Quit Claim is a transfer by the borrower of ownership to the lender in exchange for releasing the borrower from any further liability. This happens infrequently since it would only be beneficial to the borrower if there was no equity in the property, and therefore would not be beneficial to the lender. The lender and borrower would have to agree to this arrangement voluntarily.

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3. Appointment of a Receiver Typically used in commercial properties where there is business or rental income generated by the property, the lender applies to the Court for appointment of a receiver. Once appointed, the receiver will collect and administer the income generated by the commercial property, paying expenses, including the mortgage payments.

4. Assignment of rents Similar in concept to the appointment of a receiver, an assignment of rents, often a clause written into the Standard Charge Terms, allows the lender to collect rent from tenants of the mortgage property, while the mortgage is in default.

5. Action on the Covenant This refers to a lender’s right to immediately sue a borrower for the missed mortgage payment (although this is not often done since the lender will typically proceed to the power of sale process), and to sue after a power of sale if there is still an amount outstanding (this is common).

9.3.4 Working with the Lender If a borrower has difficulty managing their payments, they should contact the lender and advise it of this difficulty. In doing so, the borrower gives the lender the opportunity to make alternative arrangements to assist the borrower to successfully repay the mortgage. In most cases the lender is not interested in losing the mortgage since it is an investment.

Success Tip – If your client is about to miss a payment... You should advise your client to contact you if he or she has difficulty making his or her payments. You can then advise your client of the options available to him or her. Although you cannot act on your client’s behalf when discussing his or her situation with the lender, you can advise your client of his or her options. By offering this type of assistance to your client you will help ensure that he or she remains loyal to you which is necessary in obtaining future business from this client as well as obtaining future referrals.

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9.4

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Key Terms and Definitions

Action on the covenant A lender’s right to immediately sue a borrower for the missed mortgage payment (although this is not often done since the lender will typically proceed to the power of sale process), and to sue after a power of sale if there is still an amount outstanding (this is common). Assignment of rents A clause written into the Standard Charge Terms, allows the lender to collect rent form tenants of the mortgage property, while the mortgage is in default. Demand letter A letter sent by the lender’s lawyer that requires the defaulting borrower to pay the lender the monies owed on the defaulted mortgage. Foreclosure A lender’s remedy that enables the lender to obtain title to the defaulted borrower’s property and dispose of it. Any profit or loss will belong to the lender while the borrower is free of the debt. Judicial sale In a judicial sale, the lender may commence an action for sale in which the court oversees the sale and the distribution of proceeds after the sale. Notice of sale A document, prescribed by the Mortgages Act, R.S.O. 1990, c.M.40, that is used to inform the borrower of the lender’s intent to recover monies owing to it when the borrower has defaulted on their obligations under the mortgage contract. Power of sale A process that allows the lender to commence a proceeding against the borrower without using the courts and sell the property. This can be a quick and fairly inexpensive remedy available to lenders upon default by the borrower. Quit claim A transfer by the borrower of ownership to the lender in exchange for releasing the borrower from any further liability. Redemption period A period of time during which a defaulting borrower may pay the outstanding balance of a mortgage before the lender can sell the borrower’s property, as prescribed by the Mortgages Act, R.S.O. 1990, c.M.40 Sheriff An officer of the Enforcement Office who handles, among other things, evicting a defaulted borrower once the proper order has been made by the Courts. Statement of claim for debt and possession (commonly referred to as a Statement of claim) A document filed with the Courts outlining a lender’s claim against the borrower.

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Writ of possession A document provided by the Courts that allows the lender to take possession of the borrower’s property. This is enforced by the local sheriff.

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Review Questions

Answers to the Review Questions are found at www.REMIC.ca

9.5.1 Short Answer Questions 1. What constitutes default by the borrower? 2. What process is the most common remedy used by lenders in Ontario when a borrower defaults on their mortgage obligations? 3. What Act outlines the process that must be followed under a power of sale? 4. How long after a borrower defaults on their mortgage payment can a lender begin the power of sale process? 5. Describe, in your own words, the power of sale process. 6. How does a foreclosure differ from a power of sale? 7. What provinces currently use a power of sale process? 8. What documents must a lender provide a real estate salesperson when selling a property under power of sale? 9. List the order in which proceeds of a sale under a power of sale are distributed. 10. Other than a power of sale or foreclosure, what other steps might a lender first use to recover monies owing by a defaulting borrower? 11. What is the difference between a judicial sale and a foreclosure? 12. What provinces use the foreclosure process? 13.

What is a quit claim?

14. What is the difference between an appointment of a receiver and an assignment of rents? 15. When can an action on the covenant be commenced?

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Chapter 10: Borrower Disclosure 10.1 Learning Outcomes Successful understanding of the concepts presented in this chapter will enable the learner to: 1. Describe how legislation affects disclosure 2. Explain the purpose of disclosure to a borrower 3. Describe what must be disclosed 4. Explain the cost of borrowing 5. Describe how disclosure may be made 6. Explain when disclosure must be provided

10.2 Introduction The purpose of borrower disclosure is to ensure that there is enough information to make an informed decision regarding the suitability of the transaction. The MBLAA and its Regulations define what and how disclosure must be made. While trade associations or others may provide form templates for disclosure, ensuring that disclosure is properly made is the responsibility of the brokerage. The MBLAA and its Regulations clearly define the information that must be disclosed and provide guidelines for borrower disclosure, however neither the MBLAA, its Regulations nor FSRA provide borrower disclosure forms necessary to make that disclosure. In fact, FSRA’s current policy is that it will not approve borrower disclosure documents. Rather, the brokerage must ensure that these documents are compliant based on interpretation of the MBLAA and its Regulations, and when a brokerage is audited FSRA will check these documents for compliance. Therefore, while forms used by brokerages to provide disclosure may appear different, the information to be disclosed and how it is disclosed must be the same for each brokerage. Section 6.4 of Regulation 191/08, Cost of Borrowing and Disclosure to borrowers, states that, “A disclosure statement, or a consent in relation to a disclosure statement, must be written in plain language that is clear and concise and it must be presented in a manner that is logical and likely to bring to the borrower’s attention the information that is required to be disclosed.” In addition, legislation states that: • Licensees are prohibited from acting, or doing anything, or failing to do anything, in circumstances where they ought to know that they are being used to facilitate fraud, dishonesty, crime or illegal conduct • Brokerages are prohibited from acting as a representative of a borrower, lender or investor if the brokerage has "reason to doubt" that the mortgage, its renewal, or the investment in it is lawful • Brokerages are required to take reasonable steps to verify a borrower's legal authority to mortgage a property • The brokerage's duty to inform the lender if they it has reason to doubt the accuracy of a borrower's application or a borrower's legal authority to mortgage a property will continue after the borrower enters into a mortgage agreement The purpose of this chapter is to explore the disclosure requirements for borrowers, including what information must be disclosed, how it must be disclosed and when it must be disclosed.

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10.3 Borrower Disclosure – What must be disclosed The MBLAA states that the borrower disclosure must include the following information: 1. Fees and payments associated with the mortgage 2. The relationship between the brokerage and lender under the proposed mortgage 3. The role of the brokerage 4. The number of lenders the brokerage represented during the previous year 5. Potential conflicts of interest 6. Risks associated with the proposed mortgage 7. Terms and conditions of the proposed mortgage 8. The cost of borrowing

Pause for clarification – Borrower disclosure is NOT a contract The borrower disclosure document is not a contract. It is disclosure. By signing the borrower disclosure document, the potential borrower is acknowledging receipt of the document, not agreeing to its contents. For example, this means that the potential borrower is not liable for any brokerage fees disclosed in this document if the potential borrower cancels the application.

1. Fees and payments associated with the mortgage The MBLAA and Regulations speak to several topics related to fees and other payments: representation of fees and costs, disclosure of fees in writing to a borrower, disclosure of the cost of borrowing and accepting payments. Each is described below. Sections 20 – 23 of Regulation 188/08 specify that a brokerage is not allowed to make any form of representation that any fees or costs payable to the brokerage (in connection with carrying on the business of dealing or trading in mortgages or acting as a mortgage lender) are set or approved by any government authority, unless they are in respect to disbursements to register or deposit instruments under the Land Titles Act or the Registry Act.

Pause for clarification – Fees are not regulated The MBLAA makes it clear that a brokerage cannot state or insinuate that a brokerage fee is set or approved by the government or any governing body. The MBLAA doesn’t state what is a minimum or maximum fee, nor does it state what is appropriate to be charged; this is up to the brokerage. However, 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. A brokerage must disclose, in writing, to a borrower if the brokerage, broker or agent may, or will, receive a fee or other remuneration in connection with the mortgage or a mortgage renewal, from whom it may or will be received and the basis for calculating the amount. The borrower must acknowledge in writing that they have received this disclosure. The same disclosure applies if the brokerage may, or will, pay any fee or other remuneration to another person or entity in connection with the mortgage or mortgage renewal. Advance fees As per Sections 37 – 39 of Regulation 188/08, a brokerage cannot accept an advance payment from the borrower on transactions where the principal amount of the mortgage is $400,000 or less. If funds are

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received and are considered deemed trust funds (funds that are payable to another party) the brokerage must provide a written statement to the person or entity providing the funds. Example: You are arranging a mortgage for a client who requires a private second mortgage. The client wants to pay cash for the appraisal. You have ordered the appraisal, but the client has said he won’t be home at the time of the appraisal and that his son will be giving the appraiser access to the home. The client doesn’t want to leave the cash with his son, preferring to give the cash to you to pay the appraiser. Under these circumstances this money would be deemed to be trust funds because it is being given to you but is meant for another party. Therefore, you would have to deposit it into your brokerage’s trust account and give your client a written statement that explains if interest is being paid and when this money will be paid either to the appraiser or returned to him. In this scenario the best solution would be for the client to leave a cheque with his son payable to the appraiser or be at the home with cash when the appraiser arrives. As you can see, handling trust funds is a considerable responsibility. Fees and Payments - sample clauses Where the brokerage is receiving a fee from the lender and/or other remunerations, such as points or volume bonus to which the broker/agent will be paid a percentage, a clause may be worded as follows: • REMIC Mortgages Inc. will receive a fee and/or other remuneration by the lender on completion of this transaction based on a percentage of the loan proceeds to which the broker/agent is entitled a percentage. Where the brokerage is paying a referral fee to another party for obtaining the transaction a clause may be worded as follows: • REMIC Mortgages will pay a fee to Mortgage Referrals Inc. on completion of this transaction based on a percentage of the loan proceeds.

2. The relationship between the brokerage and lender under the proposed mortgage A brokerage is required to disclose to the borrower, in writing, the “nature of the relationship between the brokerage and each lender” under the proposed mortgage, including if the brokerage is the lender. Disclosure must be made in writing and the recipient of the disclosure must acknowledge the disclosure in writing. Relationship between brokerage and lender – sample clauses Where the brokerage is the lender, a clause may be worded as follows: • REMIC Mortgages Inc. is the lender under this proposed mortgage. Where the brokerage is the owner of the lender, such as a separate corporation a clause may be worded as follows: • The lender under this proposed mortgage is a subsidiary of REMIC Mortgages Inc.

3. The role of the brokerage Section 18 of Regulation 188/08 states that the brokerage must disclose, in writing to a prospective borrower or lender the following information about the nature of its relationship with borrowers and lenders:

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1. If the brokerage is acting as a representative of the lender but not the borrower in a transaction. 2. If the brokerage is acting as a representative of the borrower but not the lender in a transaction. 3. If the brokerage is acting as a representative of both the borrower and the lender in a transaction and is not giving preference to the interests of either. This does not apply when the brokerage is the mortgage lender. Role of the brokerage – sample clauses Clauses may be worded as follows: • REMIC Mortgages Inc. is acting solely on behalf of the lender in this mortgage transaction. • REMIC Mortgages Inc. is acting solely on behalf of the borrower in this mortgage transaction. • REMIC Mortgages Inc. is acting on behalf of both the lender and the borrower in arranging this mortgage transaction.

4. The number of lenders the brokerage represented during the previous year Section 19.1 of Regulation 188/08 states that the brokerage must disclose, “in writing to a borrower the number of lenders on whose behalf the brokerage acted as a representative during the previous fiscal year and shall indicate whether the brokerage itself was a lender.” In addition, section 19.3 of Regulation 188/08 states that upon request, “a brokerage shall disclose the following information in writing to a borrower: 1. 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. 2. 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)”. Number of lenders dealt with in the previous year – sample clauses Clauses may be worded as follows: • REMIC Mortgages Inc. acted as a mortgage lender and represented XX lenders in 20__. • REMIC Mortgages Inc. acted as the lender in more than 50% of its transactions in 20__. • REMIC Mortgages Inc. arranged over 50% of its transactions through (name of lender) in 20__.

5. Potential conflicts of interest The brokerage must disclose to a borrower, lender or investor in the transaction, any potential conflict of interest that the brokerage may have.

Pause for clarification – 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. This includes a non-arm’s length interest, such as when a family member for business associate is funding the mortgage. Conflicts of interest – sample clauses Where the brokerage/broker/agent is related to the lender a clause may be worded as follows: • The brokerage/broker/agent in this transaction is the (state the specific nature of the relationship to the lender such as wife, husband, brother, sister, director, etc.) of the lender.

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Where the brokerage/broker/agent will obtain a benefit at a future date a clause may be worded as follows: • The brokerage/broker/agent in this transaction expects to (state the specific nature of the benefit such as “obtain a stake in the mortgage,” “receive a financial or non-financial payment,” etc.) in relation to this transaction at a future date. Where the broker/agent has sold the borrower a higher rate than the lender’s lowest rate to obtain some benefit a clause may be worded as follows: • The broker/agent in this transaction will receive a higher fee and/or other remuneration for providing you with a rate higher than the lender’s lowest rate based on your application.

6. Risks associated with the proposed mortgage Risk tolerance is a concept that identifies the borrower’s acceptable level of risk. There are two fundamental requirements when considering risk: understanding the borrower’s general level of acceptable risk and disclosing the specific risks associated with the mortgage being recommended by the broker/agent. This requirement is described in section 25.1 of Regulation 188/08, Mortgage Brokerages: Standards of Practice, which states that, “A brokerage shall disclose in writing to a borrower, lender or investor, as the case may be, the material risks of each mortgage or investment in a mortgage that the brokerage presents for the consideration of the borrower, lender or investor.” Furthermore, in its October 24, 2008, webinar, FSRA clearly stated that it if a brokerage is using a standardized disclosure form it may consider providing the disclosure of risks in a cover letter. Regardless of how the disclosure is made it must be directly relevant to the specific mortgage being recommended. Risks – sample clauses Variable rate mortgage: • The mortgage being recommended is a variable rate mortgage. This type of mortgage has inherent risks which you must be made aware of. These risks include the possibility of the interest rate rising, based on market conditions. To prevent the possibility of negative amortization, an increase in the interest rate may require you to increase the amount of your periodic payment; reduce the total amount of the loan amount then owing by making a lump sum payment sufficient to reduce such total amount to a point below the designated amount; or convert the mortgage to a fixed rate mortgage having equal monthly payments. If you are unable to take any of these actions then the mortgage, at the lender’s option, may immediately become due and payable. Extended amortization: • The mortgage being recommended has an extended amortization (an amortization in excess of 25 years) of XX years. If you do not reduce this amortization period on renewal of the mortgage, you may pay substantially more in interest over the lifetime of this mortgage than you would on a mortgage with a 25-year amortization. If you decide to keep the extended amortization over the life of this mortgage and do not make any additional prepayments, you will pay $_____ more than you would have on a mortgage with a 25-year amortization. Shortened amortization: • The mortgage being recommended has an amortization period less than that for which you qualify. While this will decrease the amount of interest that you pay the lender over the life of this mortgage, you may be at risk of financial hardship due to the impact of a higher mortgage payment on your cash flow. If your financial situation changes during the term of this mortgage

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and you are unable to meet your payment obligations you may not be able to decrease your mortgage payment without refinancing this mortgage, which may result in additional costs to you such as prepayment penalties, legal fees and/or other costs associated with refinancing. High TDS ratio: • The mortgage being recommended allows you to have a higher total debt service ratio than typically allowed in the mortgage industry. By having a total debt service ratio of XX you may be at risk of financial hardship due to a reduced amount of cash flow and/or disposable income than you would have had if you had taken a mortgage with lower payments and/or if you had fewer monthly obligations. Interest only mortgage: • The mortgage being recommended is an interest only mortgage. This means that you will not be reducing the amount of your outstanding principal during the term of this mortgage, resulting in the same amount owing at the end of the term as was borrowed at the beginning of the term. By not reducing the principal outstanding, you may be at risk of having less equity in your property than you would have had if you had taken an amortized mortgage if the value of your property remains the same or decreases. The fact that there is no principal reduction can put both the lender and the borrower at risk. The risk to the lender is that, if the borrower defaults and the property does not appreciate, their principal may be at risk, depending on the loan to value. For the borrower, if they use this repayment plan to increase their purchasing power and property prices decrease, they can end up owing more than the property is worth. The interest only mortgage is one of the factors that contributed to the mortgage crisis in the United States in 2007. NSF fees and other penalties • NSF (non-sufficient funds) fees are typically higher than those charged by institutions. While a bank may charge approximately $50, private lenders typically charge as high as $250. For a borrower who is having challenges with their income, this fee is a significant risk. If they can’t make their mortgage payment on time, it may be very difficult to add this NSF fee to the missed mortgage payment, due before their next payment.

Pause for clarification – NSF (non-sufficient funds) Non-sufficient funds (NSF) occurs when an account holder attempt to make a withdrawal from their bank or credit union by cheque or pre-authorized debit, but their account doesn’t have enough money to cover the withdrawal or payment. If a payment is rejected due to insufficient funds, the penalties might include: • NSF fee (an amount of money, or fee, charged by the institution) • Fees charged by the payee's bank • Having your bank close your account should you be routinely overdrawn Cases of insufficient funds are not usually reported to credit bureaus and will therefore likely not affect a person’s credit score.

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Lack of standard options • While institutional mortgages may provide flexible options such as portable and assumable options, private mortgages typically do not. Costs • Private mortgages will have costs that traditional institutional mortgages do not, such as lender fees, broker fees, administration fees, etc. These fees can add several percent to the total costs payable, reducing the amount that the borrower actually receives on closing. Default remedies • When a borrower misses a payment with an institutional lender, there is typically time to make up that payment before the lender begins the process of a power of sale (one of the legal remedies available to it). In a private mortgage, the lender will typically begin the power of sale process as soon as possible, since, in many instances, the borrower’s covenant may have been weak to begin with. This means that the borrower is at risk of having their house sold by the lender if they miss one payment. Accelerated mortgage payment: • The mortgage being recommended has an accelerated mortgage payment, which is a payment that is higher than that of a non-accelerated mortgage payment. This may put you at risk of financial hardship due to a reduced amount of cash flow and/or disposable income than you would have had if you had taken a mortgage with lower payments. Cash back option • The mortgage being recommended has a cash back option which provides you a lump sum of cash on closing. This option may put you at risk of having to repay some or all of this amount if you repay this mortgage before the end of the term. For example, if you repay this mortgage in the twelfth month you will be required to pay to the lender, in addition to any other penalties that may be charged, a pro-rated amount of $____ which may hinder your ability to repay this mortgage before the term expires. Closed mortgage: • The mortgage being recommended is closed. This means that you can only repay the mortgage before the term expires if you sell your property. You cannot refinance the mortgage before the term expires. This option may put you at risk of not being able to refinance this mortgage if interest rates decrease, if you wish to refinance your mortgage with another lender during the term, or if you need to repay this mortgage for any other reason other than sale of the property during the term of this mortgage. Failure to abide by the terms and conditions of the Standard Charge Terms: • Every mortgage has terms and conditions which a borrower must abide by. You understand that this mortgage contains a set of Standard Charge Terms that governs your rights and obligations under this mortgage contract. There is a risk to you if you fail to meet these obligations which may include penalties assessed by the lender or an action to remedy the contravention by the lender’s use of the power of sale process. Renewal • At the end of the term the lender may offer to renew this mortgage, or may not. There is the risk of default if the lender refuses to renew the mortgage and you are unable to pay the principal amount outstanding at the end of the term. This may result in default proceedings against you, including, but not limited to, the power of sale process that may result in the sale of

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your property used as security, as well as other civil remedies such as being sued for any outstanding amounts. Furthermore, there is a risk that the lender may charge a high renewal fee in comparison to other lenders.

7. Terms and conditions of the proposed mortgage As stated in section 24 of the MBLAA, in regards to term mortgages the brokerage must disclose the prepayment privileges, if any rebates are being made for a cost included in the cost of borrowing, if any charges or penalties are chargeable if prepayment is made, if any regular payment is missed, or the mortgage is not paid in full at maturity, and if the borrower has any rights or obligations under the mortgage related to these items. If the brokerage is also a lender, it may impose charges on the borrower, in addition to the interest charged, for the sole purpose of recovering the costs reasonably incurred for legal expenses and expenses related to processing a dishonoured cheque, if applicable. If the brokerage is acting as the lender in the transaction and requires the borrower to obtain insurance, it must inform the borrower that they may purchase insurance through any lawful provider, unless the brokerage has reasonable grounds to disapprove of the provider. Terms and Conditions – sample clauses A clause may be worded as follows: This mortgage contains the following terms and conditions: • If you repay this mortgage before the term expires you must pay a 3-month interest penalty or the interest rate differential, whichever is higher • Dishonoured payments will be charged a $XX NSF fee by the lender • You are permitted to make a lump sum payment, credited directly to the outstanding principal amount of this mortgage at the time of the payment, in the amount of XX% of the original mortgage amount once per calendar year • You are not allowed to rent or lease your property without the written authorization of the lender. • You must maintain your property, pay your property taxes, and maintain acceptable property insurance at all times. Failure to do so can be considered default by the lender. • You must abide by all of the terms and conditions as expressed in this mortgage’s Standard Charge Terms. Failure to do so can be considered default by the lender.

8. The cost of borrowing Disclosure of the cost of borrowing is critical for compliance purposes and is covered in Regulation 191/08. The MBLAA outlines that the cost of borrowing must include the interest rate and any amount payable by the borrower in connection with the mortgage. The MBLAA allows for certain items to be excluded from the cost of borrowing, as detailed in the Regulation.

Pause for clarification – The cost of borrowing: dollars and cents While 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. The MBLAA imposes requirements on what constitutes the cost of borrowing and how it must be expressed, as well as items of additional disclosure. The MBLAA states that a brokerage must disclose

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the cost of borrowing based on the assumption that all obligations of the borrower are met and that it be expressed as a rate per annum, except if indicated otherwise by regulation. In addition, section 27 prohibits advertising the cost of borrowing unless it contains information as required by Regulation 191/08. This Regulation clearly describes what information must be provided to borrowers and how it is to be provided. The cost of borrowing is calculated using the formula: APR = C / (T x P) x 100 in which, • “APR” means the annual percentage rate cost of borrowing, • “C” is the total of all costs legally required to be disclosed, • “P” is the average of the principal of the mortgage outstanding at the end of each period for the calculation of interest under the mortgage, before subtracting any payment that is due at that time, and • “T” is the term of the mortgage in years, expressed to at least two decimal points. The APR may be rounded off to the nearest eighth of a per cent and if the mortgage is a variable rate mortgage (VRM), the rate as of the date of the calculation must be used. In addition, the cost of borrowing for a line of credit or credit card is the annual rate that applies on the date of the disclosure.

Pause for clarification – Calculating the APR/cost of borrowing While the formula to calculate the APR appears straightforward, it cannot be calculated using a regular calculator. This is due to the fact that “P” represents the average principal of the mortgage outstanding at the end of each period. In other words, one must calculate the outstanding balance at the end of each payment, add them all and divide by the number of payments to arrive at “P.” This calculation is no different than required under the previous Mortgage Brokers Act; therefore, all mortgage origination software should continue to accurately calculate the APR/cost of borrowing for the broker/agent.

10.4 Cost of Borrowing – Expanded Explanation The cost of borrowing is a topic that confuses many new mortgage agents because it is not easily explained, so we’re going to try to expand on its explanation in more detail than we’ve seen in the previous section. The cost of borrowing is a representation of how much the mortgage will cost in total over the term of the mortgage. This total will include, of course, the interest that the lender is charging to borrow the funds, but also all of the other costs that the borrower has had to pay or will have to pay to get the mortgage. Regardless of if the cost has been paid at the time of disclosure, or has yet to be paid, if it has to be paid to obtain the mortgage it must be included in the cost of borrowing. For example, Mary is borrowing $500,000 at rate of 3% compounded semi-annually, not in advance, amortized over 25 years with a 5-year term. To her, the cost of borrowing this money may simply seem to be 3%. However, in our example, she has to pay $1,500 in legal fees, $400 as an appraisal fee, $450 for title insurance and $1,000 as a brokerage fee to get this mortgage. These costs are all part of borrowing this money. In other words, to borrow this money she must pay these other costs in addition

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to the 3% interest being charged by the lender. Therefore, the total cost of borrowing must combine these other costs with the lender’s interest rate. The confusion, of course, is that the interest rate is disclosed as a percentage, and the other costs are disclosed in dollars and cents. So, to meet the requirements of the MBLAA we have to convert everything to a percentage and convert everything to dollars and cents and disclose both of these figures in the borrower disclosure document. When the total cost of borrowing is expressed as a percentage this means the total of all costs, payable up front or over the term of the mortgage, combined with the rate of interest being charged during the term, expressed as a percentage. In Mary’s example, the total cost of borrowing will not be 3%, but 3.1824% When the total cost of borrowing is expressed in dollars and cents this means the total of all costs, payable over the term of the mortgage, expressed in dollars and cents. In Mary’s case, the total cost of borrowing will be the interest charged by the lender in dollars and cents plus the costs of obtaining the mortgage, which results in $72,696.66. Luckily most origination software programs used by brokerages in today’s market will calculate these amounts for you, so you don’t have to know the math of how to covert dollar costs to percentages, for example. When determining if a cost is included or excluded from the cost of borrowing, the general rule is that costs associated with obtaining a mortgage, such as those listed below, must be included in the cost of borrowing, while all other costs, such as costs associated with buying a home, are not included.

10.4.1 Cost of Borrowing – Included and excluded costs

Quick reference chart of included and excluded items Included in cost of borrowing 1. Administrative charges 2. Legal Fees, mortgage 3. Title insurance, lender required 4. Appraisal fees, lender required 5. PST on mortgage default insurance 6. Status certificate fee 7. Interest adjustment amount Excluded from cost of borrowing 1. Property insurance 2. Overdraft charges 3. Document registration 4. Penalties 5. Legal fees, purchase 6. Title insurance, optional 7. New home warranty 8. New hydro account 9. Appraisal fees, ordered by the borrower 10. Mortgage default insurance

Amount Depends on the lender $1,300 - $1,500 Approximately $400 - $1,000 Approximately $350 - $800 8% x premium $100 See “Included” Amount Depends on the property See “Excluded” See “Excluded” See “Excluded” See “Excluded” See “Excluded” See “Excluded” See “Excluded” See “Excluded” Depends on the insurer

282 11. 12. 13. 14. 15. 16.

Chapter 10: Borrower Disclosure Closing adjustments Property tax accounts Home inspection ordered by purchaser Land transfer tax, all of Ontario City of Toronto Municipal Land Transfer Tax (MLTT) HST on purchase

See “Excluded” See “Excluded” Approximately $250 - $300 See “Excluded” See “Excluded” See “Excluded”

Included As per the MBLAA, items that must be included in the cost of borrowing/APR calculation include: 1.

