Ever since Anglo-Saxon times, lenders have advanced money on the security of land. Although some of the more exotic mortgage derivatives dreamt up by Wall Street may be new, plain old mortgages have been around for as long as there have been legal rights in real property. And for most of that history, borrowers and lenders arranged their affairs privately. They turned to the courts only when there was a problem, primarily to deal with what should happen when the borrower defaulted. Today though, the activity of lending on the security of mortgages is regulated. In fact, trading in, syndicating and administering mortgages are all subject to supervision by regulatory agencies, often more than one.
The current Ontario legislation governing this activity is the Mortgage Brokerages, Lenders and Administrators Act, 2006. This replaced the old Mortgage Brokers Act and came into force July 1, 2008, representing the first substantial overhaul of the legislation in 35 years. There was widespread industry consultation prior to its becoming law and at its passage, it was not a particularly controversial piece of legislation.
The objective of the legislation is consumer protection. This is to be achieved through regulation of the mortgage industry, by licensing the participants, having proficiency requirements, making errors and omissions insurance mandatory and prescribing minimum practice standards such as a books and records requirement. The legislation also puts in place a more effective enforcement regime. The Crown agency that administers the Act is the Financial Services Commission of Ontario or FSCO.
The primary purpose is to regulate the industry, but if there are people outside the industry who are carrying on activity for which they are supposed to be licensed, there will be a violation of the Act. This could include charities that provide loans or financing secured by real property.
The Act requires that all persons (businesses and individuals) (i) carrying on the business of dealing in mortgages or dealing in mortgages for remuneration, (ii) trading in mortgages, (iii) carrying on business as a mortgage lender or (iv) carrying on the business of administering mortgages be licensed and subject to the supervision of the Superintendent of Financial Services. The trigger for licensing is “carrying on business” or in the case of individuals, engaging in the activity for remuneration.
There are exceptions from the requirement to be licensed, for financial institutions, lawyers, trustees in bankruptcy, certain crown corporations and businesses such as consumer reporting agencies and collection agencies. Simple referrals are exempt from the licensing requirement.
There is no blanket exception for charitable or not-for-profit corporations. Generally, in order to be “carrying on business”, there has to be some payment or compensation; services provided free of charge are usually not considered to be businesses. However, an organization can be “in business” without the expectation of returning a profit for the owners or shareholders. Associations or credit societies forming part of the cooperative credit system are not exempt and are required to be registered under the Act. Regulators formulated the exemptions on the basis that certain organizations or activities, such as financial services, are already adequately regulated under other legislation. Since the consumer protection objective was being met, there was no need to duplicate legislation. Simply because an organization or association does not seek to make a profit will not automatically result in an exemption from the requirement to be licensed if the organization engages in activity that should be registered.
The legislation requires both organizations and individuals to be licensed. In the case of an individual, simply earning a salary for performing certain types of tasks will trigger the licensing requirement.
Prior to the current regime, private mortgage lenders were largely outside the regulatory ambit. Under the Act however, even private lenders who can be considered to be “in the business” must be licensed. So for example if an entity advances money on the security of a mortgage, and facilitates and administers the arrangement by doing the paperwork, obtaining the valuations, arranging for registration of the charge, collecting payments and enforcing when necessary, there is a possibility that the entity is carrying on activity for which it should be licensed.
Charities and not for profit organizations who arrange mortgage financing should consult counsel to ensure that they are not inadvertently in breach of applicable legislation.