Contents
Executive Summary
Introduction
The Financial Services Commission of Ontario (FSCO) is a regulatory agency established by the
Financial Services Commission of Ontario Act, 1997 and accountable to the Minister of Finance. FSCO’s legislative mandate is to provide regulatory services that protect the public interest and enhance public confidence in the sectors it regulates. FSCO oversees insurance, pension plans, mortgage brokering, credit unions and caisses populaires, co-operative corporations, loan and trust companies and health service providers that invoice auto insurers for statutory accident benefits claims.
Under the
Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA), all mortgage brokerages and administrators regulated by FSCO are required to file the Annual Information Return (AIR) with FSCO by March 31 each year. FSCO may take enforcement action against any brokerages or administrators that do not file the AIR by the deadline.
This report summarizes the information provided in the 2016 AIR from those licensed during that calendar year. It includes responses from 1,170 mortgage brokerages and 164 mortgage administrators, representing a 98 per cent and 95 per cent response rate from brokerages and administrators, respectively. The remaining two per cent of brokerages and five per cent of administrators failed to file their AIR. FSCO has cautioned or initiated enforcement action against 52 brokerages and 17 administrators for late or non-filing of the 2016 AIR. These enforcement actions include licence suspension, licence revocation, and/or administrative monetary penalties. Repeat offenders face progressive enforcement action.
About the AIR
The AIR collects information about mortgage brokerages’ and administrators’ business practices and internal controls. FSCO uses this information as a tool to monitor the industry’s compliance with the law as part of its consumer protection mandate.
Depending on findings, FSCO may flag an entity for examination. FSCO may also take enforcement action where necessary.
Although the 2016 AIR asked a number of questions on many different topics, this report focuses on six specific topics for mortgage brokering – errors and omissions (E&O) insurance, supervision of operations, brokerage activities*, lending sources, syndicated mortgages, and remunerations. This report also focuses on three specific topics for mortgage administrators – E&O/financial guarantees, trust accounts, and supervision of operations. These topics are important, as they are based on specific legal requirements and/or are a potential risk for this sector.
* Licensed but did not close any mortgage business in 2016
Key Findings
Key findings for mortgage brokerages:
- Mortgage brokerages reported $132.5 billion in mortgages arranged in 2016.
- Ninety-nine per cent of mortgage brokerages reported that they have the required E&O insurance coverage.
- Thirty-seven per cent (709) of mortgage brokerage offices in Ontario did not have a licensed broker assigned in a supervisory capacity.
- Forty per cent of mortgage agents (4,561) and 30 per cent of mortgage brokers (765) in Ontario work part-time in the sector as reported by their brokerage.
- The largest source of mortgage funding was from banks.
- The second largest source of mortgage funding was self-funding, by which mortgages are funded by the brokerage itself.
- Growth in usage of mortgage investment corporations (MICs): the number of brokerages reporting using MICs as lenders has increased by 31 per cent since 2014, to 247 from 188.
- From 2015 to 2016, the number of syndicated mortgage transactions increased by 24 per cent (1,425 transactions); the total dollar value increased by 10 per cent, or $600 million over the same period.
Key findings for mortgage administrators:
- Nine per cent of mortgage administrators (15) reported they did not have a trust account.
- One mortgage administrator did not maintain the required $25,000 financial guarantee.
Detailed Findings – Mortgage Brokerages
E&O insurance
Under the MBLAA, each mortgage brokerage must have E&O insurance, including extended coverage for fraud, to protect the brokerage, brokers and agents from acts arising from the business of dealing, trading or lending in mortgages (such as negligence, misrepresentation, or fraud). The coverage must have a minimum of $500,000 per occurrence and $1 million for all occurrences in a year, and must be provided by a FSCO-approved insurer. Mortgage brokerages reported the following in their AIRs:
- Ninety-nine per cent of mortgage brokerages reported they had the minimum mandatory E&O insurance coverage amounts.
- Thirteen mortgage brokerages reported an expired E&O insurance policy.
- Five mortgage brokerages reported that their E&O insurance policy provided less than the required $500,000 per occurrence.
- Seven mortgage brokerages reported they did not have the required $1 million E&O coverage for all occurrences.
- Twenty-one per cent of mortgage brokerages reported they had coverage in excess of $2 million for all occurrences.
- In 2016, 40 E&O claims were made against 32 mortgage brokerages or the brokerages’ brokers and agents.