Administrative charges These include charges for services, transactions, or any other activity in relation to the mortgage, such as a lender’s administration fee

2. Legal fees, mortgage These include disbursements, for a lawyer hired by the lender and paid by the borrower (the majority of cases), even if that lawyer is chosen by the borrower. If they are unknown at the time of the disclosure, a good faith estimate must be used. Legal fees for other purposes, such as the purchase of a property, are not included in the cost of borrowing as they are not being paid as a cost of obtaining the mortgage. This same rule applies to other costs not associated with the mortgage. If the borrower’s own lawyer is giving the borrower independent legal advice, for example, that cost is not included in the cost of borrowing. But to be clear, legal fees to close the mortgage transaction are included in the cost of borrowing regardless of who chooses the lawyer. Legal fees associated with the mortgage will vary, but generally range between $1,300 to $1,500. They may be higher if the transaction is more complex. 3. Title Insurance, lender required When required by the lender, excluding those listed in the Excluded section below. The cost of title insurance typically runs between $400 and $1,000 but can go higher from there depending on the type of policy, the property type and the value of the property. This is a one-time premium. Try the title insurance calculator at https://quote.fct.ca/ to estimate the cost. 4. Appraisal fees, lender required These also include inspection, or survey costs payable by the borrower, when required by the lender. In most cases where an appraisal is being conducted it will be at the request of the lender. The lender wants to determine the value of the property for lending purposes, and it is therefore required to get the mortgage. As such the cost of the appraisal, if paid by the applicant, is included in the cost of borrowing. While some lenders will waive the appraisal fee or reimburse the fee on closing, it is important to advise the borrower of the typical charge which ranges from $350 to $800. Though the borrower may have to pay this fee before the transaction closes, it should be considered by the borrower since it may reduce the amount that they have for closing costs.

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5. PST on Mortgage Default insurance: CMHC/Sagen/Canada Guaranty mortgage default insurance fees, while required to obtain the mortgage, are not included in the cost of borrowing. However, the PST charged on those fees is included. In Ontario there is still 8% PST (not HST) payable on the premium. For example, a CMHC fee of $10,000 would result in a tax of $800.73 6. Status Certificate fee Typically, $100, this is required by the lender when the property is a condominium 7. Interest Adjustment Amount The interest adjustment amount is an amount payable to a lender for the period of time that mortgage proceeds are held by the borrower before the period covered by the first mortgage payment. This amount will vary based on the mortgage’s interest rate and the number of days between the mortgage advance and the interest adjustment date.

Excluded As per the MBLAA items not included in the Cost of Borrowing/APR calculation include: 1. Property insurance, and other optional insurance charges, or if the borrower is the beneficiary 2. Overdraft charges (charges for using an overdraft protection on a bank account) 3. Document registration and discharge fees, such as for registering the mortgage, transferring ownership, etc. 4. Penalties Penalties, such as NSF fees, discharge fees, prepayment penalties, etc. are not included in the cost of borrowing because they have not yet occurred, may never occur, and are not required to be paid to obtain the mortgage. They are only payable at a future point if the reason for them occurs. For example, an NSF fee is only payable if the borrower’s cheque is returned non-sufficient funds. 5. Legal fees for the purchase of the property being mortgaged, or for additional services of a lawyer not related to the mortgage transaction 6. Title insurance, optional In most cases the lender will require that the borrower purchase title insurance for their mortgage. In this case, because it is required by the lender and the lender will be the beneficiary, the cost of this insurance must be included. If, however, the borrower obtains a policy on their own, chooses the insurer and is the beneficiary, it will not be included. 7. New Home Warranty Tarion, the new name for the Ontario New Home Warranty Program, regulates the home building industry in Ontario. Tarion steps in to protect consumers when builders fail to complete purchase agreements and construction contracts or fail to fulfil their mandatory warranty obligations in the Ontario New Home Warranties Plan Act. Tarion pays claims to consumers. The builder and/or vendor pays the warranty enrolment fee to Tarion before construction and will either include it in

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CMHC, How much does CMHC loan insurance cost? http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm

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Chapter 10: Borrower Disclosure the purchase price of the home or show it as a separate item on the Statement of Adjustments. The fee ranges from $325 to $750 based on the sale price. (More information can be found by visiting www.tarion.com)

8. New Hydro Account If the purchaser has not had hydro in their name before a deposit of $200 will likely be required. 9. Appraisals, inspections, or surveys ordered directly by, and received by, the borrower 10. Mortgage Default insurance premiums for high-ratio mortgages 11. Closing adjustments On closing a purchase there are often adjustments for municipal utility accounts, such as Hydro, water, etc. that may be prepaid by the vendor. These are not associated with obtaining the mortgage and are therefore not included in the cost of borrowing. 12. Property tax accounts (the lender is adding the property tax payment to the mortgage payment) that are optional or required for a high-ratio mortgage 13. Home Inspection ordered by purchaser While prices vary, this cost can be estimated at between $250 and $300 14. Land Transfer Tax (LTT) – all of Ontario74 If the transaction is a purchase, the buyer must have funds for the land transfer tax. First-time homebuyers may be eligible for a refund of all or part of this tax. As of January 1, 2017, no land transfer tax is payable by qualifying first‑time purchasers on the first $368,000 of the value of the consideration for eligible homes. First‑time purchasers of homes greater than $368,000 would receive a maximum refund of $4,00075.

Pause for clarification – LTT refund, definition of first-time purchaser To claim a refund up to the maximum of $4,000, • you must be at least 18 years of age, • you cannot have owned a home or an interest in a home anywhere in the world, and • your spouse cannot have owned a home or interest in a home, anywhere in the world while he or she was your spouse. Previous ownership in a home means you do not qualify for the land transfer tax first-time homebuyer’s refund. NOTE: This rule is different than how CRA views first-time homebuyers for the Home Buyers’ Plan. This tax is calculated based on the following formula (the percentages are calculated on the amount of the purchase price that falls within each category):

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Ontario Ministry of Finance, https://www.fin.gov.on.ca/en/bulletins/ltt/2_2005.html Ontario Ministry of Finance, https://www.fin.gov.on.ca/en/bulletins/ltt/1_2008.html

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Purchase Price of the Property

285

Land Transfer Tax

Up to and including $55,000

0.5%

$55,000.01 - $250,000

1%

$250,000.01 - $400,000

1.5%

$400,000.01 - $2,000,000

2%

$2,000,000 and over

2.5%

Example If the purchase price is $300,000 and the purchaser is not a first-time purchaser, the provincial Land Transfer Tax would be calculated as follows: ($55,000 x .005) + ($195,000 x .01) + ($50,000 x .015) = $275 + $1,950 + $750 = $2,975 15. City of Toronto Municipal Land Transfer Tax (MLTT) – payable in addition to the LTT76 In addition to the provincial LTT, the City of Toronto introduced the following tax that must be added to the LTT as of February, 2008. In the above noted example this is not a first-time purchase so the MLTT would add an additional $2,975 to the LTT for a total payable of $5,950. This tax is calculated based on the following formula, as of March 1, 2017.

Pause for clarification – MLTT rebate, definition of first-time homebuyer To claim a rebate (Ontario refers to this as a refund while Toronto refers to this as a rebate) up to the maximum of $4,475, • the purchaser is at least 18 years of age • the purchaser must occupy the home as their principal residence no later than nine months after the date of the conveyance or disposition • the purchaser cannot have previously owned a home, or had any ownership interest in a home, anywhere in the world, at any time • if the purchaser has a spouse, the spouse cannot have owned a home, nor had any ownership interest in a home, anywhere in the world while they were the purchaser’s spouse NOTE: This rule is different than how CRA views first-time homebuyers for the Home Buyers’ Plan.

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City of Toronto, https://www.toronto.ca/services-payments/property-taxes-utilities/municipal-land-transfer-taxmltt/municipal-land-transfer-tax-mltt-rates-and-fees/

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Purchase Price of the Property

Municipal Land Transfer Tax

Up to and including $55,000

0.5%

$55,000.01 - $250,000

1%

$250,000.01 - $400,000

1.5%

$400,000.01 - $2,000,000

2%

Over $2,000,000

2.5%

Success Tip – Closing Cost Worksheet Provide your client with a Closing Cost Worksheet (found in section 18.10) and prepare him or her at the initial consultation for the costs involved. It is best to know up front if your client is going to have troubles getting cash to pay the closing costs. This can assist you in determining the mortgage product that best suits your client’s needs as well as helping the client make an informed decision on the house that he or she is about to purchase. The odds of losing a client at closing due to a lack of funds will be greatly reduced, which will help you close more business! 16. HST (formerly the GST) 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 an HST rebate applicable to new homes, substantially renovated homes, and modular and mobile homes for which an application must be completed. More information on the HST rebate can be found at Canada Revenue Agency at www.cra.gc.ca.

10.5 Borrower Disclosure – How Disclosure Must be Made Brokerages must provide written disclosure to borrowers (as per sections 6 of Regulation 191/08) that meet the following four key requirements: 1. it may be a separate document or part of another document 2. in cases where amounts required to be disclosed cannot reasonably be known, disclosure may be based on an assumption or estimate, as long as the assumption or estimate is reasonable, and the borrower is told that it is an assumption or estimate 3. it must be written in clear, plain language that brings the required information to the attention of the borrower 4. it may be provided electronically, provided that the borrower consents in writing

Pause for clarification – What disclosure documents MUST be given to the borrower? The MBLAA requires that when the borrower signs the borrower disclosure document the mortgage agent must give the borrower: 1. A signed copy of the borrower disclosure, and 2. An amortization schedule for the full term of the proposed mortgage

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It is the brokerage’s responsibility to ensure that its agents and brokers are providing disclosure using an appropriate form. Typically, the brokerage will use origination software that can automatically provide compliant disclosure forms.

10.6 Borrower Disclosure – When Disclosure Must be Made 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.

10.7 Sample Borrower Disclosure Disclaimer: The following sample borrower disclosure documents are intended for illustration purposes only and are not warranted to be compliant. It is the responsibility of the mortgage agent to use only those forms approved by their brokerage. Case Study – Fixed rate mortgage The following is a case study that is used to provide an example of the potential disclosure document for use by a brokerage arranging a fixed rate mortgage for a borrower. Adam Coren is a licensed mortgage agent with REMIC Mortgages Inc. Adam has recently arranged a fixed rate mortgage with constant payments for his clients, Noreen and Christopher Borrower to purchase a new home in Toronto. Adam is not charging a brokerage fee since he is being paid directly by the lender. Given this scenario Adam has completed a borrower disclosure document as provided by REMIC Mortgages Inc. The first document below is the lender’s commitment letter. The following document is the borrower disclosure based on this commitment letter.

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Figure 25 – Mortgage commitment Letter for use in disclosure, example

Mortgage Commitment Response: December 15, 2012 Broker Information Name: Address: Attention:

REMIC Mortgages Inc. 2175 Sheppard Avenue East, Suite 213, Toronto, ON, M2J 1W8 Adam Coren Application Reference Number: 1213456-789

Lender Information Name: Address: Lender Reference #:

SuperBank 2750 Yonge Street, Suite 6500, Toronto, ON, M1M 1M1 1213456-789 Mortgage Insurance Reference #: TBD

Applicant Information Applicant(s): Noreen Borrower, Christopher Borrower Property Information Address: 1234 Queen Lane, Toronto, ON, M1S 1M1 With reference to the above noted property SuperBank is pleased to provide the following mortgage loan offer, subject to the following terms and conditions: Purchase Value: Down payment: Amount: Insurance Premium Total Loan: Other Mortgages: Product: Cashback: Closing Date:

Loan $237,500.00 $11,875.00 $225,625.00 $6,201.94 $231,826.94 N/A Supersizer No 02/27/2023

Terms Mortgage Type: First Term Type: Closed Interest Rate* 5.390% Term**: 60 Amortization ** 300 Frequency: Monthly *compounded semi-annually **months

Payment Principal and Interest: Taxes (Estimated) Taxes Paid By: Total Installment: Commitment Expires

$1,399.64 $149.58 Lender 1,549.22 12/22/2012

LENDER AUTHORIZATION All of our normal requirements and, if applicable, those of the mortgage insurer must be met. All costs including legal, survey, mortgage insurance, etc. are for the account of the applicant(s). The mortgage insurance premium (if applicable) will be added to the mortgage. This mortgage is subject to the details and terms outlines as well as the conditions described in the attached Schedule A.

Approved by:

John Underwriter, SuperBank Signature: _________________ Date: ________________

CLIENT ACCEPTANCE I/We the undersigned applicant(s) accept the terms of this mortgage as stated above and agree to fulfill the conditions of approval as outlined in the attached Schedule A to the lender’s satisfaction. I/We further certify that the information given on the mortgage application is true and correct.

Applicant: Noreen Borrower

Signature: _________________

Date: _________________

Applicant: Christopher Borrower

Signature: _________________

Date: _________________

Mortgage Commitment – SCHEDULE A ASSUMPTION POLICIES Assumption Option: The transferee or purchaser may, upon completion of a mortgage application which meets our mortgage approval criteria then in effect, personally assume (with the consent of their spouse where required by law) all of your obligations under your mortgage by executing an assumption agreement in the form required by us.

CONDITIONS Mortgage: The mortgage loan to be made to you shall be subject to all extended terms set forth in SuperBank’s standard form of mortgage contract, and loans insured by a mortgage insurer will be subject to the requirements of the Certificate of

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Insurance issued by the mortgage insurer. Property Taxes: If stipulated by us, you will pay us monthly, an amount which in our opinion is sufficient to enable us to pay the annual property taxes on your behalf by the due date for the first installment of the tax bill in each year, based on the estimated annual taxes. We shall withhold a tax holdback from our mortgage advance sufficient to accumulate the required credit in your tax account. Any tax bills issued and unpaid at the interest adjustment date shall be paid from the proceeds of the mortgage loan. Fire Insurance: We shall require evidence of replacement cost all-risk insurance coverage acceptable to us, taken with an insurer not disapproved by us. Such policy must contain the standard Insurance Bureau of Canada mortgage clause and must indicate our interest as mortgagee. Title Insurance: A title insurance policy acceptable to us and obtained by our solicitor at your cost. Processing Fee and Costs: Whether or not this loan is funded, you agree to pay the processing fee specified herein, if any, and all legal, appraisal and survey costs incurred by you or us in this transaction. CMHC/GEMICO/Canada Guaranty Insurance Fee: Insurance Fee: You agree to pay any mortgage insurance fee, as indicated, and all applicable federal or provincial taxes thereon. Interest Adjustment: Interest shall accrue from the date the first advance is made. Interest due to the interest adjustment date will be simple interest calculated daily and will be deducted from the first advance Pre-authorized Cheque Plan: You agree to make repayment under the mortgage by a 'pre-authorized cheque plan' or by such other means as may be requested by us. Commitment: This commitment is not transferable by you and the benefit may not be assigned by you. It may be assigned by us. Representation and Warranty: You warrant to us, and it is a condition of this loan, that all information submitted by you or your broker to us in connection with your loan application is true and accurate, and you agree to supply promptly, on request, any further information concerning yourself, your financial standing or the property to be mortgaged, which may be required by us. Title: You represent and warrant to us, and it is a condition of this loan, that you have a good and marketable title to the property to be mortgaged, satisfactory in all aspects. Zoning and Work orders: It is a condition of this loan that the mortgaged property and the use thereof comply with all applicable government laws and regulations and that there are no outstanding work orders, notices, or directives against the property. Construction Loan: In the case of a construction loan, advances will be made at our discretion, and we will always retain sufficient funds to complete construction. New Homes: If this mortgage loan is for the purchase of a newly constructed home, our solicitor will be required to obtain a certified copy of the New Home Enrolment endorsed by HUDAC (or the equivalent enrolment in any governmental new home warranty program in provinces other than Ontario) before making any mortgage advances.

ASSIGNMENT POLICIES No agency: You acknowledge that we may assign this commitment or the mortgage to a third party and may receive a fee in connection with such assignment. We may also receive a fee in connection with the servicing of this loan. We are not acting as your agent or otherwise in any fiduciary capacity in relation to you in connection with the loan described herein. Solicitor and Documentation: The solicitor specified by us will act on our behalf in this transaction. You agree to deliver to our solicitor your title documents, insurance policy and survey as soon as possible. Entire Agreement: This commitment, when accepted by you, will constitute the entire agreement and understanding between you and us with respect to this loan and will supercede all other agreements or understandings Survival: You agree that the terms, conditions & covenants contained in this commitment shall survive and will not merge upon registration of the mortgage and the advance of funds thereunder but will remain valid and subsisting obligations. Information: You agree that we may conduct credit checks with consumer reporting agencies and make such other investigations and collect such other information concerning you as we may deem advisable, all such information to be used for the purpose of underwriting, assessing the risk associated with, and administering this mortgage loan. Privacy: You agree that we may share information concerning you with (a) any proposed assignee of this commitment or the mortgage loan, (b) our duly authorized agents and representatives who are engaged in the processing or servicing of your

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mortgage, (c) any parties necessary or desirable in connection with any sale or securitization of this mortgage loan and (d) organizations with which the lender has strategic alliances who may use such information to provide you from time to time with information on financial products which may be of interest to you. If you prefer that your personal information not be shared with any party referred to in this document or future documents, you may so advise us in writing at any time and we will not share the information with them.

PAYMENT FLEXIBILITY OPTIONS Circle Payment Option:

Weekly

Bi-weekly

Semi-monthly

Monthly

INSTRUCTIONS The terms and conditions of this mortgage commitment will form part of the solicitor’s instructions.

OTHER Borrower disclosure required prior to funding Title to be taken in the name of Borrower, Noreen and Borrower, Christopher Subject to satisfactory confirmation of down payment. Subject to satisfactory confirmation of income. Subject to CMHC approval Subject to signed and dated mortgage application Receipt of satisfactory purchase agreement including all addendums and MLS listing.

PORTABILITY OPTIONS If the mortgagor is not in default and has entered into an agreement to sell or transfer title to the mortgaged property, the mortgagor may exercise the Portability Option.

PREPAYMENT POLICIES Privileges: 15% per year and periodic payment increase up to 100% at any time, once per year The Mortgagor, when not in default of any terms or conditions contained in the Mortgage, may prepay the whole of the principal sum then outstanding without notice upon payment to the Mortgagee of the greater of i) three months' interest at the interest rate on the principal sum outstanding; or ii) the amount, if any by which interest at the Interest rate exceeds interest at the Mortgagee's current interest rate for reinvestment calculated on the principal sum outstanding. Such amount to be calculated from the date of prepayment to the maturity date of the mortgage.

RATE ADJUSTMENT POLICIES If five days prior to closing our interest rate is lower than the guaranteed interest rate, upon request, the lower rate will prevail.

ADMINISTRATION AND SERVICE FEES NSFs, Stopped Payment, Returned Items: $150.00 Date:______________________________

Initials:__________

Initials: __________

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Figure 26 – Borrower Disclosure document, example

Borrower Disclosure

Page 1 of 4

REMIC Mortgages Inc. To:

Noreen Borrower, Christopher Borrower 1234 Borrower Lane, Toronto, ON, M1M 1M1

We are pleased to inform you that we have arranged the following mortgage on your behalf: Details of the mortgage we have arranged on your behalf Address of property to be mortgaged: 1234 Queen Lane, Toronto, ON, M1S 1M1 Purpose: Purchase Closing Date: 03/01/2023 Commitment Expires: 12/22/2022 Loan Terms Payment Purchase Value: $237,500.00 Type: First Principal and $1,399.64 Interest: Down payment: $11,875.00 Term Type: Open on Penalty Taxes (Estimated) $149.58 Amount: $225,625.00 Interest Rate: Fixed at 5.390% Taxes Paid By: Lender Insurance Premium $6,201.94 Compounding: Semi-Annual Total Installment: 1,549.22 Term (months): 60 Total Loan: $231,826.94 Amortization: 300 months Due Date: 1st of each month Other Mortgages: N/A Frequency: Monthly Product: Supersizer All mortgage payments are applied to interest first, followed by principal

Other Terms and Conditions Prepayment Privileges:  When not in default of any terms or conditions contained in the mortgage, you may prepay the whole of the principal sum then outstanding without notice upon payment to the mortgagee of the greater of three months' interest at the interest rate on the principal sum outstanding; or the amount, if any by which interest at the Interest rate exceeds interest at the mortgagee's current interest rate for reinvestment calculated on the principal sum outstanding. Such amount to be calculated from the date of prepayment to the maturity date of the mortgage.  15% per year & Double Up Rate Guarantee  If five days prior to closing our interest rate is lower than the guaranteed interest rate, upon request, the lower rate will prevail. Portability Option  If the mortgagor is not in default and has entered into an agreement to sell or transfer title to the mortgaged property, the mortgagor may exercise the Portability Option.

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Assumable Option  The transferee or purchaser may, upon completion of a mortgage application which meets our mortgage approval criteria then in effect, personally assume (with the consent of their spouse where required by law) all of your obligations under your mortgage by executing an assumption agreement in the form required by us. Administration and Service Fees  NSFs, Stopped Payment, Returned Items: $150.00 Other Obligations

 You must maintain your property, pay your property taxes, and maintain acceptable property insurance at all times. Failure to do so can be considered default by the lender.  You must abide by all of the terms and conditions as expressed in this mortgage’s Standard Charge Terms. Failure to do so can be considered default by the lender.  You understand that time is of the essence and that you must meet all of the terms and conditions of the attached mortgage approval. Failure to do so may result in cancellation of the mortgage commitment without recourse by you resulting in potential financial loss. Other information about your mortgage As with all mortgages borrowing involves a certain degree of risk. The potential risks associated with this mortgage include:

 Standard Charge Terms Every mortgage has terms and conditions which a borrower must abide by. You understand that this mortgage contains a set of Standard Charge Terms that governs your rights and obligations under this mortgage contract. There is a risk to you if you fail to meet these obligations which may include penalties assessed by the lender or an action to remedy the contravention by the lender’s use of the power of sale process. About REMIC Mortgages Inc.  REMIC Mortgages Inc. will receive a fee and/or other remuneration by the lender on completion of this transaction based on a percentage of the loan proceeds to which the broker/agent is entitled a percentage.  REMIC Mortgages Inc. is acting on behalf of both the lender and the borrower in arranging this mortgage transaction. The cost of  REMIC Mortgages Inc. acted as a mortgage lender and represented 23 lenders in 2011. borrowing is expressed as a Cost of Borrowing and APR percentage… The total APR of this transaction is 5.646% and includes the following costs of borrowing: Cost Details Appraisal fee: $250.00 You have already paid this amount Legal fees plus disbursements (this is an $1,500.00 To be deducted on closing estimate): … and in dollars and cents Total Costs: $1,750.00 Over the term of this mortgage if all of your payments are made on time and you do not make any prepayments you will have paid $26,482.83 in principal and $61,089.57 in interest and your outstanding balance at the end of 60 payments will be $215,161.49

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Brokerage Acknowledgement I, Adam Coren, a licensed mortgage agent on behalf of REMIC Mortgages Inc., have completed this disclosure document in accordance with the Mortgage Brokerages, Lenders and Administrators Act, 2006. ________________________________ Signature of Adam Coren, Broker

________________________________ Date

Borrower Acknowledgement By signing below, we, Noreen Borrower and Christopher Borrower acknowledge that we have read and understand this document, including the terms and conditions of this mortgage and have received an amortization schedule. We understand that this disclosure must be made at least two business days before we are asked to make a payment, enter into the mortgage agreement or incur any other obligation in relation to this proposed mortgage waive this waiting period, unless we consent in writing to waive these two business days. By signing below, we do not waive this waiting period. or By signing below, we further acknowledge that we understand that time is of the essence and we must meet the terms and conditions of the attached mortgage commitment letter and will undertake to do so immediately. We understand that failure to do so may result in this mortgage approval being cancelled without recourse. We further understand that if this mortgage approval is cancelled based on my/our failure to meet the terms and conditions of this transaction that we may suffer financial harm, in which case we agree to hold harmless and indemnify REMIC Mortgages Inc. from all liability. We further acknowledge that we may obtain independent legal advice, at our own cost regarding this transaction and that REMIC Mortgages Inc. has not advised us against this.

__________________________________ Signature of Noreen Borrower __________________________________ Signature of Christopher Borrower

__________________________________ Date __________________________________ Date

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Borrower Disclosure Continued

Page 4 of 4

Amortization Schedule (this must be included with every Borrower Disclosure document) Loan Amount: Interest Rate: Term: Amortization:

$500,000 5% 1 year 25 years

Payment Number 1 2 3 4 5 6 7 8 9 10 11 12

Payment Amount $2,908.03 $2,908.03 $2,908.03 $2,908.03 $2,908.03 $2,908.03 $2,908.03 $2,908.03 $2,908.03 $2,908.03 $2,908.03 $2,908.03

Payment Date 04/01/2023 05/01/2023 06/01/2023 07/01/2023 08/01/2023 09/01/2023 10/01/2023 11/01/2023 12/01/2023 01/01/2024 02/01/2024 03/01/2024

Compounding Frequency: Payment Frequency: Monthly Payment: Interest Adjustment Date: Amount to Principal $846.07 $849.56 $853.06 $856.58 $860.12 $863.66 $867.22 $870.80 $874.39 $878.00 $881.62 $885.25

Cumulative Principal $846.07 $1,695.63 $2,548.69 $3,405.27 $4,265.39 $5,129.05 $5,996.27 $6,867.07 $7,741.46 $8,619.46 $9,501.08 $10,386.33

Amount to Interest $2,061.95 $2,058.47 $2,054.97 $2,051.45 $2,047.91 $2,044.37 $2,040.81 $2,037.23 $2,033.64 $2,030.03 $2,026.41 $2,022.78

Semi-Annual Monthly $2,908.03 February 27, 2023 Cumulative Interest $2,061.95 $4,120.42 $6,175.39 $8,226.84 $10,274.75 $12,319.12 $14,359.93 $16,397.16 $18,430.80 $20,460.83 $22,487.24 $24,510.02

Balance $499,153.93 $498,304.37 $497,451.31 $496,594.73 $495,734.61 $494,870.95 $494,003.73 $493,132.93 $492,258.54 $491,380.54 $490,498.91 $489,613.66

Pause for clarification – Interest adjustment date and amount In this example the mortgage is closing on February 27, 2023, and the first regular monthly mortgage payment is due April 1, 2023. This first payment is for the month of March, as mortgage payments are made in arrears (for the previous month in this case, but may also be weekly, bi-weekly, etc. depending on the payment frequency). Therefore, the interest adjustment payment is based on the time the borrower has the money outside of the first regular payment; in other words, for the period of February 27 to March 1. In this case the amount of the interest adjustment payment would be approximately $67.52.

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10.8 Borrower Disclosure Checklist The following checklist can be used to assist in developing borrower disclosure form(s). Figure 27 – Borrower Disclosure Checklist

Does our disclosure form(s) include? All fees and payments associated with the mortgage, including brokerage fees? The nature of the relationship between the brokerage and lender? 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 mortgage? The terms and conditions of the proposed mortgage, including prepayment penalties and NSF fees? The cost of borrowing expressed as an APR? The cost of borrowing expressed in dollars and cents? Good faith estimates for costs unknown at the time of disclosure? The amount of the mortgage? The interest rate of the mortgage and how it is compounded? The amount of each mortgage payment and when it is due? An amortization schedule? Information on any optional services, such as a home warranty or other insurance? Costs associated with discharging the mortgage? Any other items covered by the MBLAA and its Regulations and/or any items we want disclosed to our borrowers? List below: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

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10.9 The Importance of Independent Legal Advice (ILA) In certain cases, the lender will require that the borrower (or Guarantor, as the case may be) meet with their own lawyer to discuss the terms and conditions of the proposed mortgage. This may occur in situations where the individual is acting as a Guarantor for a friend or family member, or where the mental state of the borrower may be in question. In addition, the MBLAA requires that a borrower in a reverse mortgage transaction brokered by a licensee must have ILA. The lawyer acting on behalf of the lender will send the closing mortgage documents to the lawyer providing ILA, and this lawyer will meet with the client and explain the mortgage to him or her. Once done, this lawyer will complete a Certificate of Independent Legal Advice, which basically states that the lawyer has met with the client, explained the terms and conditions of the mortgage, and that the client attests that they are not taking the mortgage under duress or undue influence. In a private mortgage, it is important that the borrower understand their right to independent legal advice. In addition to ensuring the borrower understands all of the terms and conditions of the mortgage, it further protects the licensee from potential legal issues related to claims of incomplete or improper disclosure by the licensee. Figure 28 – Certificate of ILA, example

CERTIFICATE OF INDEPENDENT LEGAL ADVICE TO:

SUPBERANK INC.

