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Mortgage Industry: Educating and Protecting Consumers
For most people, getting a mortgage is the largest financial decision they will make. Ontarians hold $142 billion in mortgage debt arranged through mortgage brokerages. To protect the interests of these consumers, FSCO places a high priority on ensuring the mortgage brokers, agents, brokerages and administrators it regulates comply with the law.
FSCO also works to help people understand their rights and responsibilities as mortgage consumers, as well as the role and legal responsibilities of mortgage brokers, agents and administrators.
FSCO regulates mortgage brokers, agents, brokerages and administrators licensed under the Mortgage Brokerage, Lenders and Administrators Act, 2006 – FSCO does not oversee mortgages arranged directly by financial institutions such as banks, credit unions, and loan and trust companies.
Mortgage Agents, Brokers, Brokerages and Administrators 2009-2017, as at March 31
Description of Mortgage agents, brokers, brokerages and administrators image
Protecting consumers in the syndicated mortgage investment market
In recent years, syndicated mortgage investments (SMIs) have grown in popularity. Over the last five years, FSCO has also seen an increase in complaints related to SMIs. While there are many legitimate SMI opportunities, FSCO considers mezzanine-type SMIs to be high-risk investments that may not be suitable for the average investor. These types of SMIs permit low minimum investment requirements, thus allowing smaller or less sophisticated investors to take part. As a result, FSCO has undertaken considerable supervisory and regulatory action to promote greater compliance by licensees to protect consumers.
Mortgage brokerages are legally required to take reasonable steps to ensure mortgage investments they recommend are suitable for the investor or lender, considering that individual’s needs and circumstances. They also have to advise clients of the mortgage’s material risks, disclose potential conflicts of interest, provide a summary of key indicators of the property’s value, and provide supporting documentation that justifies the value of the mortgage and the ability of the borrower to repay the debt.
As the regulator of the mortgage brokering sector, FSCO uses education, communication and enforcement actions to protect investors and ensure mortgage professionals meet these responsibilities.
FSCO began regulatory enforcement actions against a number of licensed and unlicensed entities in 2016-17, and in one case, received court approval to appoint a receiver as trustee to monitor real estate development projects undertaken by unlicensed entities on behalf of syndicated mortgage investors. FSCO also warned the public about unlicensed activity as issues arose.
Following on its work in 2015-16 to incorporate private lending and investor/lender disclosure into the continuing education requirements for mortgage broker and agent licence renewal requirements, FSCO posted information on its website in August 2016 for potential investors about risks and rights related to SMIs.
WHAT IS A SYNDICATED MORTGAGE?
A syndicated mortgage is a mortgage loan that has more than one lender or investor who makes an investment in a mortgage. It can be as simple as two people jointly loaning a third person money secured by a mortgage on that third person’s home, or as complex as a group of investors providing a subordinated mortgage as part of a major development proposal.
A higher degree of risk exists with syndicated mortgage investments (SMIs) that support future construction developments. In these cases, instead of paying for the costs of construction, investments are used to fund “soft costs” such as consultant fees, zoning permits, architecture costs, or marketing and sales expenses. This is known as mezzanine-type financing, where the SMI investor’s mortgage is ranked below construction mortgages. These types of SMIs typically will not be paid back first or at all if the construction project is not completed.
Syndicated Mortgage Investment (SMI) complaints 2012-13 to 2016-17
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EXAMPLE OF AN SMI ENFORCEMENT: METROZEN CAPITAL INC.
This year, FSCO revoked the mortgage brokerage licence of Metrozen Capital Inc., following an extensive examination into the company’s activities in the syndicated mortgage investment (SMI) market.
In the fall of 2015, FSCO found that approximately 100 investors who invested a total of nearly $10 million in SMIs with Metrozen were at high risk of substantial losses. FSCO found little evidence of development on the properties involved in the SMIs, but Metrozen continued to promote these investments. FSCO also found that Metrozen did not meet its requirements to ensure investments were suitable for the investors or make proper disclosures related to the investment.
Because of these breaches of the Mortgage Brokerages, Lenders and Administrators Act, 2006, FSCO issued an interim order to suspend Metrozen and its principal broker from dealing or trading in mortgages in Ontario.
FSCO revoked Metrozen’s brokerage licence on March 3, 2017, following Metrozen’s failed appeal to the Financial Services Tribunal.
DEVELOPING A NEW APPROACH
This year, the Ministry of Finance established a working group, composed of ministry representatives and experts from the Ontario Securities Commission and FSCO, to find ways to better protect borrowers, lenders and investors who rely on SMIs. Ontario is currently the only province in Canada where SMIs are not overseen by securities regulators.
The working group will present recommendations to the government for its consideration.
MORTGAGE SECTOR STATISTICS
Across the mortgage brokering sector, complaints decreased in 2016-17 from a year earlier. Complaints are affected by the economy, business activities in the marketplace and consumer awareness.
Mortgage sector complaints 2012-13 to 2016-17
Description of Mortgage sector complaints image
Mortgage Brokerages and Administrators|| || |
|Compliance Orders/Cease & Desist Orders||3||4|
|Letters of Caution||–||1|
|Letters of Warning ||14||22|
Mortgage Brokers|| || |
|Letters of Caution||–||7|
|Compliance Orders/Cease & Desist Orders||–||3|
|Letters of Warning ||10||–|
Mortgage Agents|| || |
|Letters of Caution||1||13|
|Compliance Orders/Cease & Desist Orders||1||–|
|Letters of Warning ||22||–|
Administrative Monetary Penalties|| || |
Annual Information Return|| || |
| Orders Issued||12||–|
| Amount Ordered|| $12,000||–|
Errors and Omissions Insurance|| || |
| Orders Issued||–||–|
| Amount Ordered||–||–|
Unlicensed Activity|| || |
| Orders Issued||1||1|
| Amount Ordered||$15,000||$5,000|
False Information to Superintendent|| || |
| Orders Issued||2||–|
| Amount Ordered||$3,500||–|
Other Standards of Practice Violations|| || |
| Orders Issued||27||16|
| Amount Ordered||$123,363.64||$25,250|
Disclosure|| || |
| Orders Issued||–||14|
| Amount Ordered||–||$18,000|
Total AMP Orders Issued||
Total AMP Amount Ordered||
Going social to help millennial homebuyers
FSCO recognizes the importance of financial literacy to help consumers make informed decisions. To help Ontario consumers strengthen their financial literacy, FSCO launched its first major consumer outreach initiative in November 2016 for Financial Literacy Month.
FSCO undertook research that identified people under 35 as the group with the lowest financial literacy. In the sectors regulated by FSCO, mortgages would likely have the most significant impact on this group in both the short and long term.
To help first-time millennial homebuyers make informed financial decisions, the campaign provided information on how best to plan, save, shop and pay for a mortgage. It used popular social media and digital channels to deliver content right to their smartphones.
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