FSRA is helping protect consumers in the growing private mortgage sector. Mortgage brokerages engaged in private lending must ensure they’re making appropriate product recommendations for clients’ needs and disclosing all relevant information.
As part of our supervision efforts, we have now completed targeted examinations on fifteen brokerages who recommend to consumers private mortgages from a related Mortgage Investment Corporation (MIC).
Our findings suggest the sector has additional work to do in ensuring borrower suitability, product suitability, disclosing conflicts of interest and disclosing fees associated with the mortgage. As a result of this specific examination project’s findings, we are implementing a monitoring program on eight identified mortgage brokerages to run until the end of this year to support improved compliance.
Context
Between 2007 and 2021, Mortgage Investment Corporations (MICs) increased their assets held by 268%, from just under $10 billion to over $36.5 billion.[1]
MICs offer alternative lending products by pooling private investor funds and deploying them as private mortgages. The additional lending opportunity has attracted mortgage industry participants, specifically mortgage brokerages, to increase their participation in the MIC space by either obtaining a financial interest in, or fully managing a MIC.
The number of mortgage brokerages that have a financial interest or fully manage a MIC, has increased from 96 to 128 in the period between 2019 and 2022, a 33% increase[2].
Private mortgages often carry specific risks such as higher rates and fees.
These products may not be suitable for some consumers. Where brokerages direct borrowers toward a MIC controlled or materially owned by the brokerage there arise conflicts of interest. Brokerages may place the interests of their related MICs over those of consumers.
Where conflicts of interest exist, brokerages must clearly disclose to consumers any relationships with a MIC, and the full costs associated with a private mortgage[3] so that consumers can make an informed decision about their mortgage.
What we did
We conducted targeted examinations on fifteen mortgage brokerages. Five had a material financial interest in a MIC and ten had total investment or lending control of a MIC.
The examinations were intended to assess whether mortgage brokerages who are related to the MIC lender are adequately ensuring borrower suitability, disclosing conflicts of interest and disclosing fees.
We are now running a monitoring program until December 2023 for identified non-compliant brokerages during the examinations.
Findings
- 14 of 15 brokerages did not have policies or procedures specific to arranging related MIC mortgages.
- 81% of reviewed files (56 of 69) had no documentary evidence that a borrower suitability assessment had been performed.
- 80% of reviewed files (55 of 69) did not document or had inadequately disclosed the conflict of interest between the mortgage brokerage and the related MIC.
- 54% of reviewed files (37 of 69) had inaccurate APRs[4] (cost of borrowing) disclosed to the borrower due to missing charges not indicated on the cost of borrowing document. In cases where the charges were listed, they were not included in the APR calculation.
Our findings indicate the sector must design and effectively implement adequate policies and procedures to ensure the following:
- Related MIC mortgages must be suitable for borrowers
- Cost of borrowing (APR) must be accurately calculated and clearly disclosed to consumers
- Include adequate disclosures about costs, relationships and any conflicts, such that clients’ interests are always top of mind.
[1] Statistics Canada, Data Tables from Non-bank financial intermediation, 2007 to 2020. Released February 17, 2023.
[2] As per Annual Information Return data from 2019 to 2022.
[3] O. Reg. 188/08: Mortgage Brokerages: Standards of Practice and O. Reg. 191/08: Cost of Borrowing and Disclosure to Borrowers.
[4] Annual Percentage Rate Cost of Borrowing as per O. Reg. 191/08, s. 3 (1).