AND TO:

SUPERLAW INC., their solicitors

RE: SUPBANK INC. MORTGAGE LOAN TO Mr. J. Borrower, 123 Kingston Street, Southwest, Toronto, ON, M1M 1M1 With respect to the above-noted transaction, on this 23RD day of NOVEMBER, 2012, I was consulted by Mr. J. Borrower, in his presence alone as to the effect of his executing: 1. A Mortgage Loan Commitment issued by SUPERBANK INC., in his capacity as Guarantor; 2. A Mortgage/Charge of Land in favour of SUPERBANK INC. over the lands municipally known as 123 Kingston Street, Southwest, Toronto, ON, M1M 1M1 (the “Mortgage”) in his capacity as Guarantor; 3. Authorization to insert dates and other incorrect data; 4. A General Assignment of Rents and Leases in favour of SUPERBANK INC. respecting the lands municipally 123 Kingston Street, Southwest, Toronto, ON, M1M 1M1 5. Acknowledgement of receipt of Standard Charge Terms and Direction re: funds; 6. Acknowledgement of Receipt of Personal Property Security Act Financing Statements; 7. Non-Merger Acknowledgement. 8. Re-Direction of funds; 9. Certain Statutory Declarations, Warranties, Directions and Undertakings in connection with the above-noted transaction; and 10. Any other documents ancillary to the above (collectively the "documents"). I explained to Mr. J. Borrower the nature of the documents and advised him fully as to the liability which he would incur by executing them. I also advised him fully as to the manner in which such liability could be enforced. Mr. J. Borrower informed me, and I am satisfied that he fully understands the nature and effect of executing the

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documents and that in executing the Documents is acting freely and voluntarily and not under any undue influence exercised by SUPERBANK INC, or any other person. I have given this advice to Mr. J. Borrower as his solicitor and in his interest only and without regard to, or consideration for the interest of SUPERBANK INC., or any other person. I am not acting on behalf of SUPERBANK INC., or any other person in connection with this matter. Name and Address of Solicitor: ____________________________ I hereby acknowledge that all of the statements made in this Certificate are true and that Mr. Borrower’s lawyer, in advising me herein was consulted by me as my personal solicitor and in my interest only. WITNESS: ) ) ) ________________________________ )

10.10 The Importance of Proper Disclosure Proper disclosure, meaning disclosure that meets the requirements of the MBLAA and its Regulations, as discussed in the previous sections, is of significant importance to licensees for several reasons. 1. Regulatory enforcement 2. Civil suits against licensees 3. Reputational damage 1. Regulatory enforcement As discussed in section 3.5, FSRA has the obligation to impose penalties that may result in a licensee being fined, having their license suspended or revoked, as well as being imprisoned for specific contraventions of the MBLAA. It is therefore of vital importance that a licensee provide full disclosure, as discussed throughout this chapter. 2. Civil suits against licensees The number of civil suits against licensees by both investors and borrowers has been on a steady increase over the past several years, primarily suits brought against licensees by investors who have lost money in a mortgage investment. Civil liability is ultimately decided by the court if a claim is made for professional negligence. The courts will consider the specific facts of each case. The Mortgage Brokerage’s errors and omissions insurance policy is designed to provide liability coverage. Like all insurance policies, however, there are limits and exclusions. In several cases being adjudicated, the claims are in excess of the coverage, meaning licensees may be responsible for amounts awarded to plaintiffs not covered by insurance. 3. Reputational damage The reputational damage that can be caused by improper disclosure can range based on the type of improper disclosure, whether it was intentional or due to ignorance. In either case, there are several outcomes, all of which are detrimental to the industry and the licensee involved. a) Loss of business Unintentional improper disclosure may be the result if incomplete due diligence, ignorance of what must be disclosed, either because of insufficient training by the licensee’s brokerage, or incompetence of the licensee. Whatever the reason, the consequences are real. They may result

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b)

Bad publicity Social media and news reports of negligence by licensees is on the rise. Doing a simple online search of mortgage fraud nets millions of results. Improper disclosure that results in losses for investors or borrowers no longer go unnoticed or unreported. They make headlines, like, “…founders charged with fraud in connection with syndicated mortgage probe. Accused of not disclosing the risks to brokers and investors”. Once tarnished, a reputation can be very difficult to rehabilitate. As Warren Buffet once said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently”.

10.11 Summary Proper disclosure to borrowers, investors and lenders is vital to ensuring that they are aware of all of the risks, potential conflicts of interest, costs, rights and obligations and other important information associated with a proposed mortgage so that they can make an informed decision about the transaction. The brokerage is responsible for providing this disclosure in all transactions and will be held accountable even in cases where a broker or agent was at fault for improper or non-compliant disclosure. To make certain that compliant disclosure is made in every transaction requires the brokerage to have the policies and procedures in place to adequately supervise all of its brokers/agents and oversee all transactions in which anyone acting on its behalf is involved in. Full disclosure to borrowers, lenders and investors will assist in limiting misunderstandings that can potentially lead to complaints being lodged against the brokerage with FSRA. It can also ensure that the borrowers fully understand the risks associated with the proposed mortgage and that it is suitable for them based on their needs and circumstances. Full disclosure is not only necessary for the purposes of compliance, but necessary to ensure that a brokerage’s borrowers, lenders, and investors are satisfied customers, thereby providing an ongoing source of borrowers and investment funds that can assist the brokerage in its success and in maintaining its good reputation.

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10.12 Key Terms and Definitions APR Annual percentage rate cost of borrowing Conflict of interest A brokerage, broker, or agent with a direct or indirect interest in the mortgage being arranged resulting in a situation where the broker/agent must choose between their best interests and the interests of their borrower, investor or lender, as the case may be Cost of borrowing The MBLAA defines the cost of borrowing as “the interest or discount applicable to the mortgage; any amount charged in connection with the mortgage that is payable by the borrower to the brokerage or lender; any amount charged in connection with the mortgage that is payable by the borrower to a person other than the brokerage or lender, where the amount is chargeable, directly or indirectly, by the person to the brokerage or lender, and; any charge prescribed as included in the cost of borrowing, but does not include any charge prescribed as excluded from the cost of borrowing. It must be disclosed as either a percentage or in dollars and cents”. Disclosure The act of making something evident. There are several disclosure requirements for mortgages being recommended to a borrower, investor, or lender by a brokerage. Disclosure form A form, prescribed or otherwise, used to provide disclosure to a borrower, lender or investor, as the case may be, in accordance with the MBLAA and its Regulations Estimated costs When an exact dollar amount for the purposes of disclosure is unknown, a reasonable estimate of what that cost will be must be used Fees and payments This phrase is used to describe all payments involved in arranging a mortgage transaction, excluding repayment of the mortgage Relationship between brokerage and lender This phrase is used to describe the nature of the relationship between the brokerage and lender, specifically if there is any relationship other than an arm’s length relationship between the two. This information must be disclosed to every potential borrower. Risk A concept that identifies the borrower’s or investor’s acceptable level of risk. There are two fundamental requirements when considering risk: understanding the borrower’s or investor’s general level of acceptable risk and disclosing the specific risks associated with the mortgage being recommended by the broker/agent Role of the brokerage This phrase is used to describe the nature of a brokerage’s relationship with borrowers and lenders, specifically on whose behalf the brokerage is acting, and must be disclosed in every mortgage transaction

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10.13 Sample Borrower Disclosure - FILOGIX

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10.14 Sample Closing Cost Worksheet

Closing Costs Worksheet Client Name(s): Item

Cost

Appraisal Fee

$

Broker’s Fee and/or lender’s Fee

$

Closing Adjustments

$

Condominium Status Certificate Fee

$

HST (formerly GST – on new homes only)

$

Home Inspection

$

Interest Adjustment (based on anticipated closing date and 1st payment date)

$

Land Transfer Tax @ ___% of Purchase Price: $____________

$

New Home Warranty

$

Legal Fees

$

New Hydro Account

$

Property Insurance

$

PST on CMHC Premium @ 8% x $____________ (if applicable)

$

Title Insurance

$

Total

$

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10.15 External Resources Mortgage brokerage disclosure requirements, FSRA https://www.fsrao.ca/industry/mortgage-brokering/compliance-and-other-resources/mortgagebrokerage-disclosure-requirements

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10.16 Review Questions Answers to the Review Questions are found at www.REMIC.ca

10.16.1 True or False Questions 1. The role of the brokerage must be disclosed to the borrower. 2. The nature of the relationship between the brokerage and the borrower must be included in the disclosure document to the borrower. 3. A brokerage fee must be disclosed to the borrower and included in the cost of borrowing. 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. 5. If a prospective mortgage was default insured by CMHC, the insurance fee would have to be included in the cost of borrowing. 6. Lawyer’s fees, excluding disbursements, must be included in the cost of borrowing. 7. It is not necessary to include an exact dollar amount in the cost of borrowing if the cost is unknown 8. The borrower disclosure must be given to the borrower at least 72 hours before they can enter into the mortgage 9. APR stands for actual percentage rate 10. PST on a default premium must be included in the cost of borrowing

10.16.2 Short Answer Questions 1. List the types of information (e.g., risks) that must be included in a borrower disclosure form. 2. Explain the timing requirements of providing disclosure to a borrower. 3. List the specific costs that must be included when calculating the cost of borrowing. 4. How must the cost of borrowing be expressed in a borrower disclosure form? 5. If a cost is unknown, how must it be disclosed? 6. What is a conflict of interest? 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?

8. There are three possible relationships that a brokerage may have with a borrower. List them. 9. Discuss how brokerage fees are regulated by the MBLAA.

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10. What legislation prohibits the cost of borrowing from exceeding 60% APR?

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Chapter 11: Closing the Transaction 11.1 Learning Outcomes Successful understanding of the concepts presented in this chapter will enable the learner to: 1. Estimate common closing costs 2. Explain how documents related to the transaction are electronically registered 3. Explain the steps involved in closing a mortgage transaction 4. Explain the interest adjustment date (IAD)

11.2 Introduction Properly preparing the borrower for the closing process is a step that can be overlooked by the new mortgage agent, resulting in confusion on the part of the borrower and/or the borrower’s failure to have adequate funds to pay the closing costs. In this chapter, the closing process will be discussed, common closing costs will be described and the lawyer’s role in the closing process will be explained. By understanding this process, the mortgage agent can advise their client on what to expect, thereby reducing or removing the confusion and stress experienced by the borrower.

11.3 Estimating Closing Costs Before a transaction can close, it is vital that the borrower understand and be prepared for the closing costs associated with the transaction. Failure to prepare for these costs has caused many transactions to be cancelled at the lawyer’s office because the borrower did not have the funds to close. The exact amount required by the borrower on closing differs based on the type of transaction, but a mortgage agent should ensure that the borrower has between 1.5% and 3% of the purchase price set aside for closing costs. To estimate the costs involved in closing, the mortgage agent should advise the borrower of common closing costs. Example Bob and Mary are purchasing a resale, single family detached home for $420,000 in Barrie, Ontario and are putting $37,800 (9%) down. The CMHC premium at 91% LTV is 4% of the $382,200 mortgage, or $15,288. They are moving in 10 days before the end of the month. This means that there will be 10 days of interest, which is the interest adjustment, required on closing. The closing costs for this transaction may be approximately (these were discussed in detail in chapter 18): Item Appraisal Fee – not required on this CMHC insured mortgage Closing Adjustments (as per the lawyer) HST – not applicable as this is not a new home Status Certificate Fee – not a condominium Home Inspection Interest Adjustment (based on 10 days at J2=6%) Land Transfer Tax – LTT only as not in the GTA Legal Fees New Home Warranty – this is a resale home New Hydro Account

Cost (all rounded) $0 $350 $0 $0 $300 $641 $4,875 $1,500 $0 $200

Chapter 11: Closing the Transaction Property Insurance – first month’s premium payment PST on CMHC Premium @ 8% Title Insurance Total

307 $50 $1,223 $400 $9,539 or 2.27% of the purchase price

11.4 The Closing Process The following is a brief description of the process involved in closing a mortgage transaction and includes the steps involved in the purchase of a property with a mortgage.77 This process begins where an agent’s involvement typically ends, although it is in the agent’s best interests to be aware of how the process is progressing to ensure that the mortgage does in fact close. Once the agent has met all of the lender’s conditions, the process is in the hands of the lender, the lawyer, and the borrower. 1. The purchaser’s lender is satisfied that all conditions have been met 2. Borrower or lender decides on which lawyer to use This step may have been done earlier in the process. It is always best to have the lawyer chosen early in the process so that as soon as the lender is satisfied that all conditions have been met it can proceed to the next step. Certain lenders will have a specific lawyer they wish to use to close the transaction, while others will allow the client to use their own lawyer. If the borrower uses their own lawyer, it is important to note that this lawyer is working for the lender, and while the lawyer has a responsibility to provide disclosure to the borrower, their main responsibility is to the lender.

Pause for clarification – When are 2 lawyers required? 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. It is important to note that while the borrower pays the lawyer’s fee, the closing lawyer is working primarily on behalf of the lender. 3. The lender sends the closing lawyer an “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

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Requirements regarding property insurance, surveys, condominium units, proof of identity, etc. In a private transaction this included Form 9D

In addition, if the lender is prohibiting secondary financing such as a vendor take-back or a 2nd mortgage, the lawyer is required to inform the lender if they become aware of any secondary financing. This may cause the transaction to be cancelled. 4. Lawyer meets with the client The lawyer performs due diligence such as obtaining proof of identity in the form of photo ID, and has the client sign the Acknowledgement and Direction (see the Appendix for a sample Acknowledgment and Direction). This document allows the lawyer to act on the client’s behalf, register documents electronically and includes authorization to use the Document Registration Agreement (DRA) (see the Appendix for a sample DRA). The DRA allows Solicitors to exchange documents, cheques, and keys before closing. In a private transaction the lawyer will complete Form D, Investment Authority (see the Appendix for a sample Form D) 5. The purchaser’s lawyer prepares and sends documents The purchaser’s lawyer prepares a draft e-reg deed, performs the required searches/subsearches in POLARIS, and sends a Requisition letter to the vendor’s lawyer.

Pause for clarification - 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. A subsearch typically consists of performing searches on the title of the main property and adjoining properties for easements, restrictive covenants, etc., as well as execution searches, chattel searches and other land-related searches. 6. The vendor’s lawyer receives documents The vendor’s lawyer receives the Requisition letter, reviews the e-reg deed, and confirms use of the DRA by responding to the purchaser’s lawyer. 7. The purchaser’s lawyer receives documents The purchaser’s lawyer receives a response to the Requisition letter, updates the e-reg deed if necessary, and finalizes the registration documents. 8. The vendor’s lawyer sends the purchaser’s lawyer the closing documents 9. The purchaser’s lawyer requests funds from the purchaser’s lender 10. The lender sends funds to or deposits funds into the purchasing lawyer’s trust account 11. The purchaser’s lawyer sends documents and closing funds to the vendor’s lawyer 12. The vendor’s lawyer receives all documents and monies

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13. The Registering Solicitor, as determined by the DRA, typically the vendor’s lawyer, registers the discharge/cessation of mortgage, transfer/deed, charge/mortgage and advises the vendor’s lawyer of registration 14. The vendor’s lawyer releases funds and documents and sends money to the original lender to discharge the current mortgage (if applicable) 15. The purchaser obtains keys, garage door opener, security codes, etc. 16. The purchaser’s lawyer advises the Tax and Assessment departments and condominium corporation (if applicable) of the change of ownership 17. The purchaser’s lawyer reports to the title insurer and remits the premium (if applicable) 18. The purchaser’s lawyer sends closing reports to the vendor’s lawyer, the lender, and the new homeowner (in a private transaction this includes Form 9E) 19. The lender remits insurance premium to the mortgage default insurer (if applicable) 20. The lender sends the mortgage brokerage its finder’s fee (if applicable) 21. The mortgage brokerage pays the mortgage agent the contracted percentage of the finder’s fee

11.5 Forms 9D and 9E The following are frequently asked questions about Form 9D and Form 9E.78 1. What is the purpose of Forms 9D and 9E? Forms 9D and 9E (collectively, the "Forms") were developed to ensure documented communication between lawyers and their clients. Written instructions reduce allegations of miscommunication and failure to follow client instructions. The Law Society's goal is to ensure that the public is protected and to reduce claims and complaints by lender clients to the LawPRO® and the Law Society's Compensation Fund. 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®. Form 9E is a report on the investment for the lender. Subject to limited exceptions, the Forms must be completed for mortgage transactions in which the lawyer acts for or receives money from a lender. 2. When are Forms 9D and 9E required? The Forms are required whenever a lawyer acts for or receives money from a lender, except

78

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• • •

• •

the lender (note, all three conditions must apply) o is a bank listed in Schedule I or II to the Bank Act (Canada), a licensed insurer, a registered loan or trust corporation, a subsidiary of any of them, a pension fund, or any other entity that lends money in the ordinary course of its business; o has entered a loan agreement with the borrower and has signed a written commitment setting out the terms of the prospective charge; and o has given the lawyer a copy of the written commitment before the advance of money to or on behalf of the borrower. the lender and borrower are not "arm's length”. the borrower is an employee of the lender or of a corporate entity related to the lender; the lender has executed the "Investor/Lender Disclosure Statement for Brokered Transactions", approved under section 54(1) of the Mortgage Brokerages, Lenders and Administrators Act, 2006, and has given the lawyer written instructions, relating to the particular transaction, to accept the executed form as proof of the loan; the total amount advanced by the lender does not exceed $6,000; or the lender is selling real property to the borrower and the charge represents part of the purchase price (i.e. a vendor take-back mortgage).

Depending on the circumstances, it may be advisable to use the Forms even if a particular mortgage transaction falls within one of the exceptions. 3. Can Form 9E be replaced by a reporting letter? Yes, provided that the reporting letter contains a response to every question in the prescribed Form. Where an item on Form 9E is not applicable, it should nonetheless be included in the reporting letter with an appropriate notation. 4. Am I required to complete Forms 9D and 9E if my lender clients arrange their own mortgage loans, they pay the borrower directly, and I only register the mortgage documents? Yes. Subject to limited exceptions, the Forms are required whenever a lawyer acts for a lender or receives money from a lender. The lender clients are looking to the lawyer for protection and assurance that there is adequate security for their loan. The Forms ensure that the clients' instructions are specified in writing in order to avoid misunderstandings and potential allegations of failing to follow client instructions. If the lender client comes to you after the transaction is completed (i.e., the lender has already given the money to the borrower) and instructs you to register a mortgage to secure the loan, you should still have the lender sign the completed Form 9D to confirm the lender's instructions. Because By-Law 9 requires that Form 9D be signed by the lender prior to the advance of the mortgage funds, you should also have the lender acknowledge in writing that the mortgage funds had already been advanced prior to consulting you and before Form 9D was prepared. 5. Am I required to complete Forms 9D and 9E if I act for a lender in a vendor take-back mortgage or renewal/extension of a vendor take-back mortgage? No. Form 9D and Form 9E are not required where the lender is selling real property to the borrower and the charge represents part of the purchase price. Because of the nature of such a transaction, the lender/vendor can be expected to be aware of the security and is frequently intimately involved in the negotiation of the terms of the mortgage.

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On a renewal of a vendor take-back mortgage, the Forms are not required if the transaction is exempted under By-Law 9. Nonetheless, a detailed reporting letter must be provided within the time required under Rule 3.2-9.8 of the Rules of Professional Conduct ("Rules"). 6. Am I required to complete Forms 9D and 9E if I act for a lender where the mortgage is arranged through a mortgage broker? While Form 9D and Form 9E would normally be applicable, the transaction may be exempt if the lender • •

has executed an "Investor/Lender Disclosure Statement for Brokered Transactions", approved under section 54(1) of the Mortgage Brokerages, Lenders and Administrators Act, 2006, and has given the lawyer written instructions, relating to the particular transaction, to accept the executed form as proof of the loan agreement.

For the transaction to be exempt from the completion of the Forms, both these conditions must be met. 7. Am I required to complete Forms 9D and 9E if I act for the lender in a renewal of a mortgage? No, unless the renewal involves • making a change in the priority of the charge that results in a reduction of the amount of security available to it; • making a change to another charge of higher priority that results in a reduction of the amount of security available to the lender's charge; • releasing collateral or other security held for the loan; or • releasing a person who is liable under a covenant with respect to an obligation in connection with the loan. Notwithstanding the occurrence of any of the four events listed above, new Forms are not required if the original transaction was exempted on any basis except on the basis that it was arranged by a mortgage broker. However, if the transaction is not exempt and the Forms in the original transaction were not prepared (for any reason), they must be prepared on the renewal. 8. Am I required to complete Forms 9D and 9E if I act for the lender where the mortgage loan is less than $75,000? Yes. If the total amount to be advanced by the lender exceeds $6,000 the Forms must be completed. The $75,000 limit applies to a mortgage or loan transaction in which you may be permitted to act for both lender and borrower, pursuant to Rules 3.4-12 and 3.4-14 of the Rules. 9. Am I required to complete Forms 9D and 9E if I act for the lender where the mortgage loan is under $6,000? No. If the total amount to be advanced by the lender does not exceed $6,000, the Forms do not need to be completed. 10. Am I required to complete Forms 9D and 9E if I lend my own money to a client? No, as there is no independent lawyer-client relationship between you, the lawyer, and the lender. Unless one of the exceptions outlined in Rule 3.4-14 of the Rules applies, you are prohibited from acting for the borrower in the mortgage transaction. Even where one of the exceptions permits you to act for the borrower client in the mortgage transaction (e.g., they are a person "related" to you, or the loan is less than $75,000), lending money to your client puts you in a potential conflict of interest, particularly if the mortgage goes into default.

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Accordingly, before representing the borrower you must inform the borrower of the potential conflict of interest or how and why it might develop later, and • if the borrower is not a related person, require that the borrower obtain independent legal representation regarding the transaction; or • if the borrower is a related person, require that the borrower receive independent legal advice on the transaction. After the client receives the disclosure and the legal advice or representation required, and before proceeding with the transaction, you must also obtain the client’s consent. It is also recommended that you confirm the terms of the loan in writing. In situations where the borrower chooses to proceed as an unrepresented party, you must also comply with Rule 7.2-9 of the Rules regarding unrepresented persons. 11. Am I required to complete Forms 9D and 9E if I act for my spouse, who lends money to a client? Yes, as you are effectively acting on behalf of your spouse (the lender client) in the mortgage transaction. Unless one of the exceptions outlined in Rule 3.4-14 of the Rules applies, you must not act for the borrower in the mortgage transaction. Even where one of the exceptions permits you to act for your spouse and the borrower client in the mortgage transaction (e.g., they are a person "related" to you, or the loan is less than $75,000), your spouse lending money to your client puts you in a potential conflict of interest, particularly if the mortgage goes into default. Accordingly, before representing the borrower you must inform the borrower of the potential conflict of interest or how and why it might develop later, and • if the borrower is not a related person, require that the borrower obtain independent legal representation regarding the transaction; or • if the borrower is a related person, require that the borrower receive independent legal advice on the transaction. After the client receives the disclosure and the legal advice or representation required, and before proceeding with the transaction, you must also obtain the client’s consent. It is also recommended that you confirm the terms of the loan in writing. In situations where the borrower chooses to proceed as an unrepresented party, you must also comply with Rule 7.2-9 of the Rules regarding unrepresented persons. 12. Am I required to complete Forms 9D and 9E if I act for the lender but funds flow from my spouse's brokerage company to the borrower? Provided that you comply with the requirements set out in By-Law 9 such a transaction would not require completion of Form 9D or Form 9E. However, to address the potential conflict of interest, you must disclose to the lender client your relationship with the brokerage firm. You should consult Section 3.4 of the Rules to ensure you understand and comply with your duty to avoid conflicts of interest. 13. Am I required to complete Forms 9D and 9E if I act for the lender where the mortgage loan is from a self-directed RRSP? Yes, as the funds belong to the individual plan holder. The funds do not belong to the financial institution, nor does the financial institution have the authority to direct the investment.

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In these transactions, the financial institution is a bare trustee, which holds or moves the investment funds at the direction of the plan holder. It is the plan holder who is the directing mind of the investment. Thus, the plan holder must sign Form 9D before mortgage funds are advanced, and unless one of the exceptions outlined in Rule 3.4-14 of the Rules applies, the borrower must have independent legal representation in the mortgage transaction. 14. Am I required to complete Forms 9D and 9E if I am the sole estate trustee of an estate and I lend or invest funds on behalf of the estate? Yes. As the estate trustee you have a fiduciary duty to the estate and investments must be made pursuant to the Trustee Act and/or the testator's will. Form 9D details the lawyer's instructions on the mortgage loan in writing and is available in the file to support adherence to the instructions of the will or the Trustee Act. Unless one of the exceptions outlined in Rule 3.4-14 of the Rules applies, the borrower must have independent legal representation in the mortgage transaction. 15. Am I required to complete Forms 9D and 9E if I act for the borrower and the lender has independent legal representation? No. The lender's lawyer is responsible for completing the required Forms. 16. I just learned about the Forms. Should I now prepare Forms 9D and 9E for completed mortgage transactions? No. However, upon request, the fact that the prescribed Forms were not completed in compliance with By-Law 9 must be disclosed in your Annual Report to the Law Society. Once reported, you do not need to prepare the Forms for previously completed transactions as this would not meet the purpose of affording protection to those clients. In the future, ensure Form 9D is completed and signed before mortgage funds are advanced by the lender and that a completed Form 9E or a comprehensive reporting letter is sent to the lender within 60 days of the mortgage registration. Subject to limited exceptions, going forward you must ensure the Forms are completed for any subsequent mortgage transactions in which you act for or receive funds from a lender, as required under By-Law 9.

11.6 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.

11.6.1 Interest adjustment payment The interest adjustment payment is the amount of the payment to pay that accumulated interest.

11.6.2 Interest adjustment date The interest adjustment date is the date that the interest adjustment payment is due. Mortgage payments are made in arrears, meaning that a monthly payment made on October 1st, for example, covers the payment due for the month of September. If a mortgage is funded exactly one month before the first payment, the first payment will cover the principal and interest due for that month. However, if the mortgage is advanced on August 15th, and the repayments are monthly on the first of every month, the first regularly scheduled monthly payment must begin on October 1st. Therefore, the first monthly payment will only pay the principal and interest due from September 1st until October 1st. This leaves interest due from the date of advance to the period exactly one month before the first payment.

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In this example, the borrower would have the mortgage proceeds from August 15th until September 1st without paying interest on those funds. The due date for the payment of this interest is referred to as the interest adjustment date. The borrower is advised by the lender of this amount, known as the interest adjustment payment, normally by letter or by the lawyer closing the transaction, and a cheque is due on that date. Some lenders will deduct the amount of this interest on the date of closing, saving the borrower the aggravation of having to make an additional payment. However, if all of the mortgage proceeds are required on closing, the borrower can pay the interest adjustment on the interest adjustment date. With flexible mortgage repayment dates, a payment may be set up to be made exactly one month after closing. However, a borrower may prefer the payment to be set at the beginning, middle, or end of the month based on their specific budget. If the mortgage is advanced at any time greater than a month before the first payment, an interest adjustment payment is required. The same is true for any other payment frequency. For example, if the payment is weekly and the mortgage is advanced ten days before the first payment, there is an interest adjustment amount payable.

