Suitability and Disclosure to Borrowers
Introduction
Under the MBLAA and its Regulations (O. Reg. 188/08, s. 24), it is our duty, as Mortgage Brokers and Agents, to consider the needs and circumstances of the borrower to ensure that any mortgage presented is suitable for them. There are three basic elements to this suitability:
Does this mortgage product meet with all of the client’s needs?
Does this mortgage product meet their risk tolerance?
Is this mortgage product affordable for the client?
In addition, we need to ensure we have disclosed any and all material risks (O. Reg. 188/08, s. 25) inherent in the transaction, disclosed any potential conflicts of interest (O. Reg. 188/08, s. 27) in recommending a specific product, and disclosed anything else that may be material to the client’s decision to proceed with the mortgage transaction.
The policies and procedures below apply to all borrowers in all circumstances. We will now go into each of these elements in detail.
Know Your Client Form
It is vital in all circumstances to understand all of the needs, wants, and goals behind the client’s mortgage application. However, many times our clients don’t understand all of the options and variables that come with mortgage products today, and may not have properly considered their future needs at the time of the application. For this reason, it is mandatory that a Know Your Client (KYC) Borrower Form is filled out for each and every borrower on the application.
Please note when filling out this form that each and every question must be answered, each borrower must sign at the bottom, you must sign and date the form, and a copy must be given to the client at the time of their application. If the interview is conducted over the phone, then you must still ask the questions on the form and have the client sign and fax back to you or have them sign when you meet with them to present the mortgage commitment.
Suitability – Client Needs
After completing this section of the KYC form, you will have a good indication of the length of time they intend to stay in their new/current home, whether they plan any renovations or improvements to the property, other potential financial pressures now or in the future, and any other details that will help you determine the type of product, prepayment privileges, term, and other features required to ensure your mortgage recommendation meets their needs.
Suitability – Risk Tolerance
After completing this section, you will understand the client’s risk profile in terms of fixed or variable rates, their ability to tolerate changes in their mortgage payments monthly or annually, their ability to tolerate payment shock (should payments drastically rise at the end of the initial term of the mortgage), and their ability to tolerate any changes in the value of their property.
Suitability – Affordability
Once you have completed the entire KYC form with your client, you will also know if they have completed a simple budget form indicating the impact that this mortgage will have on their day-to-day financial situation. This is where determining the affordability of the mortgage is key to determining whether to recommend the mortgage to your client. FSCO has made it clear that, even though your client may qualify for a mortgage, and even though you may have a lender willing to issue a commitment, you must determine if a reasonable person would find the mortgage affordable under the client’s financial circumstances.
Collection of Identification
Under Anti-Money Laundering laws, as well as the MBLAA and its Regulations, we have a duty to verify the identity of the clients we meet with (O. Reg. 188/08, s.10). To this end, it is our Brokerage’s policy to collect a piece of acceptable identification from each client, record the number of the identification, photocopy it if possible or reasonable under the circumstances, and keep this information in the file.
Original Documentation
This section obligates the client to provide original documentation where available, which assists in the prevention of fraud. It is understood that this will not always be possible, given the nature of faxing and email relations with clients today. However, we are still obligated to verify the veracity of any documentation provided to us. Therefore, it is the policy of this brokerage that every Agent and Broker will exercise proper due diligence in the efforts of fraud prevention by verifying the authenticity of any documentation provided by a Client, and if potentially fraudulent documentation is discovered, it is immediately reported to the Principal Broker to be addressed.
Under the MBLAA and its Regulations (O. Reg. 188/08, s. 17 (1, 2), it is mandatory that we return this original documentation to any Client at their request, do so without charging any fees, and do so in a timely manner.
Disclosure
A disclosure should be made no later than 2 business days before the borrowers enter into a mortgage commitment (O. Reg. 191/08, s. 7). The cooling off period of 2 days may be waived by the borrowers as an option. The mortgage broker or agent should never recommend waiving the cooling period to speed up the process. This must be a decision made by the borrowers.
The brokerage may provide a disclosure statement to borrowers with information that may be based on an assumption or estimate if the assumption or estimate is reasonable (O. Reg. 191/08, s. 6 (3))
In its disclosure, the brokerage must disclose to the borrowers the following items:
– The nature of the relationship between the brokerage and the lender(s)
– The number of lenders the brokerage dealt with in the previous fiscal year
– If the brokerage acted as a lender during that period
Upon the borrowers’ request, the brokerage shall disclose the following:
– Whether the brokerage was the lender for more than 50% of the total of mortgages and renewal during the previous fiscal year.
– The name of the lender if the brokerage has used that one lender more than 50% of the time to fund mortgages or renewals during the previous fiscal year.
Fees payable by others (O. Reg. 188/08, s. 21)
The brokerage must disclose to a borrower, either for a mortgage or a renewal the following:
– The brokerage may receive or has received a fee or other remuneration directly or indirectly from a person or entity in relation to the negotiation of the arranged mortgage or renewal.
