Mortgage Broker

syndicatedmortgages no hard security associated with these types of loans until the development is built, he adds, there is no equity; therefore, these deals should not be allowed to be packaged, promoted and regulated as mortgages. While he doesn't think FSCO needs to be replaced by a new regulatory authority, Mandel says there is a place for stronger regulation in certain types of lending. "Over-regulation is not the answer. However, I really feel [the regulators] need help from industry in a major way, in order to address the challenges that exist today – challenges in the existing legislation that allow an equity transaction to be disguised as a mortgage and then perpetrated among unsuspecting investors with little sophistication to go into a risky mezzanine loan for a real estate development. "Also, when regulators refer to project equity or mezzanine loans as syndicated mortgages, the unsuspecting public is taught to paint all syndicated mortgages with the same broad brushstroke. We cannot allow our regulators to impute risk into the definition of syndicated mortgages." Mandel feels the Ministry of Finance needs to consult with industry experts to better define the various types of mortgages. He points out that regulators oen don't have the extensive industry experience required to govern these transactions. "In my opinion, these high-risk mezzanine loans should be subject to an OM [Offering Memorandum] and be under the auspices of the OSC [Ontario Securities Commission], because they don't represent what we and the public know is a mortgage. Sure, they may be seen as a hybrid, but they may better fit the definition of a collateral mortgage. Oen, these loans, which postpone to several higher-priority loans, also offer an equity kicker – investors get an eight-per-cent rate, and when it's built you may also get a bonus. You're participating in the process and your risk is typically one parking space in front of the builder." Mandel points out that this scenario carries a high level of risk for an eight per cent return. "e trouble is they [investors] really don't understand the risk, and the regulations have allowed these types of loans to be called syndicated mortgages rather than syndicated equity participation." If syndicated mezzanine loans were moved under the OSC umbrella, Mandel thinks the current structure and disclosure process for other types of syndicated mortgages would be fine, leaving no need to make drastic changes. Make Way for the FSRA e provincial government doesn't agree with Mandel, and is turning its attention to sweeping regulatory reform. In April 2015, the Ontario Minister of Finance announced the launch of a formal process to review the mandates of three finance-related agencies, including FSCO, the Financial Services Tribunal (FST) and the Deposit Insurance Corporation of Ontario (DICO). A three-member expert panel consulted with industry and other stakeholders before releasing a preliminary position paper in November 2015. In it, the panel noted that one restructured regulatory body was needed in Ontario to address changing financial marketplace structure, demand and consumer expectations. On March 31, 2016, the panel released its final report to Finance Minister Charles Sousa. In summary, the recommendation was to create a single "new, independent and integrated regulator called the Financial Services Regulatory Authority (FSRA)." e legislation to establish the FSRA was first read in the Ontario Legislature in November 2016. Although the Financial Services Regulatory Authority of Ontario Act, 2016 has not yet been finalized, industry expects it to closely follow the 44 recommendations of the expert panel. e new agency will have a board of directors and the Minister will have approval power over bylaws. A CEO and officers will be appointed, with the new FSRA replacing FSCO while also taking on DICO's mandate. e FST's independence will be preserved under the new plan. e FSRA structure will be in accordance with a "triple peaks" model that effectively creates three distinct divisions: market conduct, prudential oversight and pensions. "Each area they regulate will be a separate silo, and they will employ people who know what they're doing," says Franklin. "However, while the legislation is in process, FSCO is still operating and not doing its job." Nevertheless, David Franklin is encouraged by the direction of the legislation. Although some favour the idea of the Ontario Securities Commission assuming responsibility for oversight of the mortgage industry, he believes that agency's documentation process is too complicated for the average investor. "How can you protect the public when no one can read or understand the documents?" For its part, Fortress Real Developments maintains it is operating by the book. In a November press release distributed in response to the filing of the class-action lawsuits, it vigorously denied the basis of the allegations. e company claimed they are "untrue, misleading and aimed at damaging the reputation of Fortress and Fortress projects…" e release said Fortress is a real estate development and consulting company that does not offer syndicated mortgage loans; these are offered in Ontario only by licensed mortgage brokers and agents. e company added it has never received any commissions on syndicated mortgages for its projects. "It is unfortunate that the success of Fortress and its projects have made Fortress, its development partners, and the independent brokers and agents who offer syndicated mortgage loans targets of abusive and opportunistic claims, like these three proposed class actions," concluded the statement. On March 31, 2016, the panel released its final report to Finance Minister Charles Sousa. In summary, the recommendation was to create a single "new, independent and integrated regulator called the Financial Services Regulatory Authority" 24 | winter 2017 cmba-achc.ca CMB MAGAZINE

• Cover