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11.7 Key Terms and Definitions Acknowledgment and Direction (A&D) The Acknowledgment and Direction, signed by the client, provides the lawyer with the authorization to electronically register documents Closing costs The costs associated with closing a real estate and mortgage transaction. Document Registration Agreement (DRA) The document, signed by the vendor’s and purchaser’s lawyers that allows for closing an electronic transaction. e-reg The gateway used to access POLARIS and create and register land titles documents electronically in Ontario. 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®. Form 9E is a report on the investment for the lender. Form 9E Form 9E is a report on the investment for the lender. Interest adjustment amount The interest payable to a lender for the period of time that mortgage proceeds are held by the borrower before the period covered by the first mortgage payment. Interest adjustment date (IAD) The date that the interest adjustment payment is due. Land transfer tax A tax payable to the Provincial Government by the purchaser of a property upon the transfer of title from a seller. POLARIS Province of Ontario Land Registration Information System. Solicitor’s Final Report and Certificate of Title The document sent to the lender detailing the successful mortgage transaction.

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11.8 Review Questions Answers to the Review Questions are found at www.REMIC.ca

11.8.1 Short Answer Questions 1. How much should a borrower have set aside for closing costs? 2. Under what circumstances is PST included in the closing costs? 3. Under what circumstances is HST charged in the purchase of a property? 4. What tax is charged on the mortgage default insurance premium? 5. Explain the significance of the Acknowledgement and Direction in the closing process. 6. What purpose does the DRA serve? 7. In a title-insured transaction, who remits the insurance premium to the title insurer? 8. Explain the interest adjustment. 9. Explain the interest adjustment payment? 10. Define the interest adjustment date. 11. What is a subsearch? 12. What is the first step in the closing process? 13. Who chooses which lawyer to use to close the transaction? 14. What documents are included in the lender’s Instructions to Solicitor package? 15. If a lender prohibits a vendor take-back, what must a lawyer do if they become aware that one exists? 16. Does the purchaser’s lawyer or the vendor’s lawyer register the discharge/cessation of mortgage? 17. Which lawyer sends money to the original lender to discharge the current mortgage in a purchase transaction? 18. What is the purpose of Form 9D? 19. What is the purpose of Form 9E? 20. Under what circumstances are two lawyers required in a private mortgage transaction?

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Appendix 1: Acknowledgment and Direction

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Appendix 2: Document Registration Agreement (DRA)

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Appendix 3: Form 9D Investment Authority - Sample Sample Form 9D Investment Authority79 To: (Specify name of lawyer or law firm.) Leslie Lawyer I (or we) instruct you to act on my (or our) behalf, on my (or our) mortgage investment (or investments) of (specify amount) $40,000.00, the details, conditions and disclosures of which are set out below. A. Details About The Investment: 1. Name and address of borrower (or borrowers): (specify) Terry Taylor, 123 Main St., Anytown, ON Z9Y 8X7 2. Name and address of guarantor (or guarantors) (if any): (specify) Kerry Taylor, 987 Townline Rd., Anytown, ON Z9Y 6W5 3. Legal description and municipal address of real property: (specify) Lot 10, Plan 20, Town of Anytown, County of Plenty 123 Main St., Anytown, ON, Z9Y 8X7 4. Type of property: (specify, e.g., residence, vacant land, etc.) Residence 5. (a) Principal amount of mortgage or charge: (specify) $40,000.00 (b) Amount of loan to be advanced by me: (specify) $40,000.00 6. Rank of mortgage or charge is first (or specify other rank). 2nd (after payout and discharge of existing second mortgage) 7. My investment of (specify amount) $40,000.00 represents (specify percentage) 100% of the total of this loan to the borrower (or borrowers). 8. (a) I am (or we are) satisfied that the approximate value of the property is (specify amount) $250,000.00. 8. (b) I (or we) used the following means to determine the approximate value of the property: (specify) Arm’s length sale of property for $250,000.00 in February 2020. 8. (c) Including my (or our) mortgage amount, the percentage of the value of the property that is mortgaged (or /encumbered) is (specify percentage) 66% (after payout of existing second mortgage).

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Law Society of Ontario, https://lso.ca/lawyers/practice-supports-and-resources/topics/managingmoney/bookkeeping/sample-form-9d

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9. (a) The term of loan is (specify term of loan in months, years, etc.) 1 year. 9. (b) The due date of loan is (specify date) September 10, 2021. 9. (c) The loan is amortized over (specify number of years) 15 years. 10. The interest rate is (specify interest rate) 5.5% calculated semi-annually, not in advance (or specify how interest rate is calculated). 11. Particulars of amounts and due dates (monthly, quarterly, etc.) of payments of principal and interest: (specify) $380.70 on the first day of each month 12. Particulars and amounts of any bonus or holdback or any other special terms: (specify) N/A 13. (a) The mortgage is to be registered in the name (or names) of (specify name or names) Kim Kirby 13. (b) After completion of the mortgage transaction, a collection or administration fee of (specify amount) N/A per instalment is payable by the investor (or investors) (or borrower) (or borrowers) to (specify recipient of fee) N/A. 13. (c) If the mortgage is held in trust, the dates on which payments are to be made by the trustee (if applicable) to me (or us) are: (specify dates) N/A 14. Particulars of disbursements made for legal, brokerage or other fees or commissions in connection with the placement of the loan, including the names of recipients and amounts paid, are: (specify) Legal fees $400.00, disbursements $70.00, HST $53.30, payable to Leslie Lawyer B. Conditions: 1. (Instructions: Clauses (a) and (b) below refer to information which each investor may require from the lawyer. If you require the information referred to in a clause, initial the clause.) The information which I (or we) require from you as my (or our) lawyer before you complete the transaction and make the advance is as follows: (a) If my (or our) investment will be in a position other than a first mortgage or charge, details, including amounts, of all existing encumbrances outstanding. “KK” (b) If the mortgage or charge is a syndicated mortgage, and a prospectus is necessary, a copy of the prospectus. We acknowledge and accept that you as my (or our) lawyer express no opinion as to the necessity for or validity of a prospectus. 2. (Instructions: Each investor to complete and initial clause (a) and, if clause (a) is answered in the affirmative, to complete (if necessary) and initial clause (b) and to initial clause (c).) (a) I (or we) instruct you to obtain a current and independent appraisal of the subject property and provide it to me (or us) before you complete this mortgage transaction. (Specify yes or no.) No “KK”

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(b) The appraisal is to be paid by me (or us) or (specify name of person who is to pay for appraisal). (c) I (or we) have been advised and accept that you as my (or our) lawyer do not express an opinion as to the validity of the appraisal.

C. Disclosure: 1. You as my (our) lawyer have advised me (us) that: (a) You do not have any direct or indirect interest in the borrower. “KK” August 31, 2020 or (b) You have or intend to have a direct or indirect interest in the borrower, details of which have been provided to me (us) in writing. You have explained to me (us) how your direct or indirect interest in the borrower is permitted under the Rules of Professional Conduct, including the Transactions with Clients rules. (Specify (a) or (b). If (a) is selected, indicate the date on which the lawyer advised you that they have no direct or indirect interest in the borrower. If (b) is selected, append all relevant documents, including a certificate or waiver of independent legal advice where required, to this Form). (Warning: 1. You are cautioned that the responsibility for assessing the financial merits of the mortgage investment rests with the investor or investors at all times. The lawyer's responsibility is limited to ensuring the mortgage is legally registered on title in accordance with the investor's or investors’ instructions. The lawyer is not permitted to personally guarantee the obligations of the borrower or borrowers nor the suitability of the property as security for the mortgage investment. 2. Any loss you may suffer on this mortgage investment will not be insured under the lawyer’s professional liability policy if the lawyer has acted as a mortgage broker or has helped to arrange it.*) I (or we) hereby acknowledge receipt of a copy of this form prior to the advance of funds to or on behalf of the borrower (or borrowers). I (or we) further acknowledge having read and understood the above warnings. Investor (or Investors): Kim Kirby 456 Avenue Rd., Anytown, ON Z9Y 4V3 (Specify full name of the investor (or full names of the investors) and specify the investor’s (or each investor’s) address.) (Signature of the investor (or of each investor)) Kim Kirby (Date of signature) August 31, 2020 *(Pursuant to clause (g) of Part III of the Professional Liability Insurance Policy for Lawyers, the policy does not apply “to any CLAIM in any way relating to or arising out of an INSURED acting as a MORTGAGE BROKER, or to any CLAIM in any way relating to or arising out of circumstances in which an INSURED provided before July 1, 2008, PROFESSIONAL SERVICES in conjunction therewith”.)

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Appendix 4: Form 9E Report on the Investment - Sample Sample Form 9 E Report on the Investment80 (Note to lawyer: In all private mortgage transactions, whether or not the mortgage was arranged by you, you must complete this form, or, alternatively, you must complete a reporting letter which includes responses to all numbered items in this form. If you complete this form, you must complete every numbered item on this form, with “n/a” being entered if the numbered item is not applicable. If you complete a reporting letter, you must respond to all numbered items in this form in your reporting letter. If a numbered item is not applicable, you must include it in your reporting letter and indicate that it is not applicable. After completion, an original of this form, or the reporting letter, must be delivered forthwith to each lender. This form may be entered on a word processor. For the definition of mortgage broker and other terms found in the clause of the Lawyers' Professional Indemnity Company Policy found at the bottom of this form, please refer to the policy.) To: (Specify name and address of investor.) Kim Kirby 456 Avenue Rd., Anytown, ON Z9Y 4V3 A. Details About the Investment 1. Name and address of borrower (or borrowers): (specify) Terry Taylor, 123 Main St., Anytown, ON Z9Y 8X7 2. Name and address of guarantor (or guarantors) (if any): (specify) Kerry Taylor, 987 Townline Rd., Anytown, ON Z9Y 6W5 3. Legal description and municipal address of real property: (specify) Lot 10, Plan 20, Town of Anytown, County of Plenty 123 Main St., Anytown, ON, Z9Y 8X7 4. Type of property: (specify, e.g., residence, vacant land, etc.) Residence 5. (a) Principal amount of mortgage or charge: (specify) $40,000.00 (b) Amount of loan advanced by you: (specify) $40,000.00 6. Rank of mortgage or charge is first (or specify other rank). 2nd (after payout and discharge of existing second mortgage) 7. Your investment of (specify amount) $40,000.00 represents (specify percentage) of the total of this loan to the borrower (or borrowers). 100%

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Law Society of Ontario, https://lso.ca/lawyers/practice-supports-and-resources/topics/managingmoney/bookkeeping/sample-form-9e

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8. Date principal advanced: (specify) September 1, 2020 9. (a) The term of loan is (specify term of loan in months, years, etc.). 1 Year (b) The due date of the loan is (specify date). September 1, 2021 (c) The loan is amortized over (specify number of years). 15 Years 10. The interest rate is (specify interest rate) calculated semi- annually, not in advance (or specify how interest rate is calculated). 5.5% 11. Particulars of amounts and due dates (monthly, quarterly, etc.) of payments of principal and interest: (specify) $370.80 on the first day of each month. 12. Particulars and amounts of any bonus or holdback or any other special terms: (specify) N/A 13. Details of any existing encumbrances, including rank on title, balances outstanding, mortgagee name and maturity dates: (specify) Existing first mortgage, balance of $121,945.74 at August 1, 2020, payable to Ontario Bank, Maturing February 1, 2021. Existing second mortgage to be paid out from mortgage advance, balance owing at September 1, 2020 is $33,742.83. 14. In those instances in which the mortgage or charge is a collateral security, or if the mortgage or charge is collaterally secured, the details of other security are: (specify) N/A 15. (a) Particulars of disbursements made for legal, brokerage or other fees or commissions in connection with the placement of the loan, including the names of recipients and amounts paid, are: (specify) Legal fees $400.00, disbursements $70.00, HST $53.30, payable to Leslie Lawyer. (b) Alternatively, I have advised I cannot confirm what independent commissions or fees are being charged to the borrower. N/A 16. Registration number, date of registration and land registry office location: (specify) Registration No. 987321, September 1, 2020, LRO for County of Plenty, Anytown 17. Insurance particulars (where relevant): (specify) Insurer: Ontario Insurance Company Policy: Homeowners Policy No. 789123 Amount: $200,000 Expiry: February 28, 2021 B. Conditions and disclosure: In accordance with your Form 9D [Investment Authority] request for information and disclosures prior to the advance of your money, I advise that I have previously provided you with the requested information and disclosures as follows: 1. Particulars of existing encumbrances outstanding: (Specify yes or no, and if yes, specify date on which particulars were provided.) Yes, August 9, 2020 2. In the case of a syndicated mortgage where a prospectus was required, a copy of the prospectus: (Specify yes or no, and if yes, specify date on which prospectus was provided.) No, N/A I advised and you acknowledged that I gave no opinion as to the necessity or validity of a prospectus.

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3. Independent appraisal: (Specify yes or no, and if yes, specify date on which independent appraisal was provided.) No, N/A I advised and you acknowledged that I gave no opinion as to the necessity or validity of an appraisal. 4. Any loss you may suffer on this mortgage investment will not be insured under the lawyers' professional liability policy if the lawyer has acted as a mortgage broker or has helped to arrange it. * I advised and you acknowledged having read and understood this warning. (Warning: You are cautioned that the responsibility for assessing the financial merits of the mortgage investment rests with the investor at all times. The lawyer's responsibility is limited to ensuring the mortgage is legally registered on title in accordance with the investor's instructions. The lawyer is not permitted to personally guarantee the obligations of the borrower or borrowers nor the suitability of the property as security for the mortgage investment.) (Name of lawyer or law firm) Leslie Lawyer (Address of lawyer or law firm) 10 Downtown St.

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Chapter 12: Mortgage Administration 12.1 Learning Outcomes Successful understanding of the concepts presented in this chapter will enable the learner to: 1. Define the role of a mortgage administrator 2. Understand the regulatory requirements for administrators 3. Explain how a mortgage administrator is licensed 4. Understand the information that administrators must provide to investors

12.2 Introduction Mortgage administrators can play an important role in the day-to-day management of private mortgages. While investors may enjoy a high rate of return, many are not familiar with what to do when a borrower runs into an issue, such as a missed payment. A mortgage administrator will have the requisite knowledge to manage the mortgage repayment, as well as deal with any administrative tasks, such as providing reports to investors and statements to borrowers. In this chapter we explore the requirements to be a mortgage administrator, and the tasks that they perform.

12.3 Role of the Mortgage Administrator A mortgage administrator, as defined by the MBLAA, means a corporation, partnership, sole proprietorship, or other entity that has a mortgage administrator’s licence; (“administrateur d’hypothèques”)81 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 A mortgage administrator licence may be granted to a corporation, partnership, or sole proprietorship. The applicant must meet all of the following requirements:82 1. Be incorporated (for a corporation) or formed (for a partnership) under any jurisdiction in Canada, or be a resident of Canada if the applicant is a sole proprietor 2. Have a mailing address in Ontario that is not a post office box and that is suitable to permit service by registered mail.

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Chapter 12: Mortgage Administration 3. Have errors and omissions insurance in a form approved by the Chief Executive Officer with extended coverage for loss resulting from fraudulent acts or it has some other form of assurance in a form approved by the Chief Executive Officer. The insurance or other assurance must be sufficient to pay a minimum of $500,000 in respect of any one occurrence involving the corporation and $1 million in respect of all occurrences during a 365-day period involving the corporation. 4. Have a financial guarantee in an amount equal to $25,000. The financial guarantee may be unimpaired working capital, or it may be another form of financial guarantee acceptable to the Chief Executive Officer.

In determining suitability, the Chief Executive Officer of FSRA is required to have regard to the following: 1. Whether, having regard to its financial position, the applicant cannot reasonably be expected to be financially responsible in the conduct of its business. 2. Whether the past conduct of the applicant affords reasonable grounds for belief that business will not be carried on in accordance with the law and with integrity and honesty. 3. Whether the applicant is carrying on activities that contravene or will contravene the Act or the regulations if the applicant is licensed. 4. Whether the applicant has made a false statement or has provided false information to the Chief Executive Officer with respect to the application for a licence. The following is FSRA’s Compliance Checklist for Mortgage Administrators.83 This checklist was developed by the regulator to assist in complying with the Act and its Regulations. All of these requirements are set out in the law – they are not suggestions.

12.3.1 Compliance Checklist for Mortgage Administrators This Compliance Checklist was developed by the Financial Services Commission of Ontario (FSRA) to assist Mortgage Administrators in complying with the new regulations relating to standards of practice (Ontario Regulation 189/08) and reporting requirements (Ontario Regulation 193/08) under the Mortgage Brokerages, Lenders and Administrators Act, 2006. All of these requirements are set out in the law — they are not suggestions.

Customer Relations  Provide your full name and Mortgage Administrator licence number when asked.  Prominently disclose the Mortgage Administrator’s authorized name and licence number in all public relations materials. The public relations materials must clearly indicate that the company is independently owned and operated if the Mortgage Administrator’s authorized name is the name of a franchise, or includes the name of a franchise.

 Verify the identity of each investor/lender before entering into an agreement with the investor/lender 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.

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 You must be clear, concise and logical in written disclosures, consents and acknowledgements.  Disclose whether fees will be received from others. Disclose in writing to the investor/lender whether the Mortgage Administrator may/will receive a fee or other remuneration, directly or indirectly, from another person/entity in connection with administering the mortgage. Disclose the identity of the person/entity, the basis for receiving the fees, how that fee was calculated and, if a benefit other than money, the nature of that benefit. Get written acknowledgement that the investor/lender has received this disclosure.

 Disclose whether fees will be paid to others. Disclose in writing to the investor/lender whether the Mortgage Administrator may/will pay a fee or other remuneration, directly or indirectly, to another person/entity in connection with administering the mortgage. Disclose the identity of the person/entity, the basis for paying the fees, how that fee was calculated, and if a benefit other than money, the nature of the benefit. Get written acknowledgement that the investor/lender has received this disclosure.

 Disclose whether referral fees will be received. Disclose in writing whether any fees or other remuneration may/will be received, directly or indirectly, for referring the investor/lender or a prospective investor/lender to another person/entity. Describe in writing the nature of the relationship between the Mortgage Administrator and the other person/entity.

 Disclose the relationship with borrower. Disclose in writing to each investor/lender the Mortgage Administrator’s relationship with each borrower. This does not apply if the investor/lender is a Mortgage Brokerage, financial institution or another Mortgage Administrator. Get written acknowledgement that the investor/lender has received this disclosure.

 Disclose potential conflicts of interest. Disclose in writing to each investor/lender, any conflict of interest that the Mortgage Administrator or an employee engaged in administering the mortgage may have in connection with the mortgage. This does not apply if the investor/lender is a Mortgage Brokerage, a financial institution or another Mortgage Administrator. Get written acknowledgement that the investor/lender has received this disclosure.

 Return original documents to their owners when requested, at no charge.  Provide a written response to a written complaint. Tell the client that he/she may contact FSRA if he/she is not satisfied with your response and believes the law has not been followed.

 Do not administer a mortgage for investor/lender if you have reason to believe the mortgage, its renewal, or the investment is unlawful.

Mortgage Administration  Include the following information in written agreements with lenders/investors: • • • • • •

Name in which the mortgage is registered. Details of the trust agreement if the mortgage is held in trust. Circumstances in which the investor/lender may dispose of his/her interest in the mortgage. What happens to payments, including penalties and bonuses. Rights and duties of each investor/lender if a borrower defaults on the mortgage, and the costs for which each investor/lender will be responsible. Procedures to follow in case of a foreclosure or power of sale.

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Information on administration fees, including how they are calculated and paid. Obligation of the Mortgage Administrator to promptly inform each investor/lender in case of mortgage default, new encumbrances, and other changes that affect the mortgage.

 Do not pay the investor/lender unless the borrower has made the mortgage payment. The borrower’s cheque must clear and funds must be received by the Mortgage Administrator before paying the investor/lender.

 Promptly pay the investor/lender redemption or partial redemption proceeds.

Business Practices  If you are operating another business, make sure it does not jeopardize your integrity, independence, or competence as a Mortgage Administrator.

 Do not use any information that was obtained while carrying on mortgage administration business for any other purpose, without first obtaining the written consent of the individual or business.

Prohibited Activities The Mortgage Brokerages, Lenders and Administrators Act, 2006 and regulations, prohibit: • Administering mortgages without a licence —as of July 1, 2008, all Mortgage Administrators must be licensed with FSRA to carry on business in Ontario, unless an exemption applies. • Using an unauthorized name — you can only use the name in which you are licensed. • Indicating that Mortgage Administration fees are approved by the government —you cannot claim that Mortgage Administration fees are approved by a government authority. The only exception is fees under the Land Titles Act or the Registry Act. • Offering guarantees to lenders/investors — you cannot offer a guarantee to an investor/lender regarding a mortgage loan or mortgage investment. • Engaging in tied selling — lenders/investors cannot be required to obtain a product/service as a condition for obtaining another product or service from the Mortgage Administrator

12.3.2 Compliance Checklist for Managing Administrator, Keeping Records and Trust Accounts

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This Compliance Checklist was developed by the Financial Services Commission of Ontario (FSRA) to assist Mortgage Administrators in complying with the new regulations relating to standards of practice (Ontario Regulation 189/08) and reporting requirements (Ontario Regulation 193/08) under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (the Act). All of these requirements are set out in the law — they are not suggestions.

Managing the Mortgage Administrator  Establish and implement policies and procedures to ensure the Mortgage Administrator and every person acting on behalf of the Mortgage Administrator complies with the law. Include policies and procedures on verifying the identity of lenders and investors, as well as identifying and disclosing potential conflicts of interest that the Administrator or any employee administering a mortgage may have in connection to that mortgage.

 Establish a complaints process for resolving complaints from the public. Designate an employee or someone authorized to act on behalf of the Administrator to receive and attempt to resolve

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complaints from the public. Keep a record of all written complaints received from the public and all written responses.

 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.

 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.

 File an Annual Information Return by March 31st each year. Late filings may be subject to a $1,000 penalty.

 Inform FSRA of your mailing address and e-mail address. All Mortgage Administrators must maintain a mailing address in Ontario that is suitable for service by registered mail. A valid e-mail address is also required. Failure to comply with this requirement may result in a monetary penalty.

 Notify FSRA within five days of the following changes: • • •

A change in the location of your principal place of business, or the opening or closing of any other office that is open to the public. A change in your mailing address, e-mail address, telephone number or fax number. A change in a Director, Officer, or Partner.

A late notification may result in a $500 penalty.

Keeping Records  Ensure the Mortgage Administrator maintains complete and accurate records of: • • •

Financial records for all mortgage administration activities in Ontario. (Financial records must distinguish between deemed trust funds and other assets). Mortgage Administrator agreements on administering mortgages. All documents and written information given to and received from lenders/investors and prospective lenders/ investors.

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Pause for clarification – 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 Deemed trust funds 33. (1) Money received by a mortgage administrator directly or indirectly from a borrower under an agreement to administer a mortgage on behalf of a lender or investor is deemed, for the purposes of this Regulation, to be held in trust by the mortgage administrator. O. Reg. 189/08, s. 33 (1). (2) Subject to subsection (3), money received by a mortgage administrator directly or indirectly from a lender or investor in connection with carrying on the business of administering mortgages is deemed, for the purposes of this Regulation, to be held in trust by the mortgage administrator. O. Reg. 189/08, s. 33 (2). (3) Money received by a mortgage administrator for any of the following purposes is not deemed to be held in trust by the mortgage administrator: 1. Money earned by the mortgage administrator for its services. 2. Money received to reimburse the mortgage administrator for its expenses. O. Reg. 189/08, s. 33 (3).

 Take adequate precautions to guard against falsification of records.  Retain all records the Mortgage Administrator is required to maintain for at least six years after expiry of records relating to mortgage administration agreements.

 Store all records at your main office. Inform FSRA if you are storing your records in a different location. Electronic records do not need to be stored at your main office as long as they can be quickly retrieved.

Trust Funds The following checklist only applies to Mortgage Administrators that receive trust funds.

 Notify FSRA within five days, if you are required to establish a trust account. Late notifications may result in a $1,000 penalty.

 Hold deemed trust funds in a trust account. Money received from borrowers under a mortgage administration agreement needs to be held in a trust account. Funds not deemed to be trust funds are: • Funds earned by the Mortgage Administrator for rendered services, and • Funds for reimbursing expenses.

 Maintain a trust account in a bank, credit union, or loan and trust company in Ontario.  Conduct the following activities when administering the trust account: • • •

Deposit trust funds within two business days. Keep trust funds separate from other funds. Pay any interest earned to the beneficial owner, unless otherwise agreed upon in writing.

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Disburse trust funds according to the terms under which the funds were received.

 Keep records of transactions related to trust funds. • • •

For deposits — note the amount, date, name of the person/business from whom the money was received and purpose of the deposit (including particulars of the mortgage). For disbursements — note the amount, date, name of the person/business to whom funds were disbursed, as well as the purpose (including particulars of the mortgage). For interest payments — identify the particular deposit of deemed trust funds to which the interest payment relates, the amount of interest associated with the deposit, and the date the interest was paid.

 Prepare a monthly reconciliation statement for the trust account. • •

The statement should be signed by an Officer of the Mortgage Administrator, certifying it is accurate. This must be done within 30 days of receiving the monthly account statement from your financial institution (if statements are received), or 30 days after the month end. The reconciliation statement must set out any differences between the Mortgage Administrator’s records and the financial institution’s records. It also needs to report the balance owing to each person/business, as of the date of the monthly account statement (if statements are received), or the last day of the month.

 Notify FSRA immediately if there are any shortfalls in the trust account.  Prepare an annual trust account reconciliation within 90 days of fiscal year end. A Mortgage Administrator that is required to prepare monthly reconciliation statements during the fiscal year must also prepare an annual reconciliation statement for that year. The annual reconciliation statement must summarize the contents of each required monthly reconciliation statement.

 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.

12.3.3 Communicating with Investors A mortgage administrator should have policies and procedures in place to communicate with its investors about the following circumstances: 1. An NSF (non-sufficient funds) 2. Upcoming renewal 3. Monthly statement of account that includes: i. All administration fees ii. Gross payment this period and net payment deposited to investor’s account iii. Gross payments received and Net payments deposited to investor’s account iv. Return on Investment (ROI) 4. Statements of accounts 5. Requests by the borrower, such as deferral requests, late payment request, etc.

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Chapter 12: Mortgage Administration 6. Any concerns regarding the administrator’s ability to manage the administration of the mortgage 7. New information: this includes information obtained by the administrator about: i. Falsified borrower documents, including inflated income, property values, etc. ii. Issues with construction (if applicable), including 1. Delays 2. Cost overruns 3. Labour disruptions, and 4. Anything else that may affect the performance of the mortgage

Timely communication will ensure that the investor can make informed decisions about the mortgage, such as communicating with the borrower about options, using available remedies, etc.