– If the fee or other remuneration is payable to the brokerage by a person or an entity, the identity of the person making the payment must be disclosed along with the basis for calculating the amount of the fee or other remuneration and the nature of the benefit.
Fees payable by the brokerage to others (O. Reg. 188/08, s. 22)
The brokerage must disclose to a borrower, either for a mortgage or a renewal the following:
– The brokerage may pay or has paid a fee or other remuneration directly or indirectly to a person or entity in relation to the negotiation of the arranged mortgage or renewal.
– If the fee or other remuneration is payable by the brokerage by a person or an entity, the identity of the person to whom the payment is made to and must be disclosed along with the basis for calculating the amount of the fee or other remuneration and the nature of the benefit.
Fees received by the brokerage for referral (O. Reg. 188/08, s. 23)
The brokerage must disclose to a prospective borrower, if the brokerage refers the borrower to an entity, or person or lender that the brokerage may receive a fee for referral.
This statement must include the following:
– The nature of the relationship between the brokerage and the other person or entity to which the referral is being made to.
Restrictions on payments by the brokerage (O. Reg. 188/08, s. 44)
The brokerage shall pay fees or other remuneration to a licensed mortgage brokerage and not directly to a mortgage broker or a mortgage agent.
Payments of incentives other than money (O. Reg. 188/08, s. 45)
Despite what is mentioned above, the brokerage is allowed to provide incentive other than money for dealing or trading in mortgages to an authorized broker or agent on behalf of another brokerage if the following conditions are met:
– The broker or agent has obtained the consent from the other brokerage
– The brokerages have a written agreement governing the provisions of the incentive to the broker or agent
– The brokerage has a written agreement with broker or agent who is governing the provisions of the received incentive
– Both agreements require the brokerage to periodically give the other brokerage particulars of the following (upon request):
o Incentives provided by the brokerage to the broker or agent during the applicable period and,
o Is an incentive entitles the broker or agent to exercise one or more options in the future, particulars of the options exercised during the applicable period.
Conflicts of Interest
Conflicts of Interest, or the perception of Conflicts of Interest, are another key area of disclosure to Clients, ensuring they are always aware of where there may be a potential motivation to not act in their best interests (O. Reg. 188/08, s. 27). Presenting a Client with one mortgage over another because you are going to receive a higher commission, for example, is a conflict of interest if the rate to the Client is lower for a lower-paying mortgage product.
Other examples:
The Mortgage Broker/Agent is related to the Appraiser
The Lender is related to the Mortgage Broker/Agent
The Lender is a family member of the Borrower
When the Mortgage Brokerage/Broker/Agent is also the Lender
If the Mortgage Broker/Agent or his/her spouse uses a self-directed RRSP to fund the mortgage for the Borrower
Favouring a Lender for monetary reasons
Receiving travel points, free holidays, or other incentives that are normally not available
When a Mortgage Broker/Agent acts for both the Borrower and Lender
If the Mortgage Broker/Agent receives higher “bonus” commissions for working with a specific lender during a specific timeframe
If the Principal Broker is also a Real Estate Broker who is involved with listing and selling a property
It is the policy of this brokerage that any and all perceived conflicts of interest will be disclosed to the client and recorded in this section of the Client Agreement so that these disclosures will form part of the file.
Communications with Parties Involved
This section authorizes you, the Agent or Broker, to communicate with other parties involved in the mortgage transaction with those details pertinent to their conduct of business (e.g. notifying a Realtor that the mortgage is approved, arranging an appraiser, etc.)
Indemnification of Brokerage
This is a key disclosure section to the Client, in that they are acknowledging that, as the Agent or Broker or Brokerage, we are at the mercy of the Lenders and Insurers regarding conditions that must be fulfilled in order for a mortgage to fund. This section indemnifies us and holds us free from harm should we perform our duties properly, yet the mortgage does not fund as a result of the Lender or Insurer conditions not being fulfilled for any reason other than our negligence as the Broker, Agent, or Brokerage for the transaction.
Disclosure of Material Risks
This section outlines the various material risks inherent with mortgage transactions, and is self-explanatory. It is the policy of this brokerage that each Agent and Broker will discuss the relevant material risks with all Clients, and marks the relevant check-boxes beside the risks that apply. If there are additional risks associated with the mortgage that are not included in this section, they must be documented and attached to the client agreement, after being initialed by the Client.
Credit Bureau and Privacy Authorization
This is a standard written clause which Equifax requires we have signed as proof the client has authorized us to pull a Credit Report through their services. In cases where clients provide authorization over the phone, it is the policy of this brokerage that the Client Agreement is signed on first meeting with the client, and a notation made in Expert that the client provided verbal authorization, with the time and date also registered in the appropriate field.
The Privacy Authorization covers the sensitivity of the information we are receiving from the client, and how we use it for the purposes of a mortgage transaction.
Duty to Verify Appraisals
It is the policy of this Brokerage that, whenever a property appraisal is ordered by a Lender and arranged by the Agent/Broker or Client, that the Mortgage Agent or Broker will contact the Appraiser personally after the completed appraisal has been received by the Lender to ensure the Appraiser in question actually completed the appraisal.
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