Mortgage Broker

letters to the editor update Syndicated Mortgages: Screaming for a Dedicated Mortgage Regulator On March 31, 2016, the three-person panel appointed by the Ontario Minister of Finance to review the mandates of the Financial Services Commission of Ontario (FSCO), the Financial Services Tribunal and the Deposit Insurance Corporation of Ontario completed its final report. As part of the review, the panel considered the regulation of syndicated mortgages and made Recommendation 17: e government should require that documents issued to raise capital for syndicated mortgage investments be subject to the same level of regulation as the securities regulator applies to other offering documents used to raise capital in the Province. e panel supported this conclusion in the following words: During our review, we became concerned with what appears to be a regulatory gap regarding syndicated mortgages. All companies involved in raising money for property development through the sale of syndicated mortgages to small investors should be actively monitored to ensure compliance with relevant legislation and regulations in a manner that is consistent with the level of oversight and scrutiny applied by securities regulators. Given the complexity of the product and the nature of the investment, we are of the view that the securities regulator, rather than [Financial Services Regulatory Authority], would be best equipped to undertake this task. is would best ensure a consistent application of disclosure requirements across products and investments seen by investors as comparable. is is already the case in other provinces and has been proposed by those working to establish the new [Cooperative Capital Markets Regulatory System]. However, if this approach does not align with the ultimate direction of the CCMR or government policy, we would encourage the government to ensure that syndicated mortgages are regulated in a manner consistent with similar products (i.e., securities). Syndicated mortgage investments would be a new product for the securities regulator, so it would have to hire staff that has expertise in this area – specifically, licensed mortgage brokers. One of the reasons the Minister of Finance commissioned the report was because of the FSCO's failure to have qualified staff investigating the licensed mortgage parties who are involved in this financial area. e documentation provided by the FSCO for these investments – Lender Form 1 and Lender Form 1.1 – set out the information that an educated investor can read and understand. Some of the problems that have arisen in this area are because the investors are not taking the time to review and understand the information, the mortgage brokers and/or administrators are not providing all the information required by the MBLAA [Mortgage Brokerage, Lenders and Administrators Act], and the licensed sales parties do not fully understand the investment and are not explaining fully explaining it to their clients. In contrast, the securities regulator would require the party offering the syndicated mortgage to have filed an offering memorandum or prospectus. For purposes of this commentary, it is enough to know that such documents are expensive to prepare, are difficult to understand (even for an educated person), require considerable reading and understanding (the document can be rather long) and, by being issued, protected the issuer and the securities dealer. e MBLAA requires that the investor sign forms 1 and 1.1, acknowledging that they have read and understand the document. FSCO recognized that investors sign documents where told to do so, even if they have neither read nor understood them, or even had them properly explained. As a result, FSCO added a regulation to the MBLAA which sets out that the licensed broker cannot rely upon the investor's signature if the investor subsequently asserted that the investor did not understand what was signed. is shied the onus to the licensed party to prove to the FSCO that the investor fully understood what was signed. e licensed party would have to provide notes taken from the meetings where the documents and investment were explained to prove to the regulator that the investor fully understood the investment; if that could not be done to the regulator's satisfaction, the investor's position would be accepted with the licensed party suffering the consequences. is protection is not provided under securities legislation; perhaps it should be to protect investors. If it was, then the sale by the licensed securities salesman would take a lot longer, as they would have to meet and go through the securities documentation, which they would have to fully understand. I believe that if there is to be a new body created to regulate mortgages, it must be staffed properly, have an adequate budget and not involve the securities regulator. I also believe that if all of the entities that are selling syndicated development mortgages (they oen have an eight to nine per cent interest rate, have a term longer than one year, and require investors to postpone the priority of their mortgage charge to later construction and other financing) are properly reviewed by the FSCO, none would be found to comply with the MBLAA. Provided the FSCO complies with its mandate to protect the public interest, all of the entities involved in syndicated development mortgages will be closed down. Once this happens, the regulator for this type of mortgage will still need a qualified staff. A mortgage regulator would be better qualified for this regulation. David Franklin B.Comm, JD Barrister and Solicitor Toronto, ON letters CMBA MEMBERS' VIEWS 10 | summer 2016 cmba-achc.ca CMB MAGAZINE

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