12.4 The Mortgage Administrator License Those involved in the administration of mortgages as defined in the MBLAA and Regulation 406/07 must have a mortgage administrator’s license. The MBLAA itself is vague on what constitutes administering a mortgage; however, Regulation 406/07, section 1, subsection 1 states that the activity that constitutes administering mortgages is “taking steps, on behalf of another person or entity, to enforce payment by a borrower under a mortgage.” The requirements for obtaining a mortgage administrator’s license are defined in Regulation 411/07, while the obligations to maintain that license are reflected in Regulation 189/08, Mortgage Administrators: Standards of Practice. 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. Mortgage administrators have the same licensing eligibility requirements as mortgage agents and brokers and must pass the same tests of suitability with only one additional requirement: that the corporation, partnership or sole proprietorship have a financial guarantee in an amount equal to $25,000. This may be unimpaired working capital or something else acceptable to FSRA. Standards of Practice for mortgage administrators are stated separately in the Regulations but parallel those of mortgage brokerages. Naturally, the Standards of Practice of a brokerage refer also to responsibilities related to mortgage agents and mortgage brokers. No such references are found in the Regulations for mortgage administrators. In 2020, data from the Annual Information Return for Mortgage Administrators reported a 10 per cent increase in the number of mortgage administrators, an 8 per cent increase in the number of mortgages under administration (814,470), and a 6 per cent increase in the dollar value of mortgages under administration to $307.3 billion compared to 2019. Mortgage administrators have responsibilities under MBLAA to keep investors informed of the performance of their mortgages. They must monitor circumstances that could impact mortgage performance, such as significant changes in risk to the underlying property and subsequent encumbrances on the property5. FSRA will continue its monitoring of mortgage administrators to ensure they are complying with their regulatory duties. A mortgage administrator plays a critical role, especially when a mortgage is higher risk (e.g., construction financing) or complex (e.g., NQSMIs) and the investor is unsophisticated.

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On May 10, 2020, FSRA released Interpretation Guidance which provides FSRA’s interpretation of mortgage administrators’ obligations under the MBLAA, to ensure the protection of investors and lenders.

12.4.1 FSRA’s Interpretation Guidance No. MB0039INT

Purpose This Interpretation Guidance provides the Financial Services Regulatory Authority of Ontario’s (“FSRA’s”) interpretation of mortgage administrators’ obligations under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (“MBLAA”). It addresses requirements for ensuring the protection of investors / lenders in a mortgage / mortgage investment during a significant market disruption, such as a declared emergency under the Emergency Management and Civil Protection Act (“Market Disruption”). Mortgage administrators must: • promptly notify each investor / lender of any potential impacts of the Market Disruption on the performance of the mortgage / mortgage investment being administered; and • comply with the terms of mortgage administration agreements (the “Agreements”) when exercising any discretion permitted in the Agreements.

Scope This Interpretation Guidance applies to licensed mortgage administrators under the MBLAA.

Rationale and Context Mortgage administrators are subject to Ontario Regulation 189/08, Mortgage Administrators: Standards of Practice (the “Standards of Practice”), which establishes prescribed standards of practice for every mortgage administrator in Ontario. Under the Standards of Practice, a mortgage administrator must, among other things, establish and implement policies and procedures that: (i) are reasonably designed to ensure that the mortgage administrator and every person acting on its behalf in the business of mortgage administration complies with the requirements established under the MBLAA; and (ii) provide for the adequate supervision of every person acting on its behalf in the business of mortgage administration. Further, in supervising and regulating the mortgage brokerage and administrator sector, FSRA is required to administer and enforce the MBLAA and its regulations, including the Standards of Practice, in a manner that will achieve FSRA’s statutory objects2, in particular, to: • contribute to public confidence in the regulated sectors; • monitor and evaluate developments and trends in the regulated sectors; • promote transparency and the disclosure of information in the regulated sectors; • promote high standards of business conduct particularly with respect to financial services sectors; and • protect the rights and interests of consumers particularly with respect to financial services sectors. A Market Disruption, such as the current declared emergency due to the COVID-19 pandemic, can have an impact on the viability of a project or property that is subject to a mortgage administered by a mortgage administrator. Such a Market Disruption will constitute a significant change in circumstance, where it can reasonably be expected to have a significant effect on the ability of the borrower to continue to make payments under the mortgage. This Interpretation Guidance is intended to provide FSRA’s interpretation of a mortgage administrator’s obligations under the MBLAA and the Standards of

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Practice, where Market Disruption constitutes a significant change in circumstance requiring the mortgage administrator to take specific steps.

Interpretation The MBLAA and its regulations govern mortgage brokering and administration activities in Ontario. This Interpretation Guidance sets out FSRA’s interpretation of how a mortgage administrator is required to meet certain requirements of the Standards of Practice during a Market Disruption. Duty to Notify Investors / Lenders 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. A mortgage administrator must notify each investor / lender as soon as possible after the mortgage administrator becomes aware of a subsequent encumbrance, a significant change in circumstance or a mortgage default. The mortgage administrator must not wait for a situation to be addressed or resolved before notifying the investor / lender. Where the investor / lender is a Mortgage Investment Corporation (MIC), the administrator is required to notify / deal with the MIC. Significant changes in circumstances include, but are not limited to: • borrower’s failure to make scheduled mortgage payments; • default; • 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. In order to be able to promptly notify an investor / lender of a significant change in circumstance affecting the mortgage as required by subsection 18(3) of the Standards of Practice, a mortgage administrator is required to: A. Keep current on the financial performance of each mortgage in its portfolio and the condition of the underlying property, including: • • •

maintaining awareness of significant circumstances that could impact the valuation of the property and the loan-to-value ratio, such as the ability of the borrower to obtain refinancing, pay tax arrears, or remove construction liens on development projects; regularly assessing delinquency risk, achieved by contacting the borrower at the first sign of financial difficulty; and tracking mortgage arrears and determining the impacts on distributions to the investor / lender.

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B. Provide prompt and complete notification to an investor / lender by: • having and using a communications plan for regular reporting to the mortgage investor / lender about: o the performance of their investments and/or borrower performance against loan covenants; o potential need for amendments to mortgage terms requiring investor / lender approval; and o any changes in redemption policies in light of the Market Disruption (e.g., imposition of temporary suspension of redemptions)3. A good communications plan will keep the investor / lender informed and reduce the volume of calls to the mortgage administrator from the investor / lender. Exercising Discretion in Accordance with Mortgage Administration Agreements As per subsection 18(1) of the Standards of Practice, a mortgage administrator cannot administer a mortgage for an investor / lender unless the mortgage administrator and each investor / lender have entered into an Agreement in writing governing the administration of the mortgage. A mortgage administrator must abide by the terms of the Agreement. During a Market Disruption, a borrower may approach a mortgage administrator to request a loan concession such as payment deferral / waiver and/or mortgage term amendments (e.g., maturity extension). Where an Agreement grants a mortgage administrator discretion to modify the mortgage terms, the mortgage administrator is required to determine the nature and extent of its discretion under the Agreement and document any exercise of discretion, including the basis for its decision-making. At a minimum, the documentation should include: • an analysis of each option considered, outlining the benefits and risks to investors / lenders, and rationale for the recommended / implemented option; and • a strategy for implementing the option, including investor / lender communication or notification. Where an Agreement does not grant a mortgage administrator discretion, a borrower’s request to modify the mortgage terms is considered to be a significant change in circumstances under the Standards of Practice that the mortgage administrator is required to promptly communicate to the investor / lender, along with the options available to the investor / lender. A mortgage administrator should obtain prior documented approval for any changes to the terms of the mortgage, and maintain records of the approvals obtained from the investor / lender.

Supervision and Enforcement Mortgage administrators are required to comply with the MBLAA and its Regulations, including the Standards of Practice as outlined in this Interpretation Guidance. Failure to comply may result in enforcement or supervisory action, including the imposition of licence conditions, suspension, revocation and enforcement proceedings seeking administrative monetary penalties.

Effective Date and Future Review This Interpretation Guidance becomes effective on May 12, 2020.

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The latest possible date for FSRA to initiate a review of this Interpretation Guidance will be May 1, 2025.

About FSRA FSRA regulates the insurance, credit union, caisse populaire, mortgage brokerage, loan and trust, and pension administration sectors in Ontario in addition to providing deposit insurance for members of provincially-incorporated credit unions and caisses populaires. FSRA’s vision is financial safety, fairness, and choice for Ontarians. Our mission is public service through dynamic, principles-based, and outcomes-focused regulation.

About this Guidance This document is consistent with FSRA’s Guidance Framework. As Interpretation Guidance, it describes FSRA’s view of requirements under its legislative mandate (i.e. legislation, regulations and rules) so that non-compliance can lead to enforcement or supervisory action. Effective Date: May 12, 2020

12.5 Sample mortgage administration agreement The following is a sample mortgage administration agreement provided by Jeff Levy, Managing Partner of the law firm Levy Zavet PC, Lawyers. Highlighted sections are included to point out the sections that may be modified based on the investor’s needs. This sample incorporates the requirements of the MBLAA and its Regulations, however this document is not meant to replace the advice of legal counsel and is not warranted to be compliant on its own. To ensure compliance please consult your own legal counsel, or contact Jeff Levy at [email protected]. MORTGAGE SERVICES AGREEMENT THIS AGREEMENT dated as of the _____ day of ______________________, 20___. BETWEEN: ________________________________________________, [an individual residing in the province of Ontario, Canada, OR a body corporate, incorporated pursuant to the laws of the province of Ontario] (the “Investor”) - and – __________________________________________________, is a body corporate, incorporated pursuant to the laws of Ontario (the "Mortgage Administrator") WHEREAS: a) The Investor is a LENDER (as hereinafter defined) engaged in the business of investing in mortgages; b) The Mortgage Administrator carries on the business of servicing mortgage investments; and c) The Investor requires the managerial acumen and expertise of the Mortgage Administrator, and the Mortgage Administrator is prepared to provide services to the Investor in accordance herewith; NOW THEREFORE, the parties agree as follows:

1. Definitions

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1.1 In this Agreement, unless the context otherwise requires, capitalized words and phrases shall have the meaning set forth below. "Act” means the Mortgage Brokerages, Lenders and Administrators Act (Ontario) together with all such regulations and amendments thereto including the Ontario Regulation (O. Reg.) 188/08 Mortgage Brokerages Standards of Practice. "affiliate and "associate" each have the meaning ascribed thereto by the Securities Act (Ontario) and means generally under common ownership; "Agreement" means this mortgage services agreement and all amendments made hereto by written agreement between the parties, and the terms "hereof", "hereunder" and similar expressions refer to this Agreement and not to any particular article, section or other portion hereof and include any agreement supplemental hereto; "Commercial Mortgages" means mortgages that are principally secured by multi-family housing projects, residential land developments and income-producing properties that have retail, commercial, service, office and/or industrial uses; "First Mortgage" means a mortgage having priority over all other security interests registered against the same real property used to secure such mortgage for which the principal amount, at the time of commitment, does not exceed [i.e. Eighty Five Percent (85%)] of the appraised value of the underlying real property securing the mortgage as determined by a qualified appraiser; "LENDER" means a mortgage investor either an individual, corporate body or other mortgage investment entity including a mortgage investment corporation as defined in subsection 130.1(6) of the Tax Act, as hereinafter defined; "Mortgage Loans" means mortgages granted to the Investor or Mortgage Administrator or its affiliates, as security for loans to builders, developers and owners of commercial, industrial and residential real estate located in Canada; "NI 31 103" means National Instrument 31-103 – Registration Requirements and Exemptions; "Residential Mortgages" means mortgages that are principally secured by mortgage registrations on residential property titles and leaseholds; "Second Mortgage" means a second mortgage for which the principal amount, at the time of commitment, together with the principal balance outstanding on any mortgage having priority on the same real property secured by such second mortgage, does not exceed [i.e. Ninety Percent (90%)] of the appraised value of the underlying real property securing the mortgage as determined by a qualified appraiser. "Tax Act" means the Income Tax Act (Canada) and the regulations thereunder, as amended from time to time; and "Third Mortgage" means a third mortgage for which the principal amount, at the time of commitment, together with the principal balance outstanding on any mortgage having priority on the same real property secured by such third mortgage, does not exceed [i.e. Ninety Five Percent (95%)] of the appraised value of the underlying real property securing the mortgage as determined by a qualified appraiser.

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2. Appointment of Mortgage Administrator 2.1 The Investor hereby appoints the Mortgage Administrator as the Investor's Mortgage Administrator to manage, source or arrange investments for acquisition by the Investor on a fully serviced basis. The Mortgage Administrator is granted the authority to provide, or cause to be provided through qualified service providers, various services as further described in Section 5 of this Agreement.

3. Business of the Investor 3.1 The parties acknowledge and agree that the Investor is a LENDER in the business of investing in mortgages granted as security for loans by builders, developers and owners of commercial, industrial and residential real estate located in Canada. The Investor intends to conduct business initially in the Provinces of Ontario. It may expand its business into other provinces, and, if so, the Investor shall apply, if necessary, to become registered under corporate and applicable legislation to carry on business as a LENDER in such provinces.

4. Investment Restrictions and Guidelines 4.1 The parties acknowledge and agree that the Investor's mortgage portfolio composition shall vary over time depending on the Investor's and the Mortgage Administrator's overall assessment of market conditions and outlook. The Investor and the Mortgage Administrator shall endeavor to build a mortgage portfolio that encompasses the following general characteristics: a) property type and geographical diversification; b) short term loans, intermediate term loans and long term loans; c) payment schedules of interest and principal or interest only or other; and d) loans in Canadian dollars on primarily Canadian based real estate. 4.2 The parties acknowledge and agree that the following restrictions and guidelines shall apply to the Investor's investment strategy: a) The Investor may invest only in Commercial Mortgages and Residential Mortgages. Investments shall be made by either purchasing interests in or funding mortgages offered, for sale or sourced, or managed, by the Mortgage Administrator, respectively or other licensed mortgage agents and brokers. b) The Investor shall invest only in First Mortgages, Second Mortgages and Third Mortgages. c) A First Mortgage may not exceed [i.e., Eighty Five Percent (85%)] of the appraised value of the underlying real property securing the mortgage, as determined by a qualified appraiser and calculated at the time of commitment. d) A Second Mortgage may not exceed [i.e., Ninety Percent (90%)] of the appraised value of the underlying real property (net of any First Mortgage) securing the mortgage, as determined by a qualified appraiser and calculated at the time of commitment. e) A Third Mortgage may not exceed [i.e., Ninety Five Percent (95%)] of the appraised value of the underlying real property (net of any First Mortgage or Second Mortgage) securing the mortgage, as determined by a qualified appraiser, and calculated at the time of commitment. f) Mortgages in which the Investor invests may contain clauses permitting the mortgagor, when not in default, to renew the mortgage for additional terms at the sole discretion of the Mortgage Administrator and not the borrower. g) The Investor may borrow funds in order to acquire or invest in specific mortgage investments or mortgage portfolios. Should the lender of these borrowed funds require an assignment of the Mortgage Loans, the Mortgage Administrator will assist and charge a fee, accordingly, and that any assignment of the Mortgage Loans will require the assignee to assume the obligations hereunder this Agreement as the investor, unless otherwise terminated. h) The Investor may participate in mortgages on a syndication basis in accordance with the Act.

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k) l) m)

n)

o)

p)

q) r) s)

t)

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The Investor's only undertaking will be to invest the Investor's funds in accordance with its investment objectives, strategies, and restrictions. All mortgages shall, following funding, be registered on title to the subject property in the name of the Investor, the Mortgage Administrator, or its affiliates, or a nominee for the Investor or the Mortgage Administrator, and as decided by the Mortgage Administrator on a case by case basis and for which the Investor shall be informed of at the time the Mortgage Loan is sourced. The Investor shall attempt to maintain at least 50% of its assets in investments in mortgages over residential real estate. No more than 50% of the Investor's assets shall be invested in mortgages over commercial and industrial real estate. Should the Investor invest in mortgages that are on commercial and industrial properties it shall do so only in cases for which it has reviewed and evaluated an independent appraisal and generally shall receive an evaluation of the property subject to the mortgage in the form of a Phase I Environmental Audit. If the independent appraisal reports an appraised value for the real property securing the mortgage other than on an "as is basis", the Investor shall advance funds under a loan by way of progress payments upon completion of specified stages of construction or development supported by receipt of reports of professional engineers, architects or quantity surveyors, as applicable, or upon completion of other specified milestones. So long as the Investor is able to, or has qualified as a regulated LENDER, such as under the Tax Act or Act, and whether or not required in law, the Investor will not make any investment that would result in it failing to qualify as a regulated LENDER or which investment would impair its status as a regulated LENDER. Subject to any other provision within this Agreement, the Mortgage Administrator shall not invest in securities, guaranteed investment certificates or treasury bills unless such securities, guaranteed investment certificates or treasury bills are issued by an arm's-length party and are pledged as collateral in connection with mortgage investments or obtained by realizing on such collateral. The Mortgage Administrator shall not make short sales of securities or maintain a short position in any securities. The Mortgage Administrator shall not guarantee the securities or obligations of any person. To the extent that the Investor's funds are not invested in residential and commercial mortgage investments and bridge loans, the funds will be placed in short term CDIC insured investments so as to maintain a level of working capital for the Investor's ongoing operations considered acceptable by it. The Investor and the Mortgage Administrator shall comply with NI 31-103 at all times.

5. Services of Mortgage Administrator 5.1 The Mortgage Administrator shall work to develop and implement, and assist the Investor in developing and implementing, all aspects of the investment strategies of the Investor. 5.2 The Mortgage Administrator shall provide, or cause to be provided, services to the Investor, including, without limitation: a) using its reasonable efforts to manage, source or arrange investments for acquisition by the Investor; b) service and administer the investments, including holding the Investor's interest in an investment as nominee and bare trustee for and on the Investor's behalf, subject to receipt of funds, completing progress or other advances under an investment, monitoring an investment, including tracking the status of outstanding payments, grace periods and due dates, and the calculation and assessment of other applicable charges relating to an investment, making

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c)

d)

e)

f)

g) h) i)

reasonable efforts to collect all payments on account of principal or interest or other distributions payable on an investment and causing the borrower to perform its obligations under the investment, maintaining records and accounts in respect of each investment, remitting to the Investor all amounts received on account of the Investor's interest in an investment, and on a monthly basis forwarding to the Investor a monthly report in respect of all of the Investor's investments being serviced by the Mortgage Administrator; investigate, select, and conduct relations with borrowers, lenders, consultants, lawyers and other mortgage and investment participants, such as custodians, collection agents, insurers, managers and builders and developers; to employ, retain and supervise such persons and the services performed or to be performed by such persons and to substitute any such party or itself for any other such party or for itself; provide those services as may be required relating to the collection, handling, prosecuting and settling of any claims in respect of the Investor's investments, including foreclosing and otherwise enforcing mortgages and other liens and security interests securing the Investor's investments; act on the Investor's behalf as the Investor's nominee or agent in connection with acquisitions or dispositions of our investments, the execution of deeds, mortgages or other instruments in writing for or on the Investor's behalf and the handling, prosecuting and settling of any claims relating to the Investor's investments; deliver to the Investor reports from time to time and provide any other information or documentation relating to the administration and servicing of such of the Investor's investments as the Investor may reasonably request; ensuring that the Investor complies with all regulatory requirements, including, without limitation, those of NI 31-103; generally, perform such other acts as a residential and/or commercial mortgage loan administrator would perform in the administration of the Investor's investments; and perform such other services or acts as shall be reasonably necessary or ancillary to the matters set out above or as the Investor may from time to time reasonably request.

5.3 The Mortgage Administrator is allowed to engage such persons as the Mortgage Administrator deems appropriate in connection with its performance of the services and to delegate any of its powers and duties under this Agreement, provided that the Mortgage Administrator shall at all times monitor the activities of such persons and be at all times responsible for the performance of such services, powers and duties in a manner consistent with this Agreement. 6. Representations and Warranties of the Mortgage Administrator 6.1 The Mortgage Administrator represents and warrants that: a) it is duly incorporated and validly existing as a corporation under its governing legislation; b) it presently holds all licenses and registrations under applicable legislation that are necessary to perform its duties under this Agreement, and it is not aware of any reason why those licenses or registrations might be cancelled or not renewed or which might impair its ability to discharge its obligations under this Agreement; c) it has the power and capacity to enter into this Agreement and to perform its duties and obligations under this Agreement; d) it has the power and capacity to own property and assets, to carry on its business and to carry out the transactions described herein; e) this Agreement has been duly authorized, signed and delivered by it and is a valid and binding obligation of it, enforceable against it in accordance with its terms;

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f)

the signature, delivery and performance by the Mortgage Administrator of this Agreement does not conflict with, and does not and will not result in a breach of, any agreement or other obligation to which the Mortgage Administrator is a party or by which it is bound; g) the Mortgage Administrator is not a party to, bound or affected by or subject to any charter or by-law provision which is violated, contravened or breached by the signature and delivery of this Agreement; h) the appropriate personnel of the Mortgage Administrator have read carefully and are aware of the investment objectives, investment strategy and investment guidelines and restrictions of the Investor; i) it is not a non-resident of Canada for purposes of the Tax Act; and j) it has, and agrees that it will continue throughout the term of this Agreement to maintain, a sufficient infrastructure and sufficient qualified personnel to satisfy its responsibilities under this Agreement. The Mortgage Administrator agrees to fulfill the role and provide the services set out in this Agreement in an honest and diligent manner, in good faith and to the best of its ability. The Mortgage Administrator further agrees to service the Investor's investments in the same manner, and with the same care, skill, prudence and diligence, with which it services and administers its current mortgage loans, giving due consideration to customary and usual standards of practice employed by commercial mortgage loan administrators with respect to loans comparable to the Investor's investments and to exercise reasonable business judgment in accordance with applicable law to maximize recovery under the Investor's investments. The Mortgage Administrator will at all times comply with all laws, rules, regulations, ordinances, policies and guidelines applicable to the Mortgage Administrator and the Investor, including obtaining and maintaining all necessary licenses, permits, consents and approvals under all applicable federal and provincial laws which are necessary or which may from time to time be required to permit the Mortgage Administrator to perform its obligations to the Investor. However, without the Investor's specific authorization or unless specified in this Agreement, the Mortgage Administrator does not have the power to and will not enter into agreements or arrangements creating obligations of the Investor. 7. Execution of Agreements 7.1 The Mortgage Administrator shall, if directed by the Investor in writing, execute any agreements on behalf of the Investor within the scope of any authority delegated to it hereunder. 8. Restrictions on Mortgage Administrator The funds of the Mortgage Administrator shall not be commingled with those of the Investor. 9. Fees Payable to the Mortgage Administrator 9.1 In consideration for providing the services hereunder, the Mortgage Administrator is entitled to an administration fee and will retain a priority allocation of the interest or other distributions accruing and payable on all investments acquired by the Investor, in amounts of up to and equal to 1.0% per annum of the outstanding aggregate principal balance of all mortgage loans, or the outstanding aggregate principal balance of the Investor's percentage interest therein, and the book value of the Investor's investments other than mortgages, calculated monthly on the first day of the month at the rate of 0.083%, aggregated and payable in monthly installments on the last day of each month and prorated for any partial month. 9.2 The Mortgage Administrator is entitled to deduct any amounts deductible under this Agreement, including its interest allocations, before distributing amounts to the Investor under this Agreement. In addition, the Mortgage Administrator is entitled to retain any overnight float interest on all accounts

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maintained by it and 50.00% of all broker, origination, commitment, renewal, extension, advance, discharge, late payment, participation, NSF, statement, enforcement, management, maintenance, administration and similar or other fees, continuous or ad hoc generated on the investments acquired by the Investor, all of which fees are and remain the sole property of the Mortgage Administrator, and to the extent that they are recovered from the borrowers or investment. 9.3 Service fees in respect of any property management, mortgage, real estate or capital raising services, as provided on an ad hoc basis upon agreement of the parties at the time. The Investor will pay the Mortgage Administrator as agreed between them at the time the particular service is initiated, but in no case will the Mortgage Administrator be paid a fee which is greater than fair market value for the service. 9.4 Performance fees in respect of the Mortgage Administrator’s management, advisory, underwriting and administration services for the investments of the Investor in an amount not to exceed 50.00% of the net yield over and above 8.00% per annum, generated from all investments to be calculated at the end of the fiscal year. For example, if the net yield throughout the year calculated on the fiscal year end is 12.00%, then the Performance fee shall be 50.00% of 4.00% (12.00% - 8.00%) which equals 2.00%. If for example the net yield throughout the year calculated on the fiscal year end is 8.00% then there shall be no Performance fee. 9.5 However, should any employees or independent contractors of the Investor be compensated for services or duties performed on behalf of the Investor or for the benefit of the Investor that are similar to and instead of the services to be provided by the Mortgage Administrator, then the Fees Payable will be reduced by those compensation amounts. 9.6 All rights granted to the Mortgage Administrator and other amounts payable to the Mortgage Administrator pursuant to the terms hereof shall include the applicable amount of harmonized sales tax ("HST") exigible in respect thereof. Accordingly, the Mortgage Administrator shall be responsible for remitting all HST exigible on the fees stated above at such times and in such amounts as required by law. 10. Expenses 10.1 The Mortgage Administrator is responsible for all of its internal costs including, without limitation, all of its internal costs incurred in originating, sourcing, arranging and offering investments for sale to the Investor. 10.2 All of the other costs with respect to the Investors' business shall be paid for by the Investor including, without limitation, taxes, legal, accounting, audit, operating, offering, management and administration fees and expenses, and fees and expenses associated with the acquisition, registration, disposition, holding, collection and enforcement of the Investor's investments. 11. Standard of Care and Liability 11.1 The Mortgage Administrator and any agent to whom the Mortgage Administrator has delegated any of its duties hereunder shall exercise its powers and perform all of its duties hereunder honestly, in good faith and in the best interests of the Investor and shall exercise the same care, skill, prudence and diligence, with which it services and administers its current mortgage loans, giving due consideration to customary and usual standards of practice employed by commercial mortgage loan administrators with respect to loans comparable to the Investor's investments and to exercise reasonable business judgment in accordance with applicable law to maximize recovery under the Investor's investments. Mortgage Administrator, in incurring any debts, liabilities or obligations, or in taking or omitting any

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other actions for or in connection with the affairs of the Investor is, and shall be conclusively deemed to be, acting for and on behalf of the Investor, and not in its own personal capacity. 11.2 The Mortgage Administrator shall not be liable in any way for any default, failure or defect in any of the Investor's investments if it has satisfied the duties and standard of care, diligence and skill set forth above. However, the Mortgage Administrator shall be liable to the Investor for any loss, damage, claim, cost charge, expense or liability resulting from the Mortgage Administrator's willful misconduct, bad faith, negligence or disregard by the Mortgage Administrator of the Mortgage Administrator's duties or standard of care, diligence and skill prescribed by this section or a material breach or default of the Mortgage Administrator's obligations under this Agreement. 11.3 In addition, whether the claim be in tort, contract or otherwise, the Mortgage Administrator will only be liable to the Investor for actual damages incurred by the Investor and only to the extent that such actual damages are equal to or less than the amount paid to the Mortgage Administrator under this Agreement and the Mortgage Administrator shall not be liable to the Investor for any consequential, special, indirect, incidental, exemplary, punitive or similar damages, or lost profit or revenue, or failure to realize expected benefits, capital, revenues, income, profits or savings, relating to the provision or conduct by the Mortgage Administrator of its services, duties and obligations under this Agreement. 11.4 If, notwithstanding the provisions of this Agreement, the Mortgage Administrator or any of its directors, officers, employees, consultants or agents shall be held personally liable as such to any other person in respect of any debt, liability or obligation incurred by or on behalf of the Investor, or, subject to the provisions hereof, any action taken or omitted or in connection with the affairs of the Investor, the Mortgage Administrator and its directors, officers, employees, consultants or agents shall be entitled to indemnity and reimbursement out of the Investor's property and assets to the full extent of such liability and the costs of any litigation or other proceedings in which such liability shall have been determined, including without limitation, the fees and disbursements of counsel. The Mortgage Administrator hereby agrees that it shall only look to the Investor's property and assets for satisfaction of any claims arising out of or in connection with this Agreement. 12. Appointment of Agents 12.1 The Mortgage Administrator has currently not appointed any other entity to administer and service mortgages on behalf of the Mortgage Administrator in accordance with the terms of this Agreement. The Mortgage Administrator may also employ or engage or appoint as agent, and rely and act upon information or advice received from, investment counselors, distributors, brokers, electronic data processors, advisors, accountants, accounting and pricing services, lawyers and others. 13. Confidentiality/Non-Circumvention 13.1 The parties agree, subject to the terms of the Agreement, that the Mortgage Administrator's relationship with the Investor pursuant to this Agreement, shall be non-exclusive for both parties such that the Mortgage Administrator and its directors and officers shall be permitted to act as a mortgage administrator for any other LENDER or be associated with any entity that competes directly with the Investor's business. 13.2 During the term of the Agreement and for a period of two (2) years after termination of this Agreement, the Investor agrees to keep the advice and information provided by the Mortgage Administrator hereunder confidential, except to the extent such information is otherwise available to the public, or disclosure is required by law. During the term of this Agreement and for a period of two (2) years after termination of this Agreement, the Mortgage Administrator agrees to keep confidential,

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except to the extent such information is otherwise available to the public or disclosure is required by law, information received by it with respect to the affairs of the Investor. 13.3 The parties acknowledge that, as a consequence of the engagement contemplated hereby, each will acquire considerable knowledge relating to the contracts and relationships of the other party. The parties acknowledge that each could utilize such knowledge to the serious detriment of the other party. Accordingly, the parties agree that during the term of this Agreement and for a period of two (2) years after the termination of this Agreement: a) the Investor will not, directly or indirectly, through any other party or entity, approach or solicit any borrowers and other construction finance lenders introduced to the Investor by the Mortgage Administrator; and b) the Mortgage Administrator will not, directly or indirectly, through any other party or entity, approach or solicit: (i) any shareholder, investor, employee, consultant of the Investor; (ii) anyone who was a shareholder, investor, employer, consultant of the Investor; or (iii) any exempt market dealer, registered advisor or dealing representative introduced to the Mortgage Administrator by the Investor for any purpose whatsoever. 14. Duration and Termination 14.1 This Agreement shall continue for an indefinite term unless terminated pursuant to this Agreement. 14.2 This Agreement may be terminated at any time by the Investor on 30 days' written notice or at any time by mutual consent in writing. 14.3 This Agreement may be terminated by either party immediately in the event of: (i) the commission by either party of any fraudulent act; (ii) either party becomes bankrupt, insolvent or makes a general assignment for the benefit of its creditors; (iii) conviction of either party for a criminal offence; (iv) conduct by either party that is materially damaging to the other party and contrary to the terms of this Agreement; (v) material breach of this Agreement by a party; (vi) material misrepresentation by a party; or (vii) material failure by a party to perform its duties as described in this Agreement within ten days of written notice by the other party. 14.4 The Mortgage Administrator may resign and this Agreement may be terminated upon 60 days' notice by the Mortgage Administrator to the Investor. 14.5 Other than as stated above, this Agreement may not be terminated without the mutual written consent of the parties hereto. 14.6 Other than payment of the fees payable to the Mortgage Administrator to and including the date of termination of this Agreement, no additional payments shall be required to be made by the Investor to the Mortgage Administrator as a result of any termination of this Agreement. 14.7 Upon termination of this Agreement, the Mortgage Administrator shall forthwith deliver to the Investor, or such other person as directed by the Investor, all records, documents and books of account and all materials and supplies of the Investor which are in the possession or control of the Mortgage Administrator or for which the Mortgage Administrator has been paid or reimbursed by the Investor and which relate directly or indirectly to the Investor or to the performance by the Mortgage Administrator of its obligations under this Agreement.