- E&O insurance carriers paid seven claims against mortgage brokerages and 10 claims against the brokerages’ mortgage brokers and agents. Some of the claims paid related to issues such as wrong interest penalty calculation, discrepancy on the appraisal, and delayed closing and/or funding.
Supervision of operations
Mortgage brokerages are required to organize their operations in a way that facilitates adequate supervision of their mortgage brokers and agents to ensure they are compliant with all legal requirements. FSCO found:
- Ninety-five per cent of mortgage brokerages (1,117) reported their head office was in Ontario, while the remainder had head offices primarily in British Columbia and Alberta.
- Forty-five per cent (507) reported their head office in the Greater Toronto Area, while 39 per cent (434) were based in Central Ontario.
- Thirteen per cent of mortgage brokerage offices (257) were located more than 100 kilometres away from the principal broker’s primary work location.
- Thirty per cent of mortgage brokers (765) and 40 per cent of mortgage agents (4,561) work part-time in the sector as reported by their brokerage.
- Six per cent of brokerages (73) reported they had not reviewed their internal policies and procedures to ensure they are compliant with current MBLAA regulations.
- Two mortgage brokerages failed to report to FSCO, through Licensing Link, the name of a mortgage broker or agent who was terminated for cause.
Principal brokers are responsible for ensuring each mortgage broker and agent within their mortgage brokerage is authorized to deal or trade in mortgages on the mortgage brokerage’s behalf, and complies with MBLAA regulations. Additionally, as per subsection 43 (3) of
Ontario Regulation 188/08, a mortgage brokerage shall immediately notify the Superintendent if they believe that a broker or agent is not suitable to be licensed under MBLAA.
Failure to report the name of a mortgage broker or agent terminated for cause concerns FSCO because of the risk it poses to consumers and their confidence in the mortgage brokering industry.
Brokerage activities
FSCO noticed the following trends for brokerages that were licensed but did not close any mortgage deals:
- The number of mortgage brokerages that reported engagement in mortgage brokering activities but did not close any mortgage deals increased by eight per cent to 128 in 2016, from 118 in 2015.
- The number of brokerages that reported that their primary line of business was not mortgage brokering and that they did not close any mortgage deals decreased by six per cent to 137 in 2016, from 145 in 2015.
Lending sources and volume of mortgage
The 2016 AIR data revealed the following about sources of funding and volume of mortgages in Ontario:
- The number of mortgages reported by mortgage brokerages increased by two per cent to 340,527, from 334,760 in 2015.
- Mortgage brokerages reported a total dollar value of $132.5 billion in arranged mortgages, a one per cent decrease compared to the $134 billion reported in 2015.
- Banks and self-funding were the top two types of mortgage lenders, accounting for 59 per cent of the total dollar value of mortgages ($78.4 million), and 69 per cent of the total volume of mortgages (233,354).
- Twenty per cent of mortgage brokerages (235) funded more than half of their business with one lender, which is down just slightly from 21 per cent (248) in 2015. The main sources of funding were banks and the brokerages themselves.
Mortgage investment corporations
The number of mortgage brokerages that reported using mortgage investment corporations (MICs) as lenders increased by 31 per cent since 2014, to 247 from 188. During the same period, the value of mortgages funded by MICs increased by 42 per cent, to $4.4 billion from $3.1 billion.
Additionally, five per cent of mortgage brokerages (62) reported that the principal broker, officer and/or director also held equity interest in a MIC. Of these, none reported holding a management function within the MIC.
Private mortgages
During the 2016 reporting period, privately funded mortgages represented approximately six per cent of the total dollar value of mortgage transactions ($8.5 billion) reported by mortgage brokerages.
The number of brokerages that reported using a private lender has increased by 10 per cent since 2014. During the same period, the total dollar value of privately funded mortgages increased by 42 per cent.
Although private lenders remain a relatively small portion of the market, FSCO has observed growth by private lenders since 2014. FSCO will continue to monitor their rate of growth, sales and lending practices, and any changes in market share.
Sub-prime mortgages
Mortgage brokerages reported arranging 28,138 sub-prime mortgages with a total value of $8.2 billion in 2016. Sub-prime mortgages represented eight per cent of the total number of mortgages and six per cent of the total dollar value of mortgages reported.
Although sub-prime mortgages remain a relatively small portion of the market, FSCO will continue to monitor their rate of growth and any significant changes in market share.
Syndicated mortgages
During the 2016 reporting period, syndicated mortgages represented approximately five per cent ($6.6 billion) of the total dollar value of mortgage transactions reported by mortgage brokerages.
