FAQs on Disclosure of Suitability and Risks to Borrowers, Lenders and Investors

General
Forms
Disclosure to Borrowers
Disclosure to Borrowers and Lenders
Disclosure to Lenders and Investors
Other Questions


General

  1. When do the new disclosure requirements go into effect?
  2. How will FSCO ensure that each Mortgage Brokerage is requiring its Mortgage Agents to follow the new rules and regulations under the Mortgage Brokerages, Lenders and Administrators Act, 2006?

 

Forms

  1. Does FSCO have a standard form or sample wording for disclosing risks for typical residential mortgages?
  2. Does FSCO have a standard form for disclosing the cost of borrowing?
  3. Does FSCO have any disclosure forms other than the Statement of Mortgage Form?
  4. Can my Mortgage Brokerage use its own Statement of Mortgage Form?
  5. In the webinar presentation, FSCO says “the industry” is creating a new disclosure form. Who is “the industry”?
  6. The cost of borrowing is disclosed in the current Statement of Mortgage Form. Does this meet the disclosure requirement for the cost of borrowing?

     

 

Disclosure to Borrowers

  1. Do I need to provide written disclosure of material risks for each borrower?
  2. How do I disclose to a borrower that selecting a longer amortization in a declining market may have a negative impact if he/she defaults on the mortgage?
  3. Is it a conflict of interest for a mortgage agent to also be an insurance agent or real estate agent?
  4. Can a consulting fee be charged?
  5. If a borrower needs to have his/her “eyes wide open” going into a mortgage, are standard charge terms (STCs) adequate?
  6. If I co-broker a mortgage with another Mortgage Broker, who has the responsibility of providing disclosure and forms to the client?
  7. How do I know which mortgage term is suitable for my client?
  8. What steps should I take to verify a borrower’s identity, if the borrower was found over the Internet and is located quite far from the Mortgage Brokerage?

     

Disclosure to Borrowers and Lenders


  1. What is the Mortgage Brokerage’s liability in respect to borrowers and lenders? Is this covered by errors and omissions insurance?
  2. Do I need to provide disclosure and suitability risks to a sophisticated borrower or lender? (e.g. a Mortgage Broker is acting on a $10 million commercial loan application for a borrower who is a developer.)

     

Disclosure to Lenders and Investors

  1. What types of lenders and investors do not need to have disclosure provided to them?
  2. Do I need to disclose to an investor that a mortgage may not always be a good investment?
  3. How can I determine if a mortgage is suitable for a private investor?

Other Questions

  1. Do banks need to meet the same compliance rules as Mortgage Brokerages?
  2. Why are Mortgage Brokerages not required to report mortgages in FINTRAC?
  3. How do I disclose the exact amount of a lawyer’s fee?
  4. Who can referral fees be paid to?
  5. Are my duties different for reverse mortgages, in comparison to standard mortgages?
  6. Are the disclosure requirements for commercial property lending the same as those for residential single family properties?
  7. Can Mortgage Brokers engage in leasing activities? If so, is leasing governed by the Mortgage Brokerages, Lenders and Administrators Act, 2006?
  8. How will FSCO enforce the disclosure and suitability of risks for large Mortgage Brokerages who are owned by, or associated with banks?

 

General

1. When do the new disclosure requirements go into effect?


The new disclosure requirements under Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice (sections 18, 19, 21 – 23, 25 and 27) and Ontario Regulation 189/08 - Mortgage Administrators: Standards of Practice (sections 15 – 17 and 19 – 20) go into effect on January 1, 2009.



2. How will FSCO ensure that each Mortgage Brokerage is requiring its Mortgage Agents to follow the new rules and regulations under the Mortgage Brokerages, Lenders and Administrators Act, 2006?


The Principal Broker is responsible for the conduct of the Mortgage Brokerage’s Brokers and Agents as the Chief Compliance Officer. FSCO relies on the Principal Broker to ensure compliance under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA). FSCO may hold the Principal Broker and Mortgage Brokerage or Administrator accountable for the conduct of a Broker or Agent.