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15. Indemnification 15.1 The Investor will indemnify and save harmless the Mortgage Administrator and its directors, officers, employees and agents (collectively, "Mortgage Administrator Indemnified Parties") from and against any and all losses, claims, costs, damages and liabilities (including reasonable legal fees or disbursements reasonably incurred) which the Mortgage Administrator Indemnified Parties may suffer, incur or sustain as a result of any suit, claim or demand brought or commenced against the Mortgage Administrator Indemnified Parties by a third party and resulting from the Mortgage Administrator carrying out its duties under this Agreement, other than a suit, claim or demand occasioned by the Mortgage Administrator's gross negligence or willful misconduct. 15.2 The Mortgage Administrator will indemnify and save harmless the Investor and its directors, officers, employees and agents (collectively, "Investor's Indemnified Parties") from and against any and all losses, claims, costs, damages and liabilities (including reasonable legal fees or disbursements reasonably incurred) which the Investor's Indemnified Parties may suffer, incur or sustain as a result of any suit, claim or demand brought or commenced against the Investor's Indemnified Parties by a third party and resulting from the Mortgage Administrator carrying out its duties under this Agreement, other than a suit, claim or demand occasioned by the Investor's gross negligence or willful misconduct. 16. Miscellaneous 16.1 The headings in this Agreement are included for convenience only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or interpretation. In this Agreement whenever the singular form is used, the same shall include the plural as and when required by the context. Words denoting one gender include the other or the neuter, and words denoting the neuter denote either gender, unless a contrary intention is to be inferred from or required by the subject matter or context. All references to currency in this Agreement are references to the lawful money of Canada. 16.2 Nothing in this Agreement is intended to create or shall be construed as creating a partnership, agency, joint venture, association or corporation between the parties. 16.3 This Agreement shall be governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein and the parties hereby agree to submit to the non-exclusive jurisdiction of the courts of the Province of Ontario. 16.4 If any provision of this Agreement shall be held or made invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other provision of this Agreement. 16.5 Any amendment or modification to this Agreement shall require the written approval of each party hereto in order to be effective. 16.6 Neither party may assign this Agreement to any other party without the prior written approval of the other party hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 16.7 Any notice required or permitted to be given hereunder shall be in writing and shall be properly given, if delivered personally, or by mail or by telecopy or other similar form of communication addressed:

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c) to the Investor at: Attention: President Email: Facsimile:

d) to the Mortgage Administrator at: Attention: Email: Facsimile: 16.8 Any notice, direction or other instrument given as aforesaid shall be deemed to have been effectively given, if sent by telecopier or other similar form of telecommunications, on the next business day following such transmission or, if delivered, to have been received on the date of such delivery or, if mailed, to have been received seven days after the mailing thereof excluding each day during which there exists any general interruption in postal services due to strike, lockout or other cause. Either party may change its address for service from time to time by notice given in accordance with the foregoing and any subsequent notice shall be sent to the party at its changed address. 16.9 This Agreement may be executed in one or more counterparts (including by way of facsimile), each of which when so executed shall be deemed to be an original and such counterparts together shall constitute one and the same agreement. IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed as of the day and year first above written.

Per:

Per:

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12.6 Key Terms and Definitions 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. Financial guarantee A guarantee that a specific amount of funds, at least $25,000, is available at all times. The guarantee may be unimpaired working capital, or another form of financial guarantee that is acceptable to the Superintendent. Mortgage Administrator as defined by the MBLAA, means a corporation, partnership, sole proprietorship, or other entity that has a mortgage administrator’s licence. Prohibited activities The Mortgage Brokerages, Lenders and Administrators Act, 2006 and regulations, prohibit: • Administering mortgages without a licence —as of July 1, 2008, all Mortgage Administrators must be licensed with FSRA to carry on business in Ontario, unless an exemption applies. • Using an unauthorized name — you can only use the name in which you are licensed. • Indicating that Mortgage Administration fees are approved by the government —you cannot claim that Mortgage Administration fees are approved by a government authority. The only exception is fees under the Land Titles Act or the Registry Act. • Offering guarantees to lenders/investors — you cannot offer a guarantee to an investor/lender regarding a mortgage loan or mortgage investment. • Engaging in tied selling — lenders/investors cannot be required to obtain a product/service as a condition for obtaining another product or service from the Mortgage Administrator Trust funds (also deemed trust funds) Funds held on behalf of a third party or that have yet to be earned.

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12.7 Review Questions Answers to the Review Questions are found at www.REMIC.ca

12.7.1 Short Answer Questions 1. What is the role of the Mortgage Administrator? 2. What is the minimum financial guarantee a Mortgage Administrator must have to get licensed? 3. Can a Mortgage Administrator be a sole proprietor? 4. What is the amount of E and O that a Mortgage Administrator must maintain? 5. Does a Mortgage Administrator have to verify the identity of each investor/lender before entering into an agreement with them?

6. When must a Mortgage Administrator have a trust account? 7. What are deemed trust funds? 8. Do Mortgage Administrators have to file audited financial statements with OSFI? 9. Under what circumstances must a Mortgage Administrator immediately notify an investor/lender? 10. List 5 examples of significant changes in a borrower’s circumstances.

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Chapter 13: Fraud Detection and Prevention 13.1 Learning Outcomes Successful understanding of the concepts presented in this chapter will enable the learner to: 1. Define mortgage fraud 2. Explain the different types of mortgage fraud 3. Discuss the direct and indirect consequences of mortgage fraud 4. Discuss the steps taken by different regulators to combat mortgage fraud 5. Discuss methods of preventing mortgage fraud 6. Understand different warning signs in the detection of mortgage fraud 7. Explain the role of the Land Titles Assurance Fund 8. Discuss the methods that consumers can use to protect against fraud

13.2 Introduction Mortgage fraud, while likely minor in its percentage of transactions done in the industry as a whole, can have significantly negative effects on the entire industry, especially for private investors. In this chapter we discuss what mortgage fraud is, its different types, and what can be done to identify and prevent it.

13.3 What is Mortgage Fraud? Mortgage fraud is the deliberate omission of information, use of misstatements or misrepresentations to obtain, purchase, or fund a mortgage loan. Mortgage fraud can be committed by a borrower, criminal organization, or industry participant to obtain mortgage funding, or by a lender’s representative to fund a mortgage loan. The increased usage of technology in the mortgage industry has allowed those committing mortgage frauds to take advantage of legitimate initiatives such as AVMs, risk assessment tools, electronic registration of land titles documents and the ability 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. Certain products also contribute to the ability to commit mortgage fraud. The stated income program can be misused by consumers and other industry participants. Designed to allow self-employed borrowers to state their legitimate income, this type of program has been used by some to artificially inflate the amount of income earned to obtain an approval. This type of fraud has the effect of allowing a borrower to obtain a loan that they cannot legitimately afford. Although the borrower may be able to make their mortgage payments for several months the long-term effect is often default, causing harm to the lender, the industry, and the borrower. Before a borrower defaults, they will typically struggle financially, placing a burden on the family unit. The social effects of this type of fraud are virtually impossible to measure, but anecdotally this results in marital stress, including divorce, as many divorces are due to financial issues.

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Although statistics on Canadian mortgage fraud are normally not published it is estimated that fraud accounts for several hundred million dollars of losses annually. It is reported by the Federal Bureau of investigation (FBI) that upwards of 80% of American mortgage fraud is committed by or involves industry participants.84 While fraud is harming the reputation of the mortgage industry, it is important to stay focused on the fact that the vast majority of mortgage industry participants are honest, ethical individuals providing the best products and services for their clients. It is important for these honest practitioners to take a strong stand against mortgage fraud and thereby help increase consumer confidence in the industry and protect the interests of all honest industry participants.

13.4 Types of Mortgage Fraud Mortgage fraud can be subdivided into three major categories according to the purpose of the fraud: fraud for criminal activities, fraud for profit and fraud for shelter.

13.4.1 Fraud for Criminal Activities According to the Criminal Intelligence Service Canada (CISC), mortgage fraud may be committed to further other criminal activities such as the financing of marijuana grow operations, drug labs, and money laundering.85

Marijuana Grow Operations (Grow Ops) and Drug Labs Criminal organizations will often use “straw borrowers” to obtain mortgage financing. A straw borrower is typically an individual who is paid to use their identity to obtain mortgage financing, or who is a victim of identity theft. In either case this borrower is not the individual using the mortgage proceeds. The criminal organization may use a straw borrower to purchase a property where a marijuana grow operation or other type of drug lab such as a methamphetamine lab will be housed. Once the criminal organization has completed its operation in this location it will often perform cosmetic repairs to the property and sell it to an unsuspecting purchaser. A 2007 case in Ontario saw an individual convicted of operating a grow op purchase a home that had been seized by police for being used as a grow op. The criminal was intent on restarting his practice. It is examples like this that exemplify the brazen attitude of many criminal organizations.

Money Laundering Money laundering is the practice of performing a financial transaction with the intent to conceal the source of money, typically obtained through a criminal activity. The result is that the money appears to have been legitimately obtained. If a criminal organization wishes to launder money obtained through criminal activities, it will often appear to purchase a home for less than market value but provide the vendor the difference in cash. For example, a house worth $400,000 is purchased by a criminal organization for $300,000 using a 95% LTV mortgage obtained by a straw borrower. $100,000 is

84

Mortgage Fraud Report 2006, FBI, May, 2007, https://www.fbi.gov/stats-services/publications/mortgage-fraud2006 85 Mortgage Fraud and Organized Crime in Canada, CISC, November, 2007

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provided to the vendor in cash, resulting in a total amount paid for the property of $400,000. The purchaser then sells the property for $400,000 and has successfully laundered $100,000.

13.4.2 Fraud for Profit Many crime organizations and individuals will commit mortgage fraud to obtain the proceeds of the mortgage without the intent to repay the loan. There are four basic types of fraud used for this purpose.

Air Loans An air loan is a mortgage provided on a property that does not exist. This type of fraud typically requires the involvement of a lawyer, real estate salesperson, vendor, and purchaser. In this complicated scheme the real estate salesperson creates a fake MLS listing, and the purchaser applies to a financial institution for mortgage financing. The property is valued using a risk assessment tool, as the mortgage is default-insured. The participants in this fraud receive the mortgage funds and abscond with the money.

Value Fraud Criminals, in association with a dishonest appraiser, may have a property appraised at a higher value than it is worth. The criminal will then obtain a mortgage based on the inflated value and abscond with the money. This results in the lender taking possession of a property that must be sold at a significantly lower amount. In Atlanta, Georgia an entire neighbourhood was compromised. Fifty-six properties were purchased using straw borrowers and fraudulent appraisals within roughly the same period. None of the mortgage payments were made. This type of criminal activity can have a devastating effect on a market. Figure 29 – Mortgage Fraud and its Effects on a Neighbourhood

Dark balloons indicate mortgages at least 90 days in arrears, while the lighter balloons are 60 days in arrears and the lightest balloons are 30 days in arrears. White balloons are currently up to date.

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Value fraud is also perpetrated by fraudsters who know the circumstances in which lenders will only rely on automated valuation models (AVMs) to determine the market value of a property and will not physically verify the condition of the property. These situations can arise when the fraudster impersonates an individual with good credit, knowing that the lender will use an AVM since the covenant is considered low risk. The fraudster provides details on the property that are consistent with other homes in the neighbourhood and the AVM provides a value based on that information. After the transaction closes the fraudster makes several payments and then stops. The lender then begins the power of sale process and has a full appraisal completed. Unfortunately for the lender the full appraisal paints a very different picture of the property. The following figure, a frontal view of this property is very different from the rear view, as illustrated in the second figure. In this example the property was sold for a significant loss to the lender. Figure 30 – AVM Fraud: Frontal view of a property appraised by an AVM86

86

Mortgage Fraud Update, Fannie Mae, 2007

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Another form of value fraud involves collusion between the purchaser and the vendor where the sale price is inflated. For example, a purchaser applies for a 95% LTV mortgage to purchase a house selling for $400,000. In reality the house is being sold to the purchaser for $300,000. The result is that the vendor receives $300,000 and the purchaser gets a mortgage for $380,000, making an $80,000 profit off the purchase. The purchaser does not make any mortgage payments, or defaults after making a few payments and absconds with the proceeds. Figure 31 – AVM Fraud: Rear view of a property appraised by an AVM87

Yet another type of value fraud centres on appraisals. As previously discussed, the market value approach of appraising a property uses comparable properties that have recently sold and that are similar to the subject property, among other factors. When determining similarity one of the criteria is the neighbourhood. In some areas property values can be significantly different from one neighbourhood to another. If an appraiser uses a comparable that is similar in every respect but is from a neighbourhood where values are higher, the value of the subject property can be fraudulently increased.

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Mortgage Fraud Update, Fannie Mae, 2007

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Title Fraud Title fraud involves the fraudulent transfer of title of a property. The most vulnerable homeowners are those owning rental properties or who have high value properties with no existing mortgage. Since approximately fifty percent of Canadians who own property are mortgage free, the potential losses are significant. The most common form of title fraud involves identity theft and impersonation. The criminal will create false identity documents and present him or herself as the legitimate owner of the property. They will use this process either to transfer the property to him or her and then resell it to a third party, who is often unaware, or use the real homeowner’s identity to obtain mortgage financing and abscond with the funds. Example An Ontario case that was decided upon by a court in December 2007 saw a ninety-year-old homeowner defrauded of his rental property. He leased this property to a couple who then fraudulently created a Power of Attorney. They told the owner that they were moving but wanted to honour the lease by subleasing the property to another couple. They then used this Power of Attorney to sell the property to another couple who were not involved in the fraud. A lender provided the purchasing couple with a mortgage. Once the fraud was uncovered, the property was eventually transferred back to the original homeowner’s name, but the lender refused to discharge the mortgage, stating that its mortgage was valid since, although the sale was fraudulent, the mortgage transaction was not. Luckily for the homeowner, the courts ruled that the mortgage transaction and the purchase were part of the same transaction and therefore part of the same fraud. The Court indicated that the lender should have done more due diligence in the transaction. It is of interest to note that a title insurance policy would have greatly aided the homeowner in this case by defending his position in court and paying the related costs of rectifying the title, or by potentially compensating the homeowner for the loss.

Foreclosure Fraud Although not as common in Canada as it is in the United States, foreclosure fraud is becoming more prevalent. The scheme involves an individual whose house is being foreclosed upon or who is under a power of sale. The criminal approaches the homeowner and offers to consolidate the homeowner’s debt and pay off the mortgage arrears. In many cases the criminal will take title to the home and allow the debtor to live in the property while making debt payments. While this is a legitimate solution to a foreclosure or power of sale, the difference is that a criminal scheme will see the homeowner sign over title of the property without even realizing it. In certain cases, the criminal will then sell the property without the homeowner’s knowledge or keep the debt payments without forwarding them to the appropriate creditors.

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Identity Theft Identity theft takes place when personal information has been stolen or is being used to commit fraud or theft. In 2006 there were 7,778 reported cases of identity theft in Canada, representing over sixteen million dollars in claims with Ontario having 3,353 of the claimants valued at over seven million dollars.88 That number increased to more than 20,000 reported cases of identity fraud in Canada in 201489, which reportedly only represents about 5% of the total number of cases in the country. According to “Policereported crime statistics in Canada, 2018”,90 the rate of fraud (including identity theft and identity fraud) continued to increase for the seventh year in a row, with a 12% increase between 2017 and 2018. Identity theft appears to be vastly under reported by victims.

Impersonation While impersonation and identity theft are often interchangeable, it is of interest to note that not only can a homeowner, borrower, vendor, or purchaser be impersonated, but a lawyer may as well. The Law Society of Upper Canada (LSUC) reports that lawyers in good standing with the Society may be impersonated to obtain mortgage financing for fictitious purchasers in a real estate transaction. In 2004, LSUC documented one case in which an entire law firm was fictitiously created, along with contact information.91

Elder Financial Fraud This type of fraud is considered to be on the rise as our population ages. The North American Securities Administrators Association estimates that 23% of elder financial fraud cases consist of a family member, trustee or Power of Attorney taking advantage of the senior.92 For example, a son applies for a mortgage on behalf of his elderly mother. He presents a valid Power of Attorney. While a Power of Attorney is often used by family members to legitimately act on their parents’ behalf, it is also used as a tool to commit elder financial fraud. It is vital to fully investigate the transaction to ensure that it is not designed to take advantage of the senior. In this instance it is important to rely on your brokerage’s policies and procedures for the detection and prevention of elder financial fraud. One possible solution is to require independent legal advice for any transaction where elder financial fraud is suspected, as well as contacting the lawyer who did the original Power of Attorney. If there is any doubt as to the legitimacy of the document or the legality of the transaction it cannot be completed. To do so would be to put the senior in harm’s way and violate the MBLAA.

88

Identity Theft Complaints, Phonebusters Canadian Anti-Fraud Centre, http://www.antifraudcentre-centreantifraude.ca/reports-rapports/2014/ann-anneng.htm#a28 90 Statistics Canada, https://www150.statcan.gc.ca/n1/pub/85-002-x/2019001/article/00013-eng.htm 91 Law Society of Upper Canada, Note to the Profession – July 23, 2004 92 http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2017/06/BD-Study-of-Senior-Practices-andProcedures_06152017.pdf 89

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Power of Attorney (POA) Fraud A Power of Attorney or POA is a written document in which a person (referred to as the grantor) gives someone else (referred to as the Attorney) the power to make certain decisions on their behalf if they become unable to make those decisions themselves. Although the person given this power is called an Attorney, it does not mean that this person is a lawyer. Most often, the Attorney is a spouse, relative, or a close friend. Whoever the Attorney is, that person must make decisions that are in the grantor’s best interests. This is called a fiduciary duty. There are two main types of POAs: Power of Attorney for Property and Power of Attorney for Personal Care. Typically, POA fraud refers to a Power of Attorney for Property. Unfortunately, Power of Attorney fraud, often called financial abuse, is one of the most common forms of elder abuse in Canada. The common types of Power of Attorney fraud consist of committing a fraud to obtain a POA and committing fraud using a POA. Obtaining a POA fraudulently is often the result of exerting undue influence over the grantor. It could also be fraudulently obtained by the fraudster posing as a financial advisor or other trusted financial services professional, or by forging the documents. The most common ways in which fraud is committed using a POA include: • emptying the grantor’s bank account and using the money for the Attorney’s personal use, not for the grantor’s use • theft of the grantor’s pension cheques or possessions • making unauthorized, questionable, or even speculative investment decisions on behalf of the grantor • acting in a manner when handling financial matters on behalf of the grantor, which may contribute to unnecessary expenses, or damages from inaction • misappropriation of the grantor’s assets • mortgaging or selling a grantor’s home, or other asset without the grantor’s knowledge or consent, or • other violations of fiduciary duty. Power of Attorney fraud is criminal. Because of the nature of the crimes, Power of Attorney fraud can often result in theft, forgery, and fraud charges under the Criminal Code. Section 331 of the Criminal Code deals with Theft by Persons Holding Power of Attorney: “Everyone commits theft who, being entrusted, whether solely or jointly with another person, with a power of Attorney for the sale, mortgage, pledge or other disposition of real or personal property, fraudulently sells, mortgages, pledges or otherwise disposes of the property or any part of it, or fraudulently converts the proceeds of a sale, mortgage, pledge or other disposition of the property, or any part of the proceeds, to a purpose other than that for which he was entrusted by the power of Attorney.”

13.4.3 Fraud for Shelter 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 their status.

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Since the borrower cannot qualify for the mortgage based on their true current income, they will most likely be unable to afford the mortgage. The result is that a purchaser who is already financially incapable of legitimately qualifying for a mortgage obtains the financing and either defaults on the mortgage payments or endures undue financial hardship. This can have significant negative effects on the individual’s standard of living as well as resulting in losses to the lender. The following figure illustrates a statistical breakdown of the types of mortgage misrepresentation found in loans originated in 2019 in the United States, presented by Fannie Mae, who is the United States’ equivalent of CMHC. Legend: Types of Misrepresentation Assets: The borrower’s asset information was inflated or fabricated. Credit: The borrower’s identity and/or credit history was misrepresented. Income: The borrower’s income/employment information was inflated or fabricated. Liabilities: The borrower’s liabilities were misrepresented. Occupancy: The borrower’s intent to occupy the subject property was materially misrepresented. Property: Material facts about the property and/or the comparable sales was misrepresented. SSN: There is a discrepancy in the SSN(s) used to qualify the borrower(s). Value: The property value was artificially inflated or deflated and there was non-property related misrepresentation in the loan transaction. Figure 3293 – U.S. Mortgage Misrepresentation by Type

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Fannie Mae, https://singlefamily.fanniemae.com/media/document/pdf/mortgage-fraud-loan-trends

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13.5 Direct Consequences of Mortgage Fraud As FSRA states in its November 4, 2016 Bulletin, M-01/16,94 “Failure to comply with the MBLAA’s fraud prevention requirements may expose you to enforcement action, including licence suspension or revocation and administrative monetary penalties. If you are unsure of your responsibilities or have any questions, please contact FSRA.”

13.5.1 Criminal and civil liability As CMHC states in their Mortgage Fraud discussion,95 “Borrowers who misrepresent information and straw buyers who allow a property to be purchased in their name are committing mortgage fraud and will be liable for any financial shortfall in the event of default. They may also be held criminally responsible for their misrepresentation.” , As discussed in detail in chapter 3, the MBLAA (sections 43 – 50) gives FSRA two types of enforcement tools: administrative penalties and charges under the legislation. Civil liability allows for an injured party to seek damages and compensation for injuries suffered by the actions of the party committing the fraud. Example The following fictitious example is loosely based on enforcement activity found on FSRA’s online “Enforcement Activities – Mortgage Agents.”96 Mr. Glock, a licensed mortgage agent, arranged a mortgage for a client using fraudulent income statements. Once this was discovered by the lender a complaint was filed with FSRA. After investigating, FSRA determined that Mr. Glock charged the borrower $5,000 to create the false statements. FSRA determined that Mr. Glock contravened subsection 43(2) of the Act by giving false or deceptive information or documents when dealing in mortgages in Ontario and subsection 4(1) of the Ontario Regulation 187/08 by receiving fees from a person or entity other than the brokerage on whose behalf he was authorized to deal or trade mortgages. FSRA issued a Notice of Proposal to Impose an Administrative Penalty of $10,000 on Mr. Glock. In addition, FSRA revoked the agent’s license. Beyond administrative penalties, the MBLAA allows FSRA to charge individuals or businesses with an offence under the legislation. Anyone who contravenes any of the sections as listed in section 48 of the MBLAA is considered to be guilty of an offence and may be subject, in addition to administrative penalties, of fines and imprisonment. Section 43 (1) is directly related to mortgage fraud. “Prohibition re false or deceptive information 43 (1) No mortgage brokerage or mortgage administrator shall give, assist in giving or induce or counsel another person or entity to give or assist in giving any false or deceptive information or document when carrying on the business of dealing in mortgages in Ontario or the business of trading in mortgages in

94

FSRA, http://FSRA.gov.on.ca/en/mortgage/bulletins/Pages/m-01-16.aspx CMHC, https://www.cmhc-schl.gc.ca/en/co/buho/plmayomo/plmayomo_004.cfm 96 http://FSRA.gov.on.ca/en/mortgage/enforcement/Pages/agents.aspx 95

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Ontario, when carrying on business as a mortgage lender in Ontario or when carrying on the business of administering mortgages in Ontario. 2006, c. 29, s. 43 (1)”. Individuals charged with an offence are liable to a fine up to $500,000, imprisonment for up to one year, or both while corporations are liable to a fine of up to $1,000,000. It is important to note that directors and officers of a corporation that has committed an offence are also liable. Section 48.2 of the MBLAA also dictates that any contraventions of applicable Standards of Practice are an offence under the MBLAA and liable to the fines as previously discussed.

13.6 Indirect Consequences of Mortgage Fraud Along with the consequences listed previously, as well as significant losses to lenders and claims payable by title insurers and mortgage default insurers, mortgage fraud can have other harmful effects.

13.6.1 Psychological Individuals who are victims of identity theft can suffer significant emotional harm, including stress, depression, guilt, and so on. They may suffer financial losses due to the fraudulent transaction as well as having to spend a significant amount of time recovering their compromised identification and attempting to rectify false information on their credit reports.

