Mortgage Broker

securitiesbreach M ortgage brokers in Canada who arrange loans from clients using promissory notes may, at least in some circumstances, be breaching securities legislation. As Samantha Gale, CMBA executive director, said in the Summer 2016 issue of this magazine: "e outward simplicity of a promissory note can be deceiving, in that it belies some very complicated regulatory requirements – with potentially devastating consequences for non- compliance." e BC Securities Commission's April 19th, 2017 decision in Re Cook, 2017 BCSECCOM 136 verifies Ms. Gale's comment. What Happened? A registered mortgage broker borrowed monies from four clients in the following circumstances: Client #1 and her husband went to the broker looking to leverage their existing property, in order to acquire an investment property. e broker advised them to borrow more than they needed for that purchase and to lend the excess funds to him. e client lent the broker $80,000. Client #2 met the broker at a real estate investment club and asked him for a second opinion on the mortgage rate she was then paying. She wanted to leverage her property, in order to make a further real estate investment. In giving the second opinion, the broker advised the client to borrow against the equity in her home and to lend funds to him rather than making an additional investment in real estate. e client lent the broker $70,000. Client #3 met the broker through a mutual acquaintance. She asked the broker to assist her with obtaining a second mortgage on her home, in order to make an unrelated investment. e client lent the broker money on three occasions; the amounts were $100,000, $50,000 and $50,000. Client #4 met the broker when he assisted her in obtaining a mortgage on her home. She was an acquaintance of Client #2 and asked the broker about the possibility of entering into a similar transaction as the one Client #2 had with the broker. e client lent the broker $30,000. In each instance, the broker issued a promissory note for the amount borrowed 1 ; the note provided for 15 per cent annual interest and monthly payments. e notes were renewed a few times, until the broker fell into financial troubles. e broker then negotiated with each client for replacement, interest-free promissory notes. e amount of the new note, in each case, was the difference between the initial amount of the loan less the amount of interest already paid. All but one of the clients accepted this offer. e broker later renegotiated the amounts of the promissory note further downward. Two of the remaining clients accepted this offer, the other declined Promissory notes may seem like a simple way to close a deal, but they could put you on the wrong side of the regulators By Ray Basi, ll.B., staff, eduCation and PoliCy Review 1 The case distinguishes between loans made to the broker and those made to his brokerage, of which he was the president and sole director. We can ignore the distinction for our purposes. Promises Can Lead to Insecurity 50 | spring 2017 cmba-achc.ca CmB magazine

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