FSCO follows a risk-based approach to regulating all licensed Mortgage Brokerages and Administrators. FSCO assesses risks of non-compliance by reviewing complaints from the public, Annual Information Returns from Mortgage Brokerages and Administrators, audited financial statements from Mortgage Administrators, visits to Brokerages, and responses to compliance questionnaires.

 

Forms

3. Does FSCO have a standard form or sample wording for disclosing risks for typical residential mortgages?


FSCO does not require a standard form or standard wording for disclosing material risks for typical residential mortgages. Mortgage Brokerages have the flexibility to design their own forms, and develop their own wording in compliance with section 25 of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice. A Mortgage Brokerage can develop its own form, or it may choose to use one of the Cost of Borrowing Disclosure Forms currently being developed by the Mortgage Brokerage industry associations and vendors.


4. Does FSCO have a standard form for disclosing the cost of borrowing?


FSCO does not require a standard form for disclosing the cost of borrowing. Mortgage Brokerages have the flexibility to design their own forms in compliance with Ontario Regulation 191/08 – Cost of Borrowing and Disclosure to Borrowers. A Mortgage Brokerage can develop its own form, or it may choose to use one of the Cost of Borrowing Disclosure Forms currently being developed by the Mortgage Brokerage industry associations and vendors.


5. Does FSCO have any disclosure forms other than the Statement of Mortgage Form?


The current Statement of Mortgage Form is effective until December 31, 2008. After this date, it is up to each Mortgage Brokerage to provide borrowers with disclosure statements that contain the required information on the cost of borrowing. A Mortgage Brokerage can develop its own form, or it may choose to use the forms being developed by Mortgage Brokerage industry associations and vendors. 


The current Renewal Form and Investor/Lender Disclosure Statement for Brokered Transactions can continue to be used. Mortgage Brokerages and Administrators may find the existing forms on FSCO’s website until new forms become available in 2009.


6. Can my Mortgage Brokerage use its own Statement of Mortgage Form?


The current Statement of Mortgage Form is effective until December 31, 2008. After this date, Mortgage Brokerages can develop and use their own forms, provided they comply with the regulations under the Mortgage Brokerages, Lenders and Administrators Act, 2006. (Refer to section 6 of Ontario Regulation 191/08 - Cost of Borrowing and Disclosure to Borrowers.) Mortgage Brokerage industry associations may also be able to assist with the development of new cost of borrowing disclosure forms.


7. In the webinar presentation, FSCO says “the industry” is creating a new disclosure form. Who is “the industry”?


Disclosure forms are being developed by Mortgage Brokerage industry associations: the Canadian Association of Accredited Mortgage Professionals and the Independent Mortgage Brokers Association, as well as service providers: Filogix and Marlborough Stirling Canada.


8. The cost of borrowing is disclosed in the current Statement of Mortgage Form. Does this meet the disclosure requirement for the cost of borrowing?


The current Statement of Mortgage Form is effective until December 31, 2008. After this date, a Mortgage Brokerage may use its own cost of borrowing statement, provided it complies with the regulations that go into effect on January 1, 2009. If you need assistance in developing a cost of borrowing disclosure statement, see section 6 of Ontario Regulation 191/08 - Cost of Borrowing and Disclosure to Borrowers. Mortgage Brokerage industry associations may also be able to assist with the development of new forms.


Disclosure to Borrowers

9. Do I need to provide written disclosure of material risks for each borrower?


Mortgage Brokerages are required to provide written disclosure of material risks of the mortgage to each borrower. The Mortgage Brokerage is also required to obtain written acknowledgement from each borrower that this disclosure has been provided. (See section 25 of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice.)


10. How do I disclose to a borrower that selecting a longer amortization in a declining market may have a negative impact if he/she defaults on the mortgage?


The Mortgage Brokerage is required to disclose in writing the material risks of the mortgage and obtain written acknowledgement of receipt from the borrower. (See section 25 of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice.) The Mortgage Brokerage also has a duty to ensure the mortgage is suitable for the borrower, having regard to his/her needs and circumstances. (See section 24 of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice.) If you have additional concerns, speak to your Principal Broker.


11. Is it a conflict of interest for a mortgage agent to also be an insurance agent or real estate agent?


A licensed insurance agent or real estate agent can also be licensed as a mortgage agent or broker providing that their mortgage activities do not jeopardize their integrity, independence or competence as an insurance agent or real estate agent, or vice versa. 


