Licensed Mortgage Brokers & Agents in Canada: Professional Liability and a Two-Tier System

Post date: Apr 22, 2014 2:12:51 PM

Abstract:

In 2014, the actively regulated Canadian licensed mortgage brokerage industry is still emerging out of its nascent state. In some Canadian jurisdictions, the industry is not actively regulated whereas in other jurisdictions, active regulatory oversight is less than 20 years old. Indeed most regional and national trade associations who represent licensed mortgage brokerages and their licensed agents are also less than 20 years old. Given its emergent condition, it should be expected that the participants in the licensed mortgage brokerage industry (this term is inclusive of both brokerages and its agents) actively seek to promote their occupation to the Canadian marketplace and seek to leverage a regulatory infrastructure in order to establish credentials in the mindset of the average Canadian consumer in general and the average Canadian mortgage consumer, specifically.

One hallmark of a professional occupation is for its participants be required to obtain professional liability insurance as a course of providing services. Many jurisdictions in Canada do not perceive mortgage brokers are a professional occupation so do not regulate a mortgage brokerage industry; nor do such jurisdictions afford professional liability protections for their resident consumers. Other jurisdictions (those who regulate mortgage brokers) have only recently become aware that standards of academic entry into the mortgage profession is sufficiently low that untold consumers have been materially negatively affected by the conduct of mortgage brokers and lawsuits have resulted. Indeed, it was as recently as 2006 that some Canadian jurisdictions established a legislative requirement for licensed mortgage brokers to obtain professional liability insurance.

Normal mortgage broker activity is the act of originating a mortgage for capital providers in the Canadian real estate finance industry. The vast majority of Canadian mortgage brokers legally act for the borrowers (fiduciary duty of care) and arrange financing from an institutional (bank and non-bank¹) lenders. Indeed, professional liability coverage for most mortgage brokers insures only transactions that are originated and funded by institutional (bank and non-bank) lenders. In recent years, as a result of technological innovations and regulatory enhancements, there has been an emergence of free-trading capital providers from the private sector, namely, private individuals and corporations who have surplus funds. These private sector participants invest their surplus funds into mortgage instruments in the expectation of earning above average returns on their investment. In the majority of cases, the private sector mortgage capital providers (often referred to generically as "private lenders", or, more specifically as "private mortgage lenders") access the public borrowing markets through the use of special purpose mortgage brokers that are both: trained to act as the private capital provider's agent (fiduciary duty of care) AND possess professional liability insurance which specifically insures them for trading in non-bank, private mortgage transactions.

• The private equity mortgage industry group consists of individuals and organizations that trade in what is classified as digital and non-digital, non-bank, non-institutional, non-syndicated, non-regulated or regulatory exempt, free trading securities and related financial instruments; also known as Peer-to-Peer (P2P)/Private/Crypto/Secret/Shadow securities and related financial instruments, secured by real estate.
• Capital seekers, Borrowers, Investors or Lenders who trade in private equity mortgage instruments are typically - but not always - private individuals or organizations classified as: non-bank, non-institutional, non-syndicated, non-regulated or regulatory exempt and free trading; also known as Peer-to-Peer (P2P)/Private/Crypto/Secret/Shadow entities.

From both a professional liability and mortgage brokerage business model perspective, mortgage brokers who represent private mortgage lenders are entirely different from the vast majority of mortgage brokers who act for the borrowers. Beyond the obvious distinction of "who is owed a legal fiduciary duty of care and by whom", (the basis upon which most professional liability lawsuits are initiated), private mortgage lender agents (the fiduciary term of agent, inclusive of brokerages and agents/employees is applied here) must be specifically trained and experienced to act for private mortgage lenders and have management systems in place in order to minimize errors and omissions. Given that the requirements of a mortgage borrower is in complete contradiction to the requirements a private mortgage lender, it follows that the mortgage brokers who represent either also have equally distinctive business models and supporting business systems. A mortgage brokerage can be a servant to one master (borrower) or another (private mortgage lender), but not both.

The emergence of the private mortgage lender agency relationship has effectively established a two tier mortgage brokerage industry, one where consumers may choose to work with mortgage brokers who represent them or, mortgage brokers who represent a private mortgage lender. There is a third possible tier, one of an "intermediary", where a mortgage broker neither owes a fiduciary duty of care to a borrower nor a private mortgage lender. This tier is often seen to be ineffectual because most mortgage brokers are not fully cognizant of the appropriate actions of an intermediary and in practical terms, behave in a manner contrary to that of an intermediary. Such contrary actions will prejudice the mortgage broker's role as an intermediary and subsequently expose the mortgage broker to a professional liability claim, in the event a customer (borrower or private mortgage lender) believes and act of negligence has occurred.

This report identifies and defines three tiers within the Canadian mortgage brokerage industry and compares and contrasts the two principal tiers: agent for borrower and agent for private mortgage lender.

Footnotes:

1. The Canadian Real Estate Finance Industry Landscape: An Authoritative Profile of Bank, Non-Bank & Private Capital Providers

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