The best of intentions

The CSA’s new syndicated mortgage proposal reveals a startling lack of understanding about how brokers handle these mortgages, writes Samantha Gale

The best of intentions

In March, the Canadian Securities Administrators published proposed changes to the regulatory framework for syndicated mortgages in Canada, intended to harmonize syndicated mortgage regulation across provinces. The simplified gist of the proposal is to transfer the regulation of syndicated mortgages from mortgage broker regulators to securities regulators. Rather than have mortgage brokers arrange syndicated mortgages for investor-lenders, registrants under the various provincial securities acts – primarily exempt market dealers [EMDs] – would sell syndicated mortgages to purchasers.

Sounds like a well intended plan. Who doesn’t want to have a strong syndicated mortgage sector, where the bad actors are weeded out and the public is well served with stricter compliance rules?

One problem with the CSA consultation: It has everyone jumping into the weeds without any idea of how mucky the foundation underlying the proposal is. The concept of security regulators regulating mortgage transactions is more than problematic. It creates an unworkable system that will not serve anyone – neither borrowers, lenders nor the industry.

The proposal commentators who understand mortgage brokering fully recognize this problem; however, those on the securities side, including the CSA, don’t appear to have any appreciation of these challenges.

In a typical syndicated mortgage transaction, a borrower will contact a mortgage broker looking for financing. The mortgage broker will take an application from the borrower and shop the application to different lenders, which are represented by other mortgage brokers.

Mortgage brokers acting for lenders are more than salespeople. The lender’s mortgage broker typically will underwrite the mortgage; inspect the property, appraisal, and other property information; issue a commitment letter for the borrower; determine conditions for completion and ensure those conditions have been satisfied; prepare a lender disclosure that states mortgage and transaction details; and, for draw mortgages, ensure that work has been completed before further draws are authorized.

The CSA proposal appears to assume that a mortgage broker will still be involved in syndicated mortgage transactions, but it’s not clear exactly how. Will a mortgage broker representing a borrower looking for syndicated funds contact an EMD who has investors, and who will then provide a mortgage commitment, work with the investors to clear off conditions and then close the transaction?

EMDs are described by the CSA as ‘sellers’ and investor-lenders as ‘purchasers.’ However, when it comes to syndicated mortgage lending, mortgage brokers acting for lenders do not sell investments; they arrange, negotiate, structure, confirm and process the mortgage transaction on behalf of the investor-lender. If the lenders are no longer assisted by mortgage brokers, but instead by EMDs, will the EMDs be required to underwrite the mortgage, draft the mortgage commitment, ensure that mortgage commitment conditions have been satisfied, ensure that the mortgage is registered appropriately before authorizing the release of lender funds, and inspect development sites to determine whether draws are appropriate? Will they be educated, trained and tested for competence in all matters relating to mortgage financing, including those matters specified above?

The CSA proposal also identifies borrowers in syndicated mortgage transactions as ‘issuers’ who would need to comply with the requirements of the Securities Act. However, mortgage borrowers are considered under mortgage broker regimes to be consumers deserving of consumer protection measures, not industry members who must dispense consumer protection to others. To catapult the mortgage borrower from consumer to industry service provider is a serious consumer protection concern that requires urgent review.

It makes no sense for EMDs to turn into syndicated mortgage brokers when mortgage brokers already take care of the investor. If the CSA intends to proceed with its proposal, then it needs to develop an in-depth understanding of the mortgage origination process and explain how these gaps in the process will be filled by EMDs.

Samantha Gale is the CEO of the CMBA-BC and serves as executive director of its umbrella organization, CMBA. Previously, Gale practiced law prior to a 15-year stint at FICOM.