Mortgage Broker

successful law practice for many years, and is an intelligent and sophisticated person fully capable of assessing an investment risk and making his own decision. e Court said that is what he did in this case and it is only with the benefit of hindsight he sought to shi the blame to the broker and the brokerage for what turned out to be an unfortunate investment. SECOND ADVANCE e broker, at the time of the second advance, was registered with the subject brokerage. e B.C. Mortgage Brokers Act, by defini- tion, makes the broker an employee of the brokerage. While brokers do sometimes nevertheless sign contracts with brokerages that designate themselves as contractors, no contract was entered as evidence in the case. e Court said that regardless, here the broker was clearly held out as representing the bro- kerage. As well, the broker operated out of the brokerage's premises, held the title of senior vice-president of the brokerage and used the brokerage's letterhead. Because of this, the brokerage was responsible for the conduct of the broker regarding the second advance. e broker's conduct was different regarding the second advance from that regarding the first advance. ere was increased risk for the lender regarding the second advance: n A red flag should have gone up about the bor- rower's financial situation. e borrower wanted to increase the second mortgage to raise funds to pay out a high-rate third mortgage that had been incurred to pay off a stock debt. n e broker wrote to the lender that the security property is listed for sale at $895,000 and appraised at $835,000. ere was no evidence of a new appraisal having been done and no evidence of the property having increased or maintained the value of $810,000. n e loan-to-value ratio would have been 85% and there is no evidence the broker discussed this obvious increased risk with the lender. (e Court offers no explanation as to why the lender would have been in any less of a position to assess this risk than he was regarding the first advance. Regarding the first advance, recall the Court said that the values were known to the lender and he was in a position to assess the risk.) n e broker discussed with a Realtor the ben- efits of the sale price of the property being between $775,000 and $800,000. e broker did not discuss with the lender the reduced equity that would result from such a price drop. (e substance of the conversation with the Realtor was indicated by the broker in a letter to the lender. It should have been obvious to the lender that a decreased property value would mean less available equity for the lender. Indeed, the Court said that the risk was obvious but then said the broker should have discussed it with the very lender the Court found to be sophisticated and able to assess risks.) n e broker was aware real estate values had begun to drop. A reasonable broker advising a client on the merits of an investment ought to have fully considered the extent of the increased risk presented by the second advance and advised the lender accordingly. e broker failed to do so. Instead, the broker falsely told the lender that the property was appraised for an increased amount. Had the broker done appropriate due diligence at the time of the second advance and had the increased risks been explained to the lender, the lender would not have made the second advance. e broker's negligent conduct caused the loss to the lender. e broker and the brokerage were liable for damages caused to the lender by the sec- ond advance. ey were responsible for the $50,000 advance plus interest. TAKEAWAYS n Brokers are not guarantors of the information they present to lenders, but reasonable care is required. n Brokers may need to verify information presented to a lender if the broker has reason to believe the information is suspect (such as being false or inaccurate). n Brokers must act honestly and in good faith (including applying their knowledge and experience to the best of their ability when assessing the investment and recommending it to the lender). n It is difficult to reconcile the two different decisions regarding the two advances. Possibly the Court is saying that although a broker does not have the duty to advise, at least a sophisticated lender, as to the wisdom of a transaction, they must do so honestly and in good faith if they choose to do so. e Court did not find anything lacking in this regard as to the first advance but did so as to the second. n A broker should consider limiting the scope of their responsibilities by entering into an agreement with the lender setting out what they will and will not be doing (such as, will not be assessing the financial wisdom of the transaction or any part of it, will not be verifying the accuracy of any documentation). is would not allow the broker to act dishon- estly or in bad faith, but it would more likely put the burden on the lender to make and be responsible for the lending decision. e broker would have to balance this approach with the fact that such an agreement might cause some lenders to decline to consider applications from the broker. n Brokerages may want to consider having errors and omissions insurance to cover even those persons they consider to be contractors, particularly if those persons in fact function like employees. In this case, the Court said that it had not been provided with a contractor agreement and, regardless, the broker con- ducted himself as an employee. It implicitly le open the question as to whether a broker can, at least in B.C., ever be anything but an employee given the definition of the role in the Mortgage Brokers Act. CMB MAGAZINE cmba-achc.ca winter 2019 | 45 What liability does the broker have when a funded transaction later appears to have been an unwise deal for the lender? What might a broker do to limit the possibility of any such liability? " brokers'obligations

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