13.6.2 Reputational Mortgage fraud can damage the integrity of the entire industry. As more fraud is uncovered, those industry participants involved in the fraud will see public confidence in their profession erode. In addition, mortgage agents who have originated fraudulent loans can have their reputations tarnished, whether they were involved in the fraud or not.

13.6.3 Economic Significant fraud in a single neighbourhood, as seen in Atlanta, can result in higher property taxes due to inflated values as well as having the opposite effect when the properties must be sold by lenders. This can cause a flood of properties for sale in the neighbourhood and diminish the values of surrounding properties. Properties that were used by criminal organizations for the purposes of marijuana grow ops or drug labs can cause the unknowing purchaser health hazards and significant costs to repair the property.

13.7 Fraud Prevention It is of vital interest to both the integrity of the mortgage brokerage industry and the mortgage industry as a whole that mortgage fraud be prevented whenever possible. As criminals use more sophisticated methods of committing fraud it is becoming much more difficult for mortgage agents to identify fraud. It is, however, incumbent upon mortgage agents to do everything in their power to prevent a mortgage fraud from occurring.

13.7.1 Industry Steps in Fraud Prevention

Default insurers Default insurers have implemented strategies to prevent fraud, including publications and seminars on fraud prevention. The following are links to their specific publications:

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CMHC: https://www.cmhc-schl.gc.ca/en/professionals/project-funding-and-mortgage-financing/mortgage-loaninsurance/mortgage-fraud Canada Guaranty https://www.canadaguaranty.ca/contact-us/fraud-reporting/ Sagen https://www.sagen.ca/lender-forms-worksheets/stop-fraud-worksheet/

Regulators Various regulators across the country have implemented strategies to prevent fraud, including instituting specific requirements for licensees. The following are initiatives taken by FINTRAC, FSRA, MBRCC and OSFI. Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) https://www.fintrac-canafe.gc.ca/fintrac-canafe/1-eng#s1 As Canada's financial intelligence unit and anti-money laundering and anti-terrorist financing regulator, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), or 'the Centre', helps to combat money laundering, terrorist activity financing and threats to the security of Canada, while ensuring the protection of personal information under its control. FINTRAC is one of 13 federal departments and agencies that play a key role in Canada's Anti-Money Laundering and Anti-Terrorist Financing regime. The Centre's mandate is to ensure the compliance of businesses subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and associated Regulations, and to generate actionable financial intelligence for police, law enforcement and national security agencies to assist in the investigation of money laundering and terrorist activity financing offences or threats to the security of Canada. The Centre acts at arm's length and is independent from the police services, law enforcement agencies and other entities to which it is authorized to disclose financial intelligence. FINTRAC is headquartered in Ottawa, with regional offices located in Montréal, Toronto, and Vancouver. It reports to the Minister of Finance, who is in turn accountable to Parliament for the activities of the Centre. Financial Services Regulatory Authority of Ontario (FSRA) 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. The following checklist, entitled “Checklist for Detecting and Preventing Mortgage Fraud”, is an example of the regulator’s commitment to fraud prevention: https://www.fsrao.ca/media/5021/download Mortgage Broker Regulator’s Council of Canada (MBRCC) As the council of Canadian mortgage regulators, 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

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Office of the Superintendent of Financial Institutions (OSFI)97 The Office of the Superintendent of Financial Institutions (OSFI) is an independent federal government agency that regulates and supervises more than 400 federally regulated financial institutions and 1,200 pension plans to determine whether they are in sound financial condition and meeting their requirements. Federally regulated entities include all banks in Canada, and all federally incorporated or registered trust and loan companies, insurance companies, cooperative credit associations, fraternal benefit societies and private pension plans. OSFI’s scope of regulation does not include consumer or consumer-related issues or the securities sector, which are the responsibility of other agencies, both federal and provincial. OSFI, through guidelines such as B-2098 and B-2199, 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 borrower.

13.7.2 Brokerage Steps in Fraud Prevention To protect against fraud the mortgage agent should take the following steps: Information Security The first step a brokerage must take is to ensure that information provided to it by investors, lenders and other sources is properly secured against potential misuse, including hacking of systems by outsiders. In addition, the brokerage is responsible for ensuring that none of its records are falsified, as per O. Reg. 188/08: MORTGAGE BROKERAGES: STANDARDS OF PRACTICE, Security of records, section 47, which states, “A brokerage shall take adequate precautions, appropriate to the form of its records, to guard against the falsification of the records. O. Reg. 188/08, s. 47”. This also applies to mortgage administrators, as detailed in O. Reg. 189/08: MORTGAGE ADMINISTRATORS: STANDARDS OF PRACTICE, Security of records, section 30, which states, “A mortgage administrator shall take adequate precautions, appropriate to the form of its records, to guard against the falsification of the records. O. Reg. 189/08, s. 30”. Identity Verification Ensure that the borrower’s identity is verified by viewing a piece of photo identification, preferably a driver’s license. Ensure that a photocopy of the document is made and kept on file for future reference.

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OSFI, About Us, https://www.osfi-bsif.gc.ca/Eng/osfi-bsif/Pages/default.aspx OSFI, B-20, https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b20_dft.aspx 99 OSFI, B-21, https://www.osfi-bsif.gc.ca/Eng/Docs/B21.pdf 98

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Employment and Income Verification The mortgage agent should verify the borrower’s employment and income by contacting the employer by phone and noting this information in the file. The mortgage agent should verify the validity of the contact information of the employer by conducting a business phone number search or reverse directory lookup using www.canada411.ca or other internet services. Although this task is often completed by the lender, the mortgage agent can prevent the submission of fraudulent files by discovering this information before the file is submitted. Occupancy If the mortgage agent is aware of the applicant’s intent to rent a property that they are listing as owner occupied, the mortgage agent must advise the applicant that this is in fact fraudulent and that they will not be a party to this transaction. A mortgage may still be obtained legitimately by using a product that allows the property to be used as a rental. If the application has been submitted as an owner-occupied property and the mortgage agent subsequently learns of the applicant’s intent to rent the property, they must advise the borrower that the application will be cancelled with the current lender and inform the lender of the misstatement. Credit The mortgage agent must verify the information found on the credit report with the applicant for consistency. If there are any discrepancies such as a different social insurance number, the mortgage agent should obtain documentary evidence that supports the applicant’s claim. Property In the case of the property to be mortgaged being valued by a risk assessment tool or an AVM, and since mortgage fraud based on the property is becoming much more frequent, the mortgage agent should verify that the property does indeed exist and that it conforms to the neighbourhood by viewing the property, when possible. If this is not possible the mortgage agent should use a technology like Google, that provides satellite imagery of properties to verify that the property exists. If not meeting at the applicant’s property, the mortgage agent should also ask for a copy of a recent utility bill that has the correct address of the property to be mortgaged and is in the applicant’s name. Although the risk of property fraud is borne by the lender, it is necessary for a prudent mortgage agent to protect the lender’s interests whenever possible.

13.6.3 Fraud Warning Signs or Red Flags While there are many potential warning signs (often referred to as red flags) for mortgage fraud, some are more obvious than others. It is necessary for the mortgage agent to watch for these warning signs and complete proper due diligence if any of these warning signs are present. Of course, warning signs are not necessarily an indicator of mortgage fraud, but may be, and therefore should always be investigated. Identity • The applicant cannot provide any photo identification or says that they will provide photo identification but consistently does not. The quality of the identification must also 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. • If a Power of Attorney is being used, especially on behalf of a senior

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Employment and Income • The applicant’s job letter contains inconsistencies or errors. (e.g., if it does not match pay stubs or what the applicant has disclosed about the amount of income, the time employed or their job title or has spelling or grammatical errors). • If, when verifying the applicant’s employment, the broker/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.ca or other Internet services. • The position and/or income are inconsistent with the applicant’s age • Employment verifications addressed to a specific party’s attention • Employment verifications completed on the same day they were ordered • Employment verifications on a weekend or holiday • Documentation which includes deletions, correction fluid, or other alterations • Numbers on the documentation appear to be “squeezed” due to alteration • Different handwriting or type styles within a document • Employer’s address is a post office box, the property address, or applicant’s current residence • Applicant’s residence is (will be) in a location remote from employer • Employer’s name is similar to a party to the transaction, (e.g., utilizes applicant’s initials) • Employer is unable to be contacted • Year-to-date or past-year earnings are even dollar amounts • Withholding is not calculated correctly • Withholding totals don’t increase from pay stub to pay stub • Pay period dates overlap and/or don’t correspond with other documentation • Abnormalities in paycheque numbering • Handwritten paystubs • Income appears to be out of line with type of employment • Self-employed applicant does not make estimated tax payments • Real estate taxes or mortgage interest claimed, but no ownership of real property disclosed • Tax returns not signed or dated • High income applicant without tax return preparer • Paid preparer signs taxpayer’s copy of tax returns • Interest and dividend income don’t substantiate assets • Applicant reports substantial income but has no cash in bank • Reasonableness test: income appears to be out of line with type of employment, applicant age, education and/or lifestyle Assets • • • • • • • • • •

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 Deposit Insurance 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

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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 Reasonableness Test: Assets appear to be out of line with type of employment, applicant age, education and/or lifestyle

Pause for clarification – Earnest Money Down payment or a small part of the purchase price made by a purchaser as evidence of good faith. 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 broker/agent’s process includes meeting in their office this may not be considered a warning sign. The broker/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). • Same telephone number for applicant and employer Purchase and Sale Agreement • Non arms-length transaction: seller is a real estate broker, relative, employer, etc. • Seller is not currently reflected on title • Purchaser is not the applicant • Purchaser(s) deleted from/added to sales contract • No real estate agent is involved • Power of Attorney is used • Second mortgage is indicated, but not disclosed on the application • Earnest/deposit money equals the entire down payment, or is an odd amount • Multiple deposit cheques have inconsistant dates, e.g., #303 dated 10/1, #299 dated 11/1 • Name and/or address on earnest/deposit money cheque differ from buyer • Real estate commission is excessive • Contract dated after credit documents • Contract is “boiler plate” with limited fill-in-the-blank terms, not reflective of a true negotiation Credit Report • No credit history or “thin” credit files • Invalid Social Insurance number or variance from that on other documents • Liabilities shown on credit report that are not on mortgage application • Length of established credit is not consistent with applicant’s age • Credit patterns are inconsistent with income and lifestyle • All tradelines opened at the same time • Significant differences between original and new or supplemental credit reports • Also Known As (AKA) or Doing Business As (DBA) indicated • Numerous recent inquiries

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• Employment discrepancies Appraisal • Appraisal ordered by a party to the transaction • Occupant shown to be tenant or unknown • Owner is someone other than seller shown on sales contract • Appraisal indicates transaction is a refinance, but other documentation reflects a purchase • Purchase price is substantially higher than predominant market value • Purchase price is substantially lower than predominant market value • Large positive adjustments made to comparable properties • Comparable sales are not similar in style, size and amenity • Dated sales used as comparable sales • New construction / Condo conversion: all comparable sales located in subject development • Comparable properties are a significant distance from the subject, or located across neighbourhood boundaries (main arteries, waterways, etc.) • Map scale distorts distance of comparable properties • “For Rent” sign appears in photographs • Photos appear to be taken from an awkward or unusual standpoint • Address reflected in photos does not match property address • Weather conditions in photos inconsistent with average marketing time, date of appraisal • Appraisal dated before sales contract • Significant appreciation in short period of time • Prior sales are listed for subject and/or comparables without adequate explanation Title • • • • • •

Seller not on title Seller owned property for short time Buyer has pre-existing financial interest in the property Date and number of existing encumbrances don’t make sense Chain of title includes an interested party such as realtor or appraiser Buyer and seller have similar names (property flips often use family members as straw buyers)

Owner Occupancy Purchase Transactions: • Real estate listed on application, yet applicant is a renter • Applicant intends to lease current residence • Significant or unrealistic commute distance • Applicant is downgrading from a larger or more expensive house • Sales contract is subject to an existing lease • Occupancy affidavits reflect applicant does not intend to occupy • New homeowner’s insurance is a rental policy (declarations page) Refinance Transactions: • Rental property listed on application is more expensive than subject property • Different mailing address on applicant’s bank statements, pay stubs, etc. • Different address reported on credit report • Significant or unrealistic commute distance • Appraisal reflects vacant or tenant occupancy • Occupancy affidavits reflect applicant does not intend to occupy

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Homeowner’s insurance is a rental policy (declarations page) Reverse directory does not disclose subject property address

13.8 The Land Titles Assurance Fund The Ontario Land Titles Assurance Fund (LTAF) is a fund that was created under the Land Titles Act and is designed to compensate individuals who have suffered financial losses due to errors or omissions in the land registration system and who have suffered losses due to real estate fraud. According to the LTAF, it will immediately respond to claims covered and in cases where fraud or an error or omission is clear, can rectify the situation within three months, including returning title where applicable and providing compensation. Those suffering a loss should contact a lawyer before contacting the LTAF.

13.9 Advice for Clients While there are several methods available to industry participants to assist in preventing fraud, there are also several approaches available to consumers. The following advice should be given to a mortgage agent’s client. Title Insurance Consumers should obtain title insurance on every property that they buy and get 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. ATMs 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. Consumers may also subscribe to a service that monitors their credit and notifies them of any changes to their credit file.

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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 they 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. Passwords 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, and change passwords regularly.

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13.10 Key Terms and Definitions Air Loan A mortgage provided on a property that does not exist Elder financial fraud Elder financial fraud cases consist of a family member, trustee or Power of Attorney taking advantage of the senior Foreclosure fraud The defrauding of a homeowner using the pretense of assisting to stop a foreclosure or power of sale Fraud for criminal activities Mortgage fraud may be committed to further other criminal activities such as the financing of marijuana grow operations, drug labs and money laundering Fraud for profit Fraud committed to obtain the proceeds of the mortgage without the intent to repay the loan Fraud for shelter 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 their status Identity theft The use of personal information that has been stolen or is being used to commit fraud or theft Impersonation Similar to identity theft, when the criminal poses as another individual Land Titles Assurance Fund A provincial fund that was created under the Land Titles Act which is designed to compensate individuals who have suffered financial losses due to errors or omissions in the land registration system and real estate fraud Money laundering The practice of performing a financial transaction with the intent to conceal the source of money, typically obtained through a criminal activity. The result is that the money appears to have been legitimately obtained. Mortgage fraud The deliberate omission of information, use of misstatements or misrepresentations to obtain, purchase or fund a mortgage loan Power of Attorney (POA) fraud Fraudulently obtaining a POA and using it for illegal purposes Straw borrower A straw borrower is typically an individual who is paid to use their identity to obtain mortgage financing, or who is a victim of identity theft.

Chapter 13: Fraud Detection and Prevention Title fraud The fraudulent transfer of title of a property Value fraud A misstatement of the value of a property

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13.11 Review Questions Answers to the Review Questions are found at www.REMIC.ca

13.11.1 Short Answer Questions 1. Define mortgage fraud. 2. What factors contribute to mortgage fraud? 3. Explain the difference between fraud for criminal activities and fraud for profit. 4. In your opinion, is fraud for shelter harmful? If so, to whom and why? 5. What is the most common factual misstatement made under fraud for shelter, according to Fannie Mae? 6. What are the impacts of mortgage fraud on industry participants? 7. What steps can a mortgage agent take to assist in mortgage fraud prevention? 8. List and describe the typical fraud warning signs. 9. How does the Land Titles Assurance Fund assist homeowners who are victims of fraud? 10. What ways can consumers protect themselves from fraud? 11. What steps have the default insurers taken to prevent mortgage fraud? 12. What steps has FSRA taken to assist the industry in preventing fraud? 13. What resources has the MBRCC developed to assist the industry in preventing fraud? 14. List five warning signs of mortgage fraud with regards to an applicant’s assets 15. What steps has OSFI taken to ensure its regulated entities prevent fraud?

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Chapter 14: Ethics 14.1 Learning Outcomes Successful understanding of the concepts presented in this chapter will enable the learner to: 1. Define “ethics” 2. Understand the core values of the mortgage industry and how they affect decisions 3. Understand how the decision-making model is used to determine a course of action 4. Apply the decision making-decision-making model to case studies to determine a course of action

14.2 Introduction The topic of ethics in the mortgage brokerage industry is a timely one. The sub-prime mortgage meltdown in the United States in 2007 precipitated substantial discussion on this topic within both the U.S. and Canadian industries and has resulted in a more concentrated effort being placed on practicing ethical behaviour in the mortgage industry. To understand the increasing role of ethical behaviour in the mortgage industry requires one to be able to answer the most basic question: what is ethics?

14.3 What is Ethics? While there are many definitions of the word ethics, it is important for us to discuss the definition of this concept in relation to the mortgage industry. Ethics do not exist in a vacuum. One can’t be deemed to be ethical unless the environment that they are in deems that behaviour to be ethical. Otherwise, the behaviour would be deemed unethical by the community. Therefore, ethics can be defined, for our purposes, as “the process of applying the core values of the mortgage industry to a practitioner’s daily conduct.” To be able to adequately apply this definition it is of vital importance that we understand the core values of the industry and that we practice them. Only in this fashion can one be said to be ethical in relation to the mortgage industry.

14.4 The Core Values and Beliefs of the Mortgage Industry The mortgage industry consists of many participants. For the mortgage agent, their main clients are the borrower and the lender. As was also previously discussed, both clients have basic expectations that they make when conducting business with a mortgage agent. It is useful to revisit these expectations before continuing the discussion of ethical behaviour. A detailed explanation of these expectations can be found in the chapter, Transaction Overview.

14.4.1 Borrower Expectations These expectations can be summarized as: 1. Act in the borrower’s best interests 2. Completely analyze the borrower’s needs 3. Make appropriate recommendations based on the borrower’s needs 4. Facilitate the transaction to its successful completion (funding)

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These four expectations form the cornerstone of the transaction. By ensuring that these expectations are met, the mortgage agent will develop a strong relationship with the borrower and ensure that the industry as a whole is well represented. The best way to ensure that these expectations are consistently met is to adopt them as core values or philosophies that are applied to every transaction. To meet these expectations, they must first be explained. 1. Act in the borrower’s best interests The borrower’s first expectation is that the mortgage agent will at all times act in the best interests of the borrower. This expectation is crucial to the borrower and is vital to the success of the transaction. Acting in the best interests of the borrower can best be defined as putting the borrower’s needs and concerns first and foremost above others involved in the transaction, limited only by ethical, moral and legal restrictions. This has the effect of ensuring that the mortgage obtained for the borrower is both financially best for them and suits their other needs and goals, such as providing prepayment privileges that the client believes are important to them, a term that that best reflects their goals, and so on. Example Brian was referred to a mortgage agent, Cynthia, by a past client who felt that Cynthia had provided excellent service and advice. Brian has explained to Cynthia that he has had credit problems in the recent past. After taking Brian’s application and performing the required analysis, Cynthia has determined that she can obtain a mortgage for Brian from two different sources. The first source will offer Brian a 5-year fixed rate mortgage with a rate of 6.5% compounded semiannually, not in advance, over a 25-year amortization with monthly payments. The finder’s fee to Cynthia would be 50 bps. The second source will offer Brian a 5-year fixed rate mortgage with a rate of 6.55% (.05% higher than the first option) compounded semi-annually, not in advance, over a 25-year amortization with monthly payments. The finder’s fee to Cynthia would be 75 bps. All other terms and conditions of these two mortgage options are the same. Cynthia now has a decision to make. Which option does she offer to Brian? Cynthia may consider that for only a .05% increase in the rate she will earn an extra $500 compared to the lower rate option. She may further believe that Brian will accept either suggestion that she makes since he was referred to her and has full trust in her. What option should she provide to Brian? Hopefully the decision is clear. Cynthia should offer Brian the lower rate mortgage even though the finder’s fee she earns will be less because her interests must come second to Brian’s. That is the core belief behind always acting in the borrower’s best interests. This was a fairly simple, straight forward example but it is important to point out that there are many products in the mortgage market today that will pay the mortgage agent a higher finder’s fee if they are able to sell their client a higher rate. By subscribing to the philosophy that a mortgage agent must always do what is in the best interests of the borrower the solution is always obvious.

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Success Tip – Act in the best interests of the client By always doing what is in the best interest of the client, you will find that your referral business increases over time. Even though you may make less money on a single transaction, you will grow your business through word-of-mouth referrals, resulting in increased earnings in the future. A practical reason for doing the right thing! 2. Completely analyze the borrower’s needs Taking a mortgage application and finding the right lender and product for the borrower is not possible unless the mortgage agent has detailed knowledge of a borrower’s needs. This is different from simply asking the borrower what type of mortgage they would like. To completely analyze a borrower’s needs requires that the mortgage agent assist the borrower in determining what those needs are. That is an important distinction from simply having the borrower express what they believe their needs to be to the mortgage agent. The mortgage agent must determine the other factors that are important to the borrower. Some of these factors will include: • The borrower’s risk tolerance. This can determine whether a variable rate product is suitable for the borrower. • The borrower’s intentions with regards to how long they intend to live in this home. This can determine whether a long- or short-term mortgage is suitable. • The borrower’s debt expectations. In other words, does the borrower think they may need to take equity out of their property in the future by refinancing it? This can determine whether a closed or open mortgage is suitable. • The borrower’s saving habits. This can determine whether the borrower requires more aggressive prepayment privileges.

Success Tip – Service is the key Differentiate yourself from your competition by providing more service. Part of this service may include a full financial check-up. Have you heard of agents completing budgets for their borrowers? Probably not, and if you had you would most likely remember them. That is truly a differentiator! 3. Make appropriate recommendations based on the borrower’s needs If the mortgage agent embraces the above philosophies, then this borrower expectation is a natural extension. By completing a full analysis of their needs and being determined to do what is in their best interests, the mortgage agent will make the appropriate recommendation, provided that they have the requisite knowledge to determine what that recommendation should be. This means that, to be able to make an appropriate recommendation based on the borrower’s needs, the mortgage agent must be fully versed on all of the lenders available and their products. Not only does the mortgage agent have to be aware of products available to them, but they must also take reasonable steps to be aware of products offered through lenders not dealing with the mortgage brokerage industry. This may include major banks or any other lender. This is a critical point because a mortgage agent cannot make an appropriate recommendation if they are unaware of all of the mortgage products available to the borrower.

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Taking reasonable steps to ensure that the mortgage agent has this information may seem like an overwhelming task, but it simply refers to ensuring that the mortgage agent knows products to which the borrower should have reasonable access.

Success Tip – Stay up to date on lender’s products Review lender marketing materials and communications daily to ensure that you have the most up to date information on lenders’ products and attend trade shows and lender presentations whenever possible. By doing so you will be able to confidently recommend products to the borrower. For instance, if there is a small credit union that doesn’t deal with mortgage agents and only services a small, local community that has just lowered their rates for the next two weeks, a mortgage agent might not be aware of this. Nor could they be expected to be aware of this. If, on the other hand, a major bank that does not deal with brokers has done the same, the mortgage agent should be aware of this. In this manner they can provide what they truly believe to be the most appropriate recommendation to the borrower. 4. Facilitate the transaction to successful completion (funding) A borrower further expects and has the right to expect that the mortgage agent will facilitate the transaction to a successful completion. In other words, the mortgage agent will be by their side until the transaction closes. Successful mortgage agents will advise the client of all of the steps in the transaction and stay in touch with them throughout, even when the mortgage agent is no longer involved. For example, once they have fulfilled the lender’s conditions there is nothing else for the mortgage agent to do except wait for the transaction to close. However, successful mortgage agents will follow up with the borrower to ensure that required appointments have been scheduled and preparations have been made. Not only will this provide the borrower with added security and peace of mind but will ensure that the mortgage agent is aware of any issues that arise, allowing him or her to assist in solving the issue before the transaction is jeopardized. Conclusion Some of the concepts discussed in this section may, upon closer examination of the brokerage industry, seem to go beyond what many mortgage agents deem necessary. However, by going beyond what most are doing, a mortgage agent is destined to differentiate themselves from their competition and exceed their clients’ expectations. That is truly the path to success in this industry.

Success Tip – Adopt the four borrower expectations Adopt the four borrower expectations as your four Core Values or Philosophies and write them down. Keep them with you at all times and make certain that your clients know that you subscribe to them. In so doing you will exceed your clients’ expectations in virtually every transaction.

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14.4.2 Lender Expectations These expectations can be summarized as: 1. Provide borrowers who are suitable for the lender 2. Provide appropriate protection against fraud 3. Facilitate the transaction to its successful completion (funding) These three expectations form the cornerstone of the relationship between the lender and the brokerage community. The best way to ensure that these expectations are consistently met is to adopt them as core values or philosophies that are applied to every transaction. To meet these expectations, they must first be explained. 1. Providing borrowers that are suitable for the lender The lender’s first expectation is that the mortgage agent will only send an application on behalf of a borrower that fits the lender’s lending criteria. Lending criteria include such things as income and employment requirements, property requirements, credit requirements and so on. This means that the mortgage agent must know and understand the lender’s lending criteria and be able to accurately assess the borrower to determine if they meet those criteria. Unfortunately, a typical lender complaint is that some mortgage agents send them applications for products that they do not have. This type of error can erode the confidence that lenders have in the brokerage community. 2. Providing appropriate protection against fraud Lenders have been suffering from an increase in mortgage fraud over the past several years. Although not technically a mortgage agent’s legal responsibility, it is a mortgage agent’s ethical and moral responsibility to make reasonable attempts to protect the lender from fraud. In many brokerages’ set of Best Practices it is deemed necessary for the mortgage agent to review all documentation received from the borrower for accuracy and consistency. This means identifying any signs of potential fraud, such as poorly written or typed income verification as well as verifying income and identity. 3. Facilitating the transaction to its successful completion (funding) A lender expects that a mortgage agent has submitted an application to that lender because they have determined that lender to be the most appropriate for the borrower. In addition, the lender expects that, if approved, the mortgage transaction will close. That requires the mortgage agent to ensure that the borrower is committed to completing the transaction and understands what is required of him or her to conclude it. A lender also expects that a mortgage agent will be available to assist in ensuring the transaction closes if there is anything that the mortgage agent is required to accomplish such as meeting outstanding conditions. The mortgage agent’s other client, the borrower, also begins by having a set of expectations regarding the mortgage agent. If a mortgage agent believes that they must fulfill these expectations, the next question is straight forward. How?

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The process of acting ethically in this industry can only truly be achieved by having core beliefs or values that provide the foundation for our decisions. If a person has these core beliefs, then all decisions must be based on them. Without these core beliefs the decision-making process becomes situational; in other words, each situation may have a different outcome based on its circumstances. What an individual may decide to do in one instance, for example being honest, may not be what they decide to do in another instance. This may seem inconsistent, but if a person is making decisions on what is best for him or her in any given scenario, the results may be honesty in one situation and dishonesty in another. Situational ethics have no place in the mortgage industry. Rather, it is necessary to outline the core beliefs of the industry and apply them to every situation.