Agents should contact their employers or sponsors to determine if the corporate policies of the mortgage brokerage could restrict their ability to hold other employment.


12. Can a consulting fee be charged?


Any fees that are payable to the Mortgage Brokerage for its services must be disclosed and included in the Cost of Borrowing Disclosure. In addition, in cases where the principal amount of the mortgage is $300,000 or less, the Mortgage Brokerage cannot accept an advance payment or deposit, or require a borrower to make an advance payment or deposit, for services to be rendered or expenses to be incurred by the Mortgage Brokerage or any other person. For more details, refer to section 37 of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice.


13. If a borrower needs to have his/her “eyes wide open” going into a mortgage, are standard charge terms (STCs) adequate?


The standard charge terms (STCs) that specify the terms and conditions of a mortgage, and act as the contract between the lender and the borrower are not sufficient. Refer to sections 18 – 36 of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice for the Mortgage Brokerage’s disclosure requirements. For cost of borrowing disclosure requirements, refer to Ontario Regulation 191/08 - Cost of Borrowing and Disclosure to Borrowers.


14. If I co-broker a mortgage with another Mortgage Broker, who has the responsibility of providing disclosure and forms to the client?


If a mortgage is co-brokered, both Mortgage Brokers are responsible for providing the client the required disclosure, and for maintaining mortgage files for the required period of time. If agreed upon, these responsibilities can be delegated to one of the Mortgage Brokers. However, all required disclosures and forms must be maintained by both Mortgage Brokers.


15. How do I know which mortgage term is suitable for my client?


Advising a client involves giving your professional opinion. As a regulator, FSCO will not tell you what to recommend to a client. However, the general principles include:


• Asking your client questions to understand his/her financial situation and future plans;
• Ensuring that the mortgage does not expose your client to undue risk; and
• Making sure that the mortgage is suitable for your client.


16. What steps should I take to verify a borrower’s identity, if the borrower was found over the Internet and is located quite far from the Mortgage Brokerage?


Credit reporting agencies and other companies offer services to help verify the identities of potential clients found through the Internet.


Other possibilities include asking for a letter of introduction from a local lawyer, calling the lawyer to confirm the letter, and checking the lawyer’s name, address and telephone number with the Law Society of Upper Canada. You may also want to conduct reverse telephone and address checks on telephone directory websites, to see if the names match the addresses and telephone numbers. Sections 10 and 11 of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice require that you take reasonable steps to verify the borrower’s identity. Work with your Principal Broker to decide what is reasonable in this case.


Disclosure to Borrowers and Lenders

17. What is the Mortgage Brokerage’s liability in respect to borrowers and lenders? Is this covered by errors and omissions insurance?


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, but like all insurance policies, there are limits and exclusions.


18. Do I need to provide disclosure and suitability risks to a sophisticated borrower or lender? (e.g. a Mortgage Broker is acting on a $10 million commercial loan application for a borrower who is a developer.)


In this example, the borrower/client appears to be a business corporation, and thus falls under the “designated classes of lenders and investors” (as defined in section 2 of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice), which do not have the same disclosure requirements as other clients (such as those purchasing single family properties). In addition, the requirements in Ontario Regulation 191/08 - Cost of Borrowing and Disclosure to Borrowers do not apply to a borrower that is not an actual person (such as a business corporation), or a borrower who enters into a mortgage for business purposes.


Disclosure to Lenders and Investors

19. What types of lenders and investors do not need to have disclosure provided to them?


According to section 2(1) of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice, there are certain lenders and investors that the regulation calls “designated classes of lenders and investors” that do not need disclosure provided to them. This includes a Mortgage Brokerage acting on its own behalf, a financial institution, and an individual who alone or with his/her spouse has net assets of at least $5 million, and provides written confirmation of this to the Brokerage. For a complete list of “designated classes of lenders and investors”, refer to Regulation 188/08.