The number of syndicated mortgage transactions continues to grow year-over-year. Brokerages reported 7,412 transactions in 2016, a 24 per cent increase since 2015. During the same period, the total dollar value of these transactions increased by 10 per cent to $6.6 billion.
In 2016, nine per cent of mortgage brokerages (105) reported engaging in syndicated mortgage activity. Fifteen per cent of these brokerages (16) reported engaging exclusively in syndicated mortgage transactions. The value of syndicated mortgages for those 16 brokerages represented 36 per cent ($2.4 billion) of all syndicated mortgage transactions.
FSCO considers certain types of syndicated mortgage investments (SMIs) to be a high-risk investment that may not be suitable for all investors. Mortgage brokerages that are engaged in this activity should review
FSCO Bulletin no. M-01/15: Requirements for Promoting Syndicated Mortgage Investments to ensure they are able to demonstrate they have met their suitability and disclosure obligations to investors.
Remuneration
The 2016 AIR collected information about non-monetary payments and incentives that mortgage brokerages received from lenders or paid out to other parties for referrals. Proper disclosure must be provided for non-monetary incentives, as per subsection 5 (2) of
Ontario Regulation 187/08 and subsection 45 (1) of
Ontario Regulation 188/08.
FSCO observed the following from the data collected:
- Forty-one per cent of mortgage brokerages (480) had a contingency commission or payment arrangement with lenders;
- Twenty-four per cent of mortgage brokerages (278) accepted non-monetary remuneration from lenders. Reward points, trips, gifts and event tickets were the most common forms of non-monetary remuneration; and
- Four per cent of mortgage brokerages (50) offered credit cards or gift cards as remuneration for referrals.
Detailed Findings – Mortage Administrators
Errors and omissions (E&O) and financial guarantees
Overall, mortgage administrators reported a high level of compliance with E&O insurance requirements and financial guarantees.
By law, administrators must maintain E&O insurance coverage from an insurance company approved by FSCO. This insurance must cover any claims that may arise from the business of administering mortgages (such as negligence or fraud). Administrators must also maintain a $25,000 financial guarantee at all times.
- No administrators reported being subject to any E&O claims or charges against them, licence suspensions, or outstanding fines.
- One administrator reported that a complaint was made against it to a regulatory body in a Canadian jurisdiction that was based, in whole or in part, on fraud, theft, deceit, misrepresentation, forgery or similar conduct.
- One administrator did not maintain the $25,000 financial guarantee.
Trust Accounts
Mortgage administrators are required to maintain a trust account to hold money received from a borrower or lender in connection with the administration of a mortgage.
- Nine per cent of administrators (15) reported they did not have a trust account.
- Forty-three administrators reported opening a trust account during the reporting year, of which 81 per cent (35) did so without obtaining the approval of the Superintendent in advance.
Supervision of Operations
Mortgage administrators must organize their operations, including office locations, in a manner that facilitates the supervision of their staff, as well as examinations by FSCO. The AIR data showed that:
- Ninety per cent of administrators (148) had head offices in Ontario, while the remainder had head offices in British Columbia, Alberta, Manitoba and Quebec; and
- Eighty-four per cent of administrators (145) had an office in Central Ontario, eight per cent were based in Southwestern Ontario (13) and eight per cent were based in Eastern Ontario (13).
FSCO’S Commitment to the Fair Treatment of Consumers
The data gathered in the 2016 AIR will be used by FSCO to inform consumer protection measures.
In addition, FSCO is revising the questions in the 2017 AIRs to make it clearer, easier to complete, and to capture more comprehensive data on the industry.
In the year ahead, FSCO will be focusing on the fair treatment of consumers by the mortgage brokering sector during compliance examinations.
FSCO is committed to consumer protection and will pursue regulatory action where there is evidence of non-compliance. Regulatory action can range from a letter of caution, to an administrative monetary penalty, up to licence revocation or prosecution. FSCO bases its regulatory decisions on the facts and circumstances of each case.
All licensed mortgage brokerages and administrators must meet their legal requirements under the MBLAA. FSCO encourages licensed brokerages and administrators to visit the
Mortgage Brokering section on FSCO’s website in order to learn more about their legal obligations.
For additional data on mortgage brokerages and administrators, please refer to the companion guide,
Appendix to 2016 Annual Information Return – Mortgage Brokerages and Administrators Results Summary Report.