What should be top of mind for brokers in private lending?

FSRA has declared two significant areas where mortgage professionals must demonstrate high conduct standards

What should be top of mind for brokers in private lending?

With the Financial Services Regulatory Authority of Ontario (FSRA) having identified mortgage brokerages’ business practices in private lending as an area of focus in its 2021-22 supervision plan, its head of financial institutions and mortgage brokerage conduct Antoinette Leung (pictured) told Canadian Mortgage Professional that keeping clients’ best interests top of mind should be a key priority for brokers in that space.

Leung was speaking shortly after FSRA noted two significant areas where mortgage professionals must demonstrate high conduct standards to protect their customers from financial harm. Firstly, the body said, mortgage brokerages should clearly explain the options, risks and consequences of using private lenders to homebuyers who seek financing in the private space.

Secondly, for mortgage administrators, FSRA said that providing investors with “timely and accurate” information to ensure they make informed decisions, and adapt their investment strategies if needed, was an essential step.

Leung noted that private lending plays an important role in the market, particularly with traditional lenders having become more selective in their choice of borrowers and as a short-term financing solution.

Still, FSRA has identified the sector as a key area of focus for the coming year, particularly given its recent surge in popularity in the mortgage market.  

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“I would say we would be concerned if the private lending is targeting more vulnerable customers, especially those that don’t have access to traditional financing,” Leung said.

“From our perspective, especially when they’re dealing with vulnerable customers, brokers and agents take on a more advisory role, so it’s very important that they explain very clearly and make sure the customer understands the terms of the potential mortgages, what it means if their situation deteriorates, and what happens if they don’t follow the identified exit strategy that will eventually get them back to more conventional mortgages.”

FSRA recently issued a questionnaire to 1,200 principal brokers licensed with the organization, receiving responses from 81% of those contacted. Of the respondents, Leung said that 86% said the compliance resources at their brokerage consisted of either only themselves, or themselves plus one or two additional staff.

With FSRA having expressed its concern in its supervision plan that the limited availability of resources could impede compliance effectiveness at brokerages, Leung said principal brokers needed to carefully reflect on how they ensured compliance enforcement.

“We would like principal brokers to really think about what is the approach and the setup to make sure that their brokers and agents are being supervised properly, [and] to make sure that they’re compliant with the regulatory requirements,” she said.

“Brokers and agents… should reflect on how their compliance programs within the brokerage are actually protecting themselves, by making sure that their business activities are compliant.”

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Leung said that other than availability of resources, FSRA was also interested in understanding how the organizational structure of a brokerage, authority level or compensation arrangements for principal brokers could impact their supervision.

In 2019, in a bid to ensure that non-qualified syndicated mortgage investments (NQSMIs) were provided sufficient disclosure by brokers and administrators to make informed investment decisions, FSRA introduced real-time supervision of those disclosures.

Leung said that that step had seen a stronger appreciation among brokerages of the regulations, and compliance concerns, around that issue.

“We notice that brokerages are actually more responsive when we raise concerns with them. They respond to us quicker [and] provide supporting documentation faster, just so that they can address our concerns,” she said.

“What we really wanted to do is make sure that the industry is supported in improving their disclosure practices, enhancing protection to investors. What we’re going to do, going forward, is to continue to monitor the syndicated mortgage market – especially those that are brokered by our licensees.”

For brokers, Leung said the main thing to prioritize in private lending was keeping clients’ interests in mind and ensuring that they’re kept fully apprised of mortgage terms, advantages and pitfalls.

“It’s really explaining and making sure they understand: what are the different options here? What are the risks, and what are the consequences?” she said.

“It’s very important, especially when they are related to the private lenders. We’ve noticed cases where they themselves… have a relationship with the private lenders. So, in those situations, they need to keep clients’ interests top of mind.”

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Finally, Leung emphasized that brokers and agents should also be mindful if they start arranging equity financing for real estate, since in those situations they may require registration with the securities commission. Administrators who are arranging mortgages for customers, she said, also require a brokerage licence.

“We are seeing a few cases where mortgage brokers are getting into equity financing or administrators brokering mortgages,” she said.

“We’re also seeing some developers raising capital by setting up their own debt funds. With this evolution, we think the community needs to be mindful of what type of licencing and registration they may need.”