20. Do I need to disclose to an investor that a mortgage may not always be a good investment?


Each Mortgage Brokerage has a duty to ensure that a mortgage investment is suitable for the potential investor, having regard to the investor’s needs and circumstances. The Mortgage Brokerage is also required to disclose material risks of the mortgage investment in writing to the potential investor. For more details, please refer to section 25 of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice. Please note that this requirement does not apply for “designated classes of lenders and investors” (see section 2 of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice).


21. How can I determine if a mortgage is suitable for a private investor?


To determine if a mortgage is suitable for a private investor:


• Ask your client questions to find out his/her needs and circumstances;
• Think about what makes a mortgage investment suitable for that client;
• A suitable mortgage investment does not expose the investor to undue risk;
• Ask yourself if the mortgage fits the investor’s risk tolerance;
• Understand the range of products that are available to you for your client.


Other Questions

22. Do banks need to meet the same compliance rules as Mortgage Brokerages?


Banks are subject to federal regulation and are exempt from licensing under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA).


23. Why are Mortgage Brokerages not required to report mortgages in FINTRAC?


Mortgage Brokerages are not on the list of businesses that must report suspicious transactions and other specific types of transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). However, Real Estate Brokers, Real Estate Sales Representatives, and certain Real Estate Developers are required to report transactions in FINTRAC. For more information, visit FINTRAC’s website.


24.How do I disclose the exact amount of a lawyer’s fee?


Mortgage Brokerages, Brokers and Agents do not need to disclose the exact amount of a lawyer’s fee. If you are providing an estimate, or information based on an assumption, indicate that the information is based on an estimate or assumption.


25. Who can referral fees be paid to?


A referral fee for a “simple referral” –- which is a referral where only contact information is provided to a potential borrower, lender or investor –- may be paid to individuals and businesses who are not licensed as Mortgage Brokerages. (See sections 1 and 2 of Ontario Regulation 407/07 - Exemptions from the Requirements to be Licensed.)


Referral fees for “simple referrals”, as well as referrals that involve more than providing contact information, may be paid to licensed Mortgage Brokerages that refer mortgage business to other Mortgage Brokerages. Referral fees cannot be paid directly to Mortgage Brokers or Agents. They must be paid to the Mortgage Brokerage and be fully disclosed in writing to the borrower, lender or investor.


26. Are my duties different for reverse mortgages, in comparison to standard mortgages?


A Mortgage Brokerage cannot arrange or enter into a reverse mortgage with a borrower, unless the borrower provides a written statement signed by a lawyer. The written statement needs to say that the lawyer has provided the borrower independent legal advice about the proposed reverse mortgage. (For more information see section 29 of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice.) This is in addition to the duty to ensure suitability based on the client’s needs and circumstances, and to disclose material risks that apply to other mortgages. Mortgage Brokerages, Brokers and Agents are responsible for fully understanding the mortgage products they offer to their clients.


27. Are the disclosure requirements for commercial property lending the same as those for residential single family properties?


Clients that fall under the “designated classes of lenders and investors” (as defined in section 2(1) of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice) do not have the same disclosure requirements as other clients (such as those purchasing single family properties). In addition, the requirements in Ontario Regulation 191/08 - Cost of Borrowing and Disclosure to Borrowers do not apply to a borrower that is not an actual person (such as a business corporation), or a borrower who enters into a mortgage for business purposes.


28. Can Mortgage Brokers engage in leasing activities? If so, is leasing governed by the Mortgage Brokerages, Lenders and Administrators Act, 2006?


Mortgage Brokers can engage in leasing activities. Leasing is not governed by the Mortgage Brokerages, Lenders and Administrators Act, 2006. If a Mortgage Broker is engaged in another business, the Mortgage Brokerage should ensure the other business does not jeopardize the Mortgage Brokerage’s integrity, independence or competence. The Mortgage Brokerage should also not use any information that is obtained while carrying on business for any other purpose, without the written consent of the person who is the subject of the information. (See sections 56 and 57 of Ontario Regulation 188/08 - Mortgage Brokerages: Standards of Practice.)


28. How will FSCO enforce the disclosure and suitability of risks for large Mortgage Brokerages who are owned by, or associated with banks?


A licensed Mortgage Brokerage that is owned or associated with a bank is required to comply with the Mortgage Brokerages, Lenders and Administrators Act, 2006 and regulations.


 
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