Private mortgages – what’s next for Ontario agents?

Recent weeks have seen new measures aimed at raising standards for Ontario agents in the private space

Private mortgages – what’s next for Ontario agents?

The brokering of private mortgages by Ontario agents has been in the spotlight of late, with the province’s regulatory body overseeing broker conduct having recently introduced new educational requirements for agents dealing in the private space.

Those regulations, set to take effect next April, will see the introduction of a new licensing class for mortgage professionals, with agents who have not reached that level designated as Level 1-classified agents and permitted only to arrange mortgages with “financial institution type lenders.”

Level 2 agents, meanwhile, will be allowed to arrange mortgages for lenders, including private individuals.

Speaking with Canadian Mortgage Professional last month, Financial Services Regulatory Authority of Ontario (FSRA) executive vice president Huston Loke pointed to the heightened risk factor for mortgage customers in the private space as the main reason behind the changes.

Having witnessed growth in private lending markets across the province, Loke said the body believed “private lending arrangements entail additional risks and the requirement for more information” to give consumers peace of mind when dealing in that arena.

Among agents and brokers operating in the private space, the issue of a product’s suitability for their client is one they should be bearing in mind above all, according to an Ontario-based mortgage veteran.

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Graeme Moss (pictured top), founder and partner at Fair Mortgage Solutions, told CMP that the private market featured a number of “exceptionally good” lenders – but that agents and brokers should always be cognizant of whether a private mortgage is in a client’s best interest.

“I think the suitability factor is a really major thing. I would say everyone goes through life shocks – a person can have health issues, unemployment, divorce and more,” he said. “When they have those events, I think getting something suitable for them is reasonable for them and the lender. If both sides mitigate risk, you make it a win-win.

“The key question has got to be: Does it work well for both the lender and the client? The consequences from the mortgage agent or broker’s actions can have a massive impact on their client, either positive or negative.”

That view was also expressed by Loke, who said that while “private mortgages are not always problematic… they’ve got to be right for the borrower, and so we’re changing the regulations to match the need.”

Where agents do not take that suitability factor into consideration, the consequences for borrowers can be potentially seismic, Moss said – for instance, in a recent case that saw a mortgage agent allegedly arrange a large prepaid private second mortgage with liens on top for a pensioner that left that individual significantly indebted.

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In that case, the individual signed papers but subsequently stated they did not understand the implications of what they were getting themselves in for. While they may have a case, the problem with litigating against the individuals behind the deal is likely to be a lengthy – and expensive – process, according to Moss.

“Often, borrowers don’t understand the legal and financial aspects that intimidate a lot of people, and they rely on the trust of the agent, broker or branch,” he said. “A lot of people don’t realize the implications – they won’t know so much about the loan to value or when it comes to financial and legal matters. That combination scares a lot of the public.”

A positive step might be for the Ontario government to change disclosure rules on liens, he said, with the current arrangement meaning that a client could theoretically agree to a monthly amount without realizing that they’ve actually signed up to pay that over a long period – such as 15 years.

While many lenders in the private space provide a “really unbelievable” level of service for their clients, Moss emphasized the importance of agents and brokers being particularly attentive to whether their clients’ interests are best served by specific private mortgages and keeping that suitability factor firmly in mind.

“You can keep busy and ensure that the lender and the client both do well – it’s a win-in,” he said. “Or you can say, ‘To hell with the client,’ and they’re at risk all the time – and it will be a nightmare. And it will be a nightmare for [the broker’s] reputation, too.”