Mortgage Broker

CmB magazIne cmba-achc.ca spring 2018 | 17 second mortgage thoughts any further mortgage will amount to a default. e default generally gives the first mortgage lender the option to obtain immediate repayment of its loan in full, by way of foreclosure proceedings if need be. iNCENTivES foR fiRST MoRTgagE lENDER Most first mortgage lenders to date have not acted on the default created by the registration of a second mortgage. is may be because in a foreclosure action they are entitled to payment in full in priority to the second mortgage lender and, in some cases, the second mortgage lender may protect its own interest by paying out the first mortgage. ere are, however, sometimes incentives or reasons for a first mortgage lender to act on the default and no broker should take for granted that, in a specific instance, the first mortgage lender will not do so. For example, the lender: n May make greater money on the transactional costs earned at the time loans are made (such as lender's fees and brokerage fees) as compared to during the term of the mortgage. Accordingly, the lender may monetarily benefit from the early return and relending of the mortgage funds. n May conclude that the market has changed since the money was lent (such as interest rates having increased) and that the lender may benefit from relending money under the more favourable terms. n May simply have come to desire other uses for the funds and the default gives the lender the option of having the mortgage funds available early. n May find it unacceptable that the new mortgage causes the borrower's earnings to cover more debts than had been presented to be the case at the time the first mortgage was granted. n May find it unacceptable that the borrower is, aer granting the second mortgage, le with less equity in the security property. e lesser equity may make the borrower less inclined to appropriately protect and maintain the property. WhaT CaN ThE BRokER Do? Does the first Mortgage Prohibit further Mortgages? e broker should foremost determine whether the first mortgage contains the clause prohibiting further mortgages. Almost all mortgages do. If the first mortgage documentation does not contain such a clause, the broker acting for the borrower may proceed without further action to obtain consent. obtaining informed instructions from Client If the first mortgage documentation does contain such a clause, the broker should obtain informed and written instructions from the borrower before proceeding. e instruction form should include that the client understands unless consent is obtained from the first mortgage lender to register the second mortgage, the registration could be a default under the first mortgage and entitle that lender to immediate payment of the full balance owing under the first mortgage. It should state that failure to make that payment could trigger foreclosure proceedings. If the client, aer being informed of the possible consequences, instructs the broker not to proceed, that should end the matter. obtaining Consent from the first Mortgage lender If the client, aer being informed of the possible consequences, instructs the broker to proceed without obtaining consent from the first mortgage lender, the mortgage broker should obtain informed instructions to that effect in writing. e instructions document should include the advice the broker has provided, that the borrower understands the advice the broker has provided, the instruction to proceed without obtaining the consent, and the client's signature. is protection for the broker could be very important if the first mortgage lender later calls its mortgage due and the client denies having provided the instructions or not having been informed before providing them. Note that, even with the borrower client's informed instructions, there is always some risk to the broker that a regulator or court could determine that the broker was not entitled to facilitate the breach of the first mortgage. If the client, aer being informed of the possible consequences, instructs the broker to proceed only with the consent of the first mortgage lender, the mortgage broker should obtain informed and signed instructions to that effect. is is important because once the first mortgage lender learns that the borrower is looking for additional funds and in effect cannot obtain those funds without his or her consent, the first mortgage lender is in a powerful position to decline consent and itself lend further funds for the borrower on terms favourable to the first mortgage lender. is could of course also have the effect of depriving the broker of otherwise earned commission. e broker may want to instead have an appropriate commitment letter signed, subject only to the condition that the conveyancing lawyer obtain the consent of the first mortgage lender to the registration of the second mortgage. If consent is requested and declined by the first mortgage lender, the broker should not encourage the borrower to proceed. As well, the broker should not lawyer-shop until one agrees to register the second mortgage, either not knowing of or not caring as to the first mortgage lender's position. is is discussed in more detail under the heading of "Illustrative Regulatory Case." Closing the Second Mortgage Transaction If consent is requested and approved by the first mortgage lender, the deal can proceed to closing with the borrower and the broker better protected. What Shouldn't a Broker do? A mortgage broker who fails to obtain the informed instructions of the borrower or encourages a borrower to proceed in the face of the first mortgage lender's declining consent risks regulatory action and civil consequences. Illustrative regulatory Case In November 2008, the B.C. Registrar of Mortgage Brokers made an urgent suspension order against a broker for having conducted business in breach of the Mortgage Brokers Act and in a manner prejudicial to the public interest. 2 e broker had encouraged and facilitated the borrowers to proceed with obtaining a second mortgage, in the face of clear opposition of the first mortgage holder. e Registrar said that this was to the prejudice of the first mortgage lender, second mortgage lender, borrowers and public interest. e urgent suspension order was made also on the basis of the Registrar forming the opinion that the broker had:

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