14.4.3 Core Values By viewing the expectations that are made by clients in a mortgage transaction, we can extrapolate the core values necessary to meet those expectations. A core value can be defined as a belief which one cannot contravene. In other words, if it is truly a core value you cannot go against it, nor do anything that contravenes that belief. We will begin exploring the core beliefs of the mortgage industry. 1. Honesty 2. Integrity 3. Act in the best interests of the client 4. Act in the best interests of the industry 5. Comply with law and codes of conduct 1. Honesty Merriam-Webster’s dictionary defines honesty as: “fairness and straightforwardness of conduct; adherence to the facts” By having a core value of honesty, it becomes impossible for an individual to do something that would be deemed to be unfair, dishonest or that does not adhere to the facts. This would result in behaviour which prevents lying, cheating or stealing, to name a few. 2. Integrity Integrity can be defined as the adherence to a core set of values, from which all decisions are based. If one has integrity, they adhere to their core values. It is therefore necessary to have integrity to be considered ethical, since ethics is, at its base, a core set of beliefs. 3. Act in the best interests of the client This core belief speaks to the fact that we are in the mortgage industry to serve. We serve our clients, being the borrower and lender. In all cases we must do that which is in their best interests, since they are the ones putting their trust and faith in us, as long as doing so does not contravene the values of honesty and integrity. This will also include ensuring that you are adequately trained and knowledgeable. Failure of either will prevent you from being able to adequately advise your client of their options, and therefore render you unable to act in their best interests. 4. Act in the best interests of the industry This core belief speaks to the fact that we are members of a community. As such, it is our duty to act in the best interests of this community, adhering to its core values, as long as they do not contradict the previous core values. This will also include ensuring that you are adequately trained and knowledgeable. Failure of either has a negative impact on the industry as a whole.

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5. Comply with law and codes of conduct It should be noted that a core value of every industry is that the law of the land be adhered to, regardless of our personal core beliefs and ethics. In most cases acting ethically in adherence to the above core values will result in not only acting lawfully but exceeding the legal requirements. However, in certain circumstances the law or your firm’s code of conduct or the trade association to which you belong may require additional behaviours not covered by ethical behaviour. For example, some trade associations require its members to report unethical behaviour to it, or follow other procedures as outlined in a set of codes of conduct. While acting in the best interests of the industry requires an individual to act lawfully and to comply with their firm’s or association’s codes of conduct, it is worthwhile to stress this as a separate core value. By taking these five basic core beliefs it is possible to combine them into a statement by which a mortgage professional should adhere. “I will conduct myself with honesty and integrity, acting in the best interests of my clients and the industry to which I belong.” A simple, yet powerful statement. Once an individual prescribes to these five core beliefs, the decisionmaking process in any given scenario becomes much clearer. The next section examines scenarios and the process by which a decision can be arrived at, based on these five core beliefs.

14.5 MBRCC Code of Conduct Mortgage Broker Regulators’ Council of Canada (MBRCC) Code of Conduct for the Mortgage Brokering Sector100 The MBRCC is a forum for Canadian mortgage broker regulators to collaborate and promote regulatory consistency to serve the public interest. The MBRCC developed this plain-language Code of Conduct (Code) to promote high standards of conduct to protect consumers of mortgage brokering services. The ten principles in the Code outline professional behaviour and conduct expectations that Canadians should expect when working with mortgage brokers. Mortgage brokers should conduct their business following these common principles, while ensuring compliance with all applicable laws, regulations, rules or regulatory codes within their respective jurisdiction. Any stricter or more specific requirements, rules or standards of conduct take priority over the Code. Beyond professional conduct expectations, the MBRCC supports a vibrant and inclusive working environment, where industry representatives do not discriminate or participate in discrimination against any person or entity and where they are not subject to discrimination. The common principles for conduct in the Canadian mortgage brokering sector are:

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FSRA, https://www.fsrao.ca/media/4871/download

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1. Compliance / Outcomes: Regulated persons and entities must comply with legislative and regulatory requirements. They should take reasonable steps to ensure their staff and third-party partners also comply. Their conduct should embody the principles included in this Code. 2. Accountability: Regulated persons and entities must act in a responsible / accountable manner. They must exercise care, due diligence and sound judgement in providing products and services. 3. Honesty: Regulated persons and entities must conduct their activities in a truthful, clear and transparent manner. They must not mislead, hide or obscure material information. 4. Competence: Regulated persons must have and maintain the skills, knowledge and aptitudes necessary for their business activities. They should decline to act when they are unable to provide products / services in accordance with this Code. 5. Suitability: Regulated persons and entities must take reasonable steps to present products / services that are suitable for their client(s). They must have a sound understanding of how the products / services match the disclosed circumstances of their client(s). 6. Disclosure: Regulated persons and entities must fully disclose material information to applicable parties in a transaction. Disclosures must be meaningful and made in an honest and timely manner. 7. Management of Conflicts of Interest: Regulated persons and entities must identify and disclose actual, potential and / or perceived conflicts of interest to applicable parties in a transaction. They should have documented policies for managing such conflicts. 8. Security and Confidentiality: Regulated persons and entities must protect their clients’ information. They must use and disclose it only for purposes for which the client has given consent or as compelled by law. 9. Stewardship: Regulated persons and entities should act ethically, with integrity and respect. They should foster a culture of compliance. Their conduct should not undermine the public’s confidence in the mortgage brokering sector. 10. Co-operation with Regulators: Regulated persons and entities must co-operate with mortgage brokering regulators. They should report possible violations of laws, regulations or this Code to the appropriate authority.

14.6 The Decision-Making Model While discussing ethics and learning the core values of the industry is vitally important, practicing ethical behaviour is the end result to which we must aspire. To that end it is necessary to examine several case studies and apply the five core values to each to arrive at a truly ethical decision. The following decision-making model is a simple, nine step process: 1. What are the facts? 2. Identify the potential solutions 3. Apply the core value: Honesty 4. Apply the core value: Integrity 5. Apply the core value: Act in the best interests of your client 6. Apply the core value: Act in the best interests of the industry 7. Apply the core value: Comply with law and codes of conduct

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8. Choose the best solution 9. Review the process 1. What are the facts? Before one can come to a decision whether an action is ethical, they 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 their 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, specifically the MBRCC Code of Conduct, 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.

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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. Now that we’ve discussed the process it’s time to practice applying it.

14.7 Case Study – Investment Suitability Anastasiya is the chief executive officer of a large marketing firm in Toronto. She has significant assets and earns approximately $325,000 per year. Her financial advisor has suggested that she try to diversify her investments as most of her investments are in preferred stocks, money market funds and dividendpaying stocks. Her advisor has suggested that she look at investing a small portion of her portfolio, $300,000, in medium-risk investments, such as real estate. Her advisor has referred her to Sam, a mortgage agent level 2. Sam uses Form 3 as his know your client form, and after completing this form and discussing her investment objectives, Sam has determined that she belongs to a designated class of investors, and therefore does not require the investor/lender disclosure documents when he presents an investment option to her. Sam has several mortgages that he can refer to Anastasiya, including some that may not fit her risk profile. One deal for a high-risk commercial project has been giving Sam some trouble. In fact, Sam can’t find an investor to lend on this deal. Since he feels that Anastasiya will take his advice without question, and since she doesn’t require a Form 1, Sam is considering offering this deal to her. He feels that it is an excellent investment for the right investor, and he is set to make a 5% fee, which he desperately needs. Sam feels that, although he’s sure her investment will be safe, this may not be the right thing to do. Given this scenario, what should Sam do? Step 1: What are the facts? We can summarize them as follows: 1. Anastasiya is an investor with significant assets and a financial advisor 2. Anastasiya meets the requirements to be belong to the designated class of investors 3. Since Anastasiya belongs to a designated class of investors, Form 1 is not required 4. Sam has several potential investments for Anastasiya, including some that appear to be contrary to her investment objectives 5. Sam has a troublesome deal that he is having difficulty finding an investor for 6. Sam can make a considerable brokerage fee from the deal he may recommend Step 2: Identify the potential solutions 1. Present Anastasiya with the deal and supporting documents without Form 1 and Form 1.1 2. Present Anastasiya with the deal and supporting documents, including Form 1 and Form 1.1 3. Find another investment for Anastasiya Step 3: Apply the core value: Honesty In this step we need to analyze each option identified in step 2 and determine if they pass this test. 1. Present Anastasiya with the deal and supporting documents without Form 1 and Form 1.1

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This is an option because Anastasiya is a member of a designated class of investors and lenders, and therefore is not required to be presented with these documents. Reiterating that MerriamWebster’s dictionary defines honesty as: “fairness and straightforwardness of conduct; adherence to the facts,” we must ask if this solution meets that standard. In this solution it appears that a defendable argument could be made that there is nothing inherently dishonest with this solution, although others may rightfully feel the opposite. They may disagree because this investment does not meet Anastasiya’s investment objectives, therefore it shouldn’t be presented at all. Regardless, we will keep this option and move it to step 4 as this is a multi-part test that should weed out any unethical options. 2. Present Anastasiya with the deal and supporting documents, including Form 1 and Form 1.1 This solution may meet the standard of honesty. Providing full disclosure along with supporting documents will give Anastasiya the information she needs to make an informed decision. However, it must be noted that this investment doesn’t meet Anastasiya’s investment objectives and therefore may not even be appropriate to present. An alternate argument may be that by providing full disclosure to Anastasiya, she can make an informed decision to lend on her own. Does this meet the honesty test? If there is a doubt, let’s take it with us to the next step. 3. Find another investment for Anastasiya Clearly, this meets the standard of honesty. By deciding not to present this mortgage investment to Anastasiya Sam is not being dishonest. Rather, he is doing was is likely in her best interests. This option moves to the next round as well. Step 4: Apply the core value: Integrity In this step we need to analyze each option identified in step 2 and determine if they pass the integrity test. Let’s begin by reiterating what we mean by integrity. Integrity can be defined as the adherence to a core set of values, from which all decisions are based. If one has integrity, they adhere to their core values. It is therefore necessary to have integrity to be considered ethical, since ethics is, at its base, a core set of beliefs. Let’s apply this core value to our options. 1. Present Anastasiya with the deal and supporting documents without Form 1 and Form 1.1 Since Sam has done his due diligence with Anastasiya, he knows that this investment does not meet her investment objectives. In presenting this investment to her, especially without any of the disclosures required to make an informed decision to lend, he would, in essence, be asking her to make an uninformed decision. Would Sam like to have this process be the norm? If he was investing, would he like this done to him? Would he feel comfortable with the world knowing this was how he did business? Likely not. If Sam is abiding by the MBRCC’s Code of Conduct and adhering to the other core values in this decision-making model, he can’t keep this as a viable option. It doesn’t make the cut to the next step. 2. Present Anastasiya with the deal and supporting documents, including Form 1 and Form 1.1 This is more difficult, since Sam could argue that he would be fine if the world knew this was his business practice. Providing full disclosure to make an informed decision is not only advisable, but it’s the law. What we don’t know in this situation is how detailed a conversation Sam is having with Anastasiya. Since we do know that Sam is aware that this investment doesn’t meet her investment objectives, and since Sam can’t find another investor for this project, it is unlikely, given her background, that she would be able to make an informed decision, unless Sam provides her with additional information about the difficulties he’s having. In this case, Sam considers having that full conversation if he decides to proceed with this option, so it remains in the next round.

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Step 5: Apply the core value: Act in the best interests of your client. We have two options left. Sam needs to test both of these options to determine if they’re in Anastasiya’s best interests. 1. Present Anastasiya with the deal and supporting documents, including Form 1 and Form 1.1 Anastasiya wishes to invest in a mortgage, on the advice of her financial advisor. This is a mortgage, and Sam feels it hasn’t been given the proper consideration by his other investors. He thinks it’s a good deal, but is it a good deal for Anastasiya? Since Sam knows that this doesn’t meet her investment objectives, he can’t, in good conscience, conclude that this is in her best interests. For that reason, this option is finally being dropped. 2. Find another investment for Anastasiya Sam has other investment options, and he may have one better suited for Anastasiya based on her investment objectives. Even if he doesn’t right now, that’s not enough reason to present this investment to her. Sam decides that this option makes the cut and moves to step 6. Step 6: Apply the core value: Act in the best interests of the industry Sam has one option left, but that doesn’t mean it’s the right one. He still needs to run it through the remainder of the process. Why? If the only remaining solution doesn’t make it past this or one of the following steps, Sam will have to start over and find a solution that he’s missed. So, just because it’s the only option left right now, it doesn’t mean that it is ethical. 1. Find another investment for Anastasiya If Sam finds Anastasiya another mortgage, or mortgages in which to invest, would that harm the industry? Sam doesn’t believe so. In fact, Sam is now thinking about how he can turn this to his advantage. He could tell Anastasiya that he had this investment opportunity but that it doesn’t meet her investment objectives. He could explain how this is an example of how he looks out for his investors. That would be beneficial to both him and the industry. Sam still has to move to the next step, but he’s feeling better about this situation. Step 7: Apply the core value: Comply with law and codes of conduct Sam has one test left. 1. Find another investment for Anastasiya In applying the MBRCC Code of Conduct, reviewing the legislation with regard to suitability, and his brokerage’s policies and procedures manual, Sam is confident that this option complies with all of them. Time to make a decision. Step 8: Choose the best solution Sam has made it through the process with only one option left, which he knows to be ethical. He is happy that he’s completed the process and has chosen the most ethical solution to his dilemma. In this case study, we are left with only one solution. This doesn’t always happen. In more complicated scenarios there may be more than one option remaining, but if there are, they would all be deemed to be ethical so the licensee could opt for another reason for choosing the best solution. An example could be lender servicing, a lower rate, or another business consideration.

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Step 9: Review the process While Sam is happy with the solution, it is very helpful to review the process. Was his reasoning correct? Did he list all of the possible options? Should he speak to a colleague or friend for help? Did he learn anything about himself? These are good questions that Sam shouldn’t overlook, as they may help him in a future ethical dilemma. Questions 1. Do you agree with this solution? Why? 2. Are there any other solutions you can think of that were not included in Step 2? If so, list them. 3. Do you feel most licensees would have come to the same conclusion? Why?

14.8 Conclusion Ethics, “the process of applying the core values of the mortgage industry to a practitioner’s daily conduct”, requires that the practitioner first identify what those core values are. In the mortgage industry they consist of honesty, integrity, acting in the best interests of both the borrower and lender, and always complying with the laws of the land and the codes of conduct acceptable in the industry. The test of honesty and integrity will solve virtually every situation. In an individual’s personal life, however, the core values may be different. For example, a core value of protecting one’s family may be classed higher than honesty, and it may be more difficult to arrive at a clear decision. The process of understanding what is truly important to an individual regarding their core values can take considerable introspection, but by doing so they can use the decision-making model to assist in coming to a decision that can truly be deemed to be ethical.

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14.9 Key Terms and Definitions Code of conduct, MBRCC The MBRCC developed a plain-language Code of Conduct (Code) to promote high standards of conduct to protect consumers of mortgage brokering services. The ten principles in the Code outline professional behaviour and conduct expectations that Canadians should expect when working with mortgage brokers. Core value or belief A belief which one cannot contravene. In other words, if it is truly a core value you cannot go against it or do anything that contravenes that belief. Decision making model The model used to determine whether potential solutions to a problem pass the test of the individual’s core values. Ethics (in relation to the mortgage industry) The process of applying the core values of the mortgage industry to a practitioner’s daily conduct. Honesty Merriam-Webster’s dictionary defines honesty as: “fairness and straightforwardness of conduct; adherence to the facts”. Integrity The adherence to a core set of values, from which all decisions are based. If one has integrity, they adhere to their core values. MBRCC A forum for Canadian mortgage broker regulators to collaborate and promote regulatory consistency to serve the public interest.

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14.10 Review Questions Answers to the Review Questions are found at www.REMIC.ca

14.10.1 Short Answer Questions 1. Define the term “ethics” 2. What are the core values of the mortgage industry? 3. What are the steps in the Decision-Making Model? 4. Why should an individual review the Decision-Making Model process before making their final decision? 5. What are some options for an individual to ensure that they have obtained all of the facts? 6. What should an individual do if they can’t obtain all of the facts? 7. If two or more possible solutions make it to the final step, how would you choose the best option? 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? 9. Is it possible for an individual to determine all of the potential solutions to a scenario? If not, how else might they develop additional solutions? 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? 11. What is the MBRCC? 12. If a code of conduct found in the MBRCC Code of Conduct for the Mortgage Brokering Sector contradicts the MBLAA, which should a mortgage agent abide by? 13. What is the purpose of the MBRCC Code of Conduct for the Mortgage Brokering Sector? 14. Does acting in the best interests of the industry mean that your decision must have a positive impact on 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?

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Index

1 1Maximum administrative penalties, 206

5 5 Cs Capacity/Affordability, 154 Capital/Equity, 157 Character, 158 Credit, 154 Personal covenant, 154 5 Draws, 12 50 percent disclosure rule, 203

A a Know Your Client (KYC) form, 93 Accreditations, appraisers, 165 Accredited Appraiser Canadian Institute, Professional Appraiser (AACI, P.App), 166 Acknowledgment and Direction, 315 Action on the Covenant, 266 Administrative Penalties, 206 Administrative penalties, maximums, 206 Administrative Penalties: Amounts, 74 Advance fees, 271 Agency, 42 Agent and the principal, 42 Agent’s duties to the principal, 42 Agreement of Purchase and Sale, 155 Alternative investments, 23 Amortization Schedule, 292 Application Form, 142 Application Tips, 150 Appointment of a Receiver, 266 Appraisal Report, 170 Appraisal, Desktop, 171 Appraisal, Desktop sample, 172 Appraisal, Drive-by, 171 Appraisal, Full, 171 Appraisal, Full sample, 175 Appraisal, Real Estate, 162 Appraiser, 165 Assignment of rents, 266 Automated Valuation Models (AVMs), 169, 170

B Bait and Switch, 67 Bank of Canada Prime Rate, 9 Blanket mortgages, 192 Bokerage license, 63 Bond, 21 Borrower, 156 Borrower Expectations, 371

Bridge financing, 12 Brokerage, role of, 272 Budget, 155, 156 Business day, 200

C Calculation of 3 months’ interest penalty, 11 Canadian Residential Appraiser (CRA), 166 CAR (Certified Appraisal Reviewer), 166 Cash and cash equivalents, 20 Certificate of Canadian Citizenship, 136 Charge/Mortgage, 187 Charges for an offence, 76 Chartered Banks, 84 Citizenship Card, 137 Closing Costs, example, 304 Closing Process, 305 CMAR (Certified Mortgage Appraisal Reviewer), 166 Co-Applicants, 145 Collateral Charge/Mortgage, 189 commitment letter, 124 Commitment letter, 124 Commitment letter, legend, 250 Commitment Letter, sample, 250 Common share, 22 Competition Bureau of Canada, 71 Conflict of interest, 201 Conflicts due to compensation, 202 Conflicts due to multiple roles in a transaction, 202 Conflicts due to relationships, 202 Conflicts of interest, 273 Conflicts of interest, business, 204 Conflicts of interest, personal, 204 Continuing Education, 57 Core values, 371 Core Values, 376 Corporation, 363 Co-signors, 145 Cost Approach, 167 Cost of borrowing, 277 Cost of Borrowing – Expanded Explanation, 278 Cost of Borrowing – Included and excluded costs, 280 Credit Score, calculating, 169 Credit unions, 85 Cs of credit, 153

D DAC (Designated Appraiser Commercial), 166 DAC (with a Specialty in Agricultural), 166 DAR (Designated Appraiser Residential), 166 Dealing in mortgages, 34 Debenture, 21 Demand Letter, 265 Demand, Real Estate, 163 Deposit, 363

Index Designated classes of lenders and investors, 90 Direct Comparison Approach, 168 Discharge of Charge/Mortgage, 191 Disclosure, 37 Disclosure, Borrower, 271 Disclosure, Borrower Checklist, 293 Disclosure, Sample Borrower, 284, 285 Disclosure, Timing, 285 Document Registration Agreement (DRA), 317, 319, 322 Driver’s License, 140

E Earnest money, 364 Elder Financial Fraud, 355 Enforcement, 72 Equities / Stocks / Shares, 22 Equity take-out, 4 Ethics, 371 Ethics, Decision Making Model, 378 Exemptions to Licensure, 64 Exit Strategies, 259

F Federally issued Firearms Licence, 136 Fees and payments, 271 Fellow of the Real Estate Institute (FRI), 167 Financial Institutions, 87 Financial Services Regulatory Authority of Ontario (FSRA), 49 Financial Services Tribunal, 74 Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), 360 Firearms License, 137 Five Licenses, 63 Fixed income securities, 21 Foreclosure, 264 Form 1 - Investor/Lender Disclosure, 213 Form 1.1 – Addendum for Construction and Development Loans, 227 Form 1.2 – Waiver for Reducing the Waiting Period, 234 Form 2 – Renewal Form, 236 Form 2.1 – Waiver for Reducing the Waiting Period, 248 Form 3.0 – Information about Investor/Lender in a NonQualified Syndicated Mortgage, 95 Franchise, 36 Fraud for Profit, 351 Fraud for Shelter, 356 Fraud Prevention, 359 Fraud Prevention, Advice for Clients, 366 Fraud Prevention, Brokerage, 361 Fraud prevention, Default insurers, 359 Fraud prevention, Regulators, 360 Fraud Warning Signs, 362 Fraud, Air Loans, 351 Fraud, Consequences, 358, 359 Fraud, Criminal Activities, 350 Fraud, Foreclosure, 354 Fraud, Money Laundering, 350

389 Fraud, mortgage, 349 Fraud, Title, 354 Fraud, Value Fraud, 351 FSCO, 93, 154, 155 Futures, 23

G GTA Historical Property Prices, 14 Guarantors, 145 Guidance No. MB0039INT, 333 Guidance No. MB0047INT, 51

H Hedge fund, 23 Home Inspection, 282 Honesty, 376, 381

I Identification, Primary, 136 Identification, Secondary, 136 Identity Theft, 355 Identity Verification, 135 Impersonation, 355 Income Approach, 167 Income trust, 23 Indian Status card, 137 Integrity, 376, 382 Interest Adjustment Date (IAD), 311 Investor/Lender Disclosure Documents, 212

J Judgments, 193 Judicial Sale, 264 Judicial Sale and Foreclosure, 264

K Know Your Client (KYC) form, 93

L Land Titles Assurance Fund, 366 Land Transfer Tax (LTT) - purchase, 282 Land Transfer Tax, city of Toronto, 283 Legal responsibility of the brokerage, 39 Lender Classifications, 84 Lender Expectations, 375 Lenders, number represented, 273 Lending, 35 License Suspended or Revoked, 77 Licensing fees, 57 Lien on personal property, 195 Liens, 195

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M Market Value, 167 Material risk, 210 MBLAA, 154 MBRCC Code of Conduct, 377 Misleading, Deceptive and False Advertising, 70 Misrepresentation, 357 MLTT, 283 Mortgage administration agreement, sample, 336 Mortgage Administrator License, 332 Mortgage Administrator, role of, 325 Mortgage administrator’s, 63 Mortgage Administrators, Compliance checklist, 326 Mortgage agent level 1, 53 Mortgage agent level 2, 53 Mortgage agent’s license, 63 Mortgage broker, 53 Mortgage Broker, 93, 210 Mortgage broker’s license, 63 Mortgage Brokerage, 93, 210 Mortgage finance companies (MFCs), 85 Mortgage Fraud, types, 350 Mortgage Investment Corporations, 88 Mortgage investment entities (MIEs), 86 Mortgage-backed securities (MBS), 22 Mutual Funds, 18

N Needs and Circumstances, 94 Needs Assessment, 151 Needs Assessment, applicant, 151 NEXXUS Card, 138 NHA Approved Lenders, 29 Non-amortized (interest only), 4 Non-Permitted Client investors / lenders, 114 Non-Qualified Syndicated Mortgage (NQSMI, 113 Non-registered funds:, 24

O Offence re standards of practice, 208 Offences, 207 Office of the Superintendent of Financial Institutions (OSFI), 46, 361 Ontario Driver’s License, 140 Ontario Driver’s License, Tips for reading, 140 Ontario Securities Commission, 50 Options, 23

P Pari passu, 250 Partial Discharge, 193 Passport, 138 Penalties for offences, 208 Penalty Types, 73 Permanent Resident card, 139 Permitted Client investors / lenders, 113 Personal conflicts of interest, 204

Photo ID card, 139 Power of Attorney (POA) Fraud, 356 Power of Sale, 260 Power of Sale Process, 261 Power of Sale, Sample, 262 Preferred share, 22 Principal’s duties to the agent, 42 Private Lender, 2 Private Mortgage, 3 Prohibited Activities, 38, 73 Property Types, Residential, 163 Public Registry, 65 Public Relations Materials: Agents and Brokers, 68 Public Relations Materials: Mortgage Brokerages, 69

Q Qualified Syndicated Mortgage, 113 Qualified Syndicated Mortgage (QSMI), 113 Quit Claim, 265

R Rate of Return, 15 Real Estate, Factors affecting Value, 163 Registered funds, 24 Regulation 188/08, 93, 210 Restricted voting share, 22 Rights and warrants, 23 Risk, 94 Risks, 274

S Second mortgage, 3 Security, 15 Security based lending, 5 Short term, 4 Simple Referral, 64 Sources of Investment Funds, 24 Standards of Practice, 93, 210 Steps in the Transaction Process – Investor, 127 Stress test, 5 Stripped Bond, 21 Supply, Real Estate, 163 Syndicated Mortgage Investments (SMI), 113

T teps in Fraud Prevention, Brokerage, 361 Termination of the agency, 43 The Canadian Code of Advertising Standards, 66 The Law of Agency, 42 Top reasons for using a private mortgage, 10 Trading in mortgages, 34, 35 Transition to the new licensing requirements, 54 Trust Funds, 330 Trust funds, deemed, 329

Index

W

391 Writ of Possession, 263 writ of seizure and sale, 194

392

Table of Figures

Table of Figures Figure 1 – Bank of Canada Prime Rates ........................................................................................................ 9 Figure 2 – Chartered Bank Rates................................................................................................................. 10 Figure 3 – GTA Historical Property Prices ................................................................................................... 14 Figure 4 – Form 3.0 – Information about Investor/Lender in a Non-Qualified Syndicated Mortgage ....... 97 Figure 5 – NQSMI oversight evolution ...................................................................................................... 116 Figure 6 – Residential Mortgage Worksheet ............................................................................................ 137 Figure 7 – Application Form, example ...................................................................................................... 144 Figure 8 – Borrower Application: Information Section ............................................................................. 146 Figure 9 – Borrower Application: Details of Mortgage Request ............................................................... 148 Figure 10 – Borrower Application: Particulars of Security ........................................................................ 149 Figure 11 – Property Type and Construction ............................................................................................ 149 Figure 12 – Borrower Application: Details of Existing Financing .............................................................. 150 Figure 13 – Borrower Application: Employment Information .................................................................. 151 Figure 14 – Borrower Application: Assets and Liabilities .......................................................................... 151 Figure 15 – Applicant Needs Assessment ................................................................................................. 153 Figure 16 – Sample Borrower Budget ....................................................................................................... 158 Figure 17 – Example of How to Use Comparable Properties .................................................................... 171 Figure 18 – Drive-By Appraisal Report, blank ........................................................................................... 174 Figure 19 – Full Appraisal Report, example .............................................................................................. 177 Figure 20 – Charge/Mortgage ................................................................................................................... 189 Figure 21 – Collateral Charge/Mortgage .................................................................................................. 191 Figure 22 – Discharge of Charge ............................................................................................................... 193 Figure 23 – Notice of Sale under Mortgage, example .............................................................................. 264 Figure 24 – Writ of Possession .................................................................................................................. 265 Figure 25 – Mortgage commitment Letter for use in disclosure, example .............................................. 288 Figure 26 – Borrower Disclosure document, example.............................................................................. 291 Figure 27 – Borrower Disclosure Checklist ............................................................................................... 295 Figure 28 – Certificate of ILA, example ..................................................................................................... 296 Figure 29 – Mortgage Fraud and its Effects on a Neighbourhood ............................................................ 353 Figure 30 – AVM Fraud: Frontal view of a property appraised by an AVM .............................................. 354 Figure 31 – AVM Fraud: Rear view of a property appraised by an AVM .................................................. 355 Figure 32 – U.S. Mortgage Misrepresentation by Type ............................................................................ 359