Mortgage Broker

18 | summer 2018 cmba-achc.ca CMB MAGAZINE syndicated mortgages e challenge is that Recommendation 17 has been made and adopted without a more in-depth analysis of how mortgages are actually syndicated and exactly who looks aer the interests of syndicated investors. ere appears to be an assumption that the role of licensed mortgage brokers under the mortgage broker regime dealing with syndicated investors can be readily swapped with registered exempt market dealers under the securities regime. We note that the regulatory system in B.C. cannot be used as example of how syndicated mortgages can be regulated under the securities regime, as the vast majority of mortgage syndicators are exempt from market dealer registration. is is because they either arrange syndicated mortgages under the Mortgage Brokers Act or they rely on the current Mortgage Investment Entity Exemption (MIE Exemption) under BC Instrument 32-517. hOW SyndICATEd MORTgAgES ARE ORIgInATEd Across Canada, syndicated mortgages are arranged by either mortgage brokers in the course of their general mortgage broker practice, or by specialized entities which engage in syndicated mortgage lending on an exclusive basis. Many argue that recent syndicated mortgage failures under the spotlight in Ontario were not actually examples of true syndicated mortgage lending and should not therefore be used as a basis for regulatory change. One of our members has explained that in these cases they "were able to dupe the public and the regulators by the simple action of registering a collateral charge on title (a mortgage) to appear to secure its investors' investments and then attach the word 'mortgage' to them for belt and suspenders. ese investments were misrepresented to investors, many of whom were unsophisticated and who did not receive proper independent legal advice, suitability investigation or other required diligence. e investments themselves were in fact not mortgages but loosely secured equity investments disguised as a mortgage." Although, there are numerous variations, in a typical syndicated mortgage transaction, a borrower will contact a mortgage broker looking for financing. e mortgage broker will take an application from the borrower and shop the application to different lenders, which are represented by other mortgage brokers. hOW WILL ExEMPT MARKET dEALERS REPLACE MORTgAgE BROKERS ACTIng fOR InvESTOR LEndERS? Mortgage brokers who act for lenders are more than mere salespeople selling a finished mortgage product. e lender's mortgage broker typically will: n underwrite the mortgage; n inspect the property, appraisal and other property information; n issue a commitment letter for the borrower; n determine conditions for completion; n ensure that the conditions have been satisfied; n prepare lender disclosure for the lenders which states mortgage and transaction details; and n for draw mortgages, ensure that work has been completed before further draws are authorized. Exempt market dealers 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. e mortgage broker acting for the borrower engages in a different role from that of the broker assisting the investor lender (unless acting in dual capacity) and will assist the borrower in assessing the transaction, negotiating terms on behalf of the borrower, obtaining the commitment and clearing off commitment conditions. e CSA proposal appears to assume that a mortgage broker will still be involved in syndicated mortgage transactions, but it is not clear exactly how. Is it contemplated that a mortgage broker representing a borrower looking for syndicated funds contact an exempt market dealer who has investors and who will then provide a mortgage commitment on behalf of the investors? Here are some questions which the CSA may wish to clarify. If the lenders are no longer assisted by a mortgage broker, but instead by an exempt market dealer, will the exempt market dealer also be: n underwriting the mortgage; n draing the mortgage commitment; n ensuring that mortgage commitment conditions have been satisfied; n ensuring that the mortgage is registered appropriately before authorizing the release of lender funds; n inspecting development sites to determine whether draws are appropriate; and n educated, trained and tested for competence in all matters relating to mortgage financing, including those matters specified above? BORROWERS ARE COnSuMERS And nOT ISSuERS e CSA proposal 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, and not industry members who must dispense consumer protection to other persons. We are of the view that to catapult the mortgage borrower from consumer to industry service provider under a new syndicated mortgage regime is a serious consumer protection concern which requires further review on an urgent basis. We are of the further view that it does not make sense for exempt market dealers to turn into syndicated mortgage brokers, when mortgage brokers are already qualified and experienced in this field. e current syndicated mortgage regime in B.C. with its divided jurisdiction between the Registrar of Mortgage Brokers and the BC Securities Commission and set of exemptions, including the MIE Exemption, works well and should be a model for other jurisdictions to follow. However, if the CSA intends to proceed with its proposal, then we recommend that it: n develop a broader and more in-depth understanding of the mortgage origination process; n determine how the proposal will impact syn- dicated mortgage investors and borrowers; and n explain how gaps in the mortgage origination process will be filled by exempt market dealers. ank you for the opportunity to comment on the proposal. Please know that I am available to discuss the CSA proposal further or the comments contained in this letter.

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