The new Mortgage Brokerages, Lenders and Administrators Act (the “New Act”) came into effect in Ontario on July 1, 2008. This represents the first major overhaul of the current Mortgage Brokers Act (the “Old Act”) in about 35 years and will change the licensing regime and requirements for mortgage agents, brokers, brokerages and administrators who act as mortgage brokers in Ontario. While changes to the Old Act have been discussed for many years, it is the increase in mortgage fraud cases over the last few years that gave urgency to the new legislation. The provincial government’s goal in introducing this new legislation was not only to reduce mortgage fraud, but also to improve consumer protection, enhance and modernize financial services regulations and encourage greater competition and choice for consumers.
Regulated Activities and Parties
The New Act is much more expansive in its regulatory regime as it has significantly widened the definition of mortgage brokerage. Under the New Act, you must have a brokerage licence before you are able to carry on the business of dealing or trading in mortgages, mortgage lending or administering mortgages.
Corporations, partnerships, sole proprietorships and prescribed entities that carry on the business of dealing in mortgages, trading in mortgages or lending money on the security of real property will be required to have a brokerage licence. If they carry on the business of administering mortgages, they will be required to have a mortgage administrator’s licence.
Individuals who are compensated for dealing or trading in mortgages in Ontario, as employees or otherwise, will be required to be licensed as a mortgage broker or mortgage agent. In order to become licensed, mortgage brokers and agents will be required to meet certain educational standards approved by the Financial Services Commission of Ontario (“FSCO”). The Regulations provide that mortgage agents must successfully complete an approved education program within two years before applying for a licence. As for mortgage brokers, they must successfully complete an educational program and pass an approved qualifying exam within three years before applying for a licence. The Superintendant of the FSCO has the discretion to waive these education criteria if satisfied that the individual has a combination of education and experience equivalent to the requirements.
The New Act also provides that mortgage brokerages must ensure that every mortgage broker or agent who is authorized to deal or trade in mortgages on their behalf complies with the requirements of the New Act. Every mortgage brokerage must also appoint a principal broker who will oversee the organization and act as the “chief compliance officer.”
Those who may be affected the most by the licensing requirements under the new regime are private lenders. Under the Old Act, private mortgage lending was a completely unregulated market. However, under the New Act, any private lender who is in the business of lending money will no longer be allowed to make mortgage loans unless they obtain a brokerage licence. While many private lenders may view this licensing requirement as a hassle, the hope is that such licensing requirements will better protect the consumer.
Exemptions from Licensing Requirements
The New Act stipulates a number of general and specific exemptions from the licensing requirements. For instance, Section 6 of the New Act provides that financial institutions are exempt from having to be licensed because they are already highly regulated and have substantial consumer protection measures in place. Employees of financial institutions are also exempt from being licensed as mortgage brokers or agents.
Individuals and businesses providing simple referrals will also be exempt from the licensing requirements. A simple referral is where a person or entity refers a prospective borrower to a prospective lender, or vice versa. There is also an exception from the licensing requirements for lawyers. The Regulations state that lawyers do not need to be licensed where “the lawyer as part of acting in his or her professional capacity as a lawyer on behalf of a client engages in one of the regulated activities of mortgage brokerage and the lawyer does not hold himself or herself out as engaging in any activity regulated under the New Act.” This does not mean a lawyer could become a mortgage broker without being licensed, but does provide lawyers with the ability to assist a client where they have otherwise been retained to perform legal work.
The New Act also provides exemptions for some other parties as prescribed in the Regulations, including trustees in bankruptcy, directors, officers and employees of crown agencies as well as certain statutory corporations.
Regulation and Enforcement
In an attempt to better protect consumers, all licensees will be required to comply with the standards of practice as prescribed by the Regulations under the New Act. These obligations include the requirement for mortgage administrators and brokerages to carry errors and omissions insurance with extended coverage for loss resulting from fraudulent acts. In addition, there must be prescribed disclosure to each borrower of the cost of borrowing associated with any mortgage.
In order to ensure compliance with the New Act, the Superintendent of the FSCO has the authority to conduct inquiries and examinations of the business and activities of each licensee. Some of the powers given to the Superintendent include the right to search the premises of any licensee and seize or freeze a licensee’s assets. Moreover, the Superintendent can issue compliance orders or impose summary administrative penalties if there are grounds to believe that there is a contravention or non-compliance with the New Act or Regulations. Failures to comply with the New Act could result in administrative fines of up to $25,000 for mortgage administrators and up to $10,000 for brokers or agents. Upon conviction for a criminal offence under the New Act, the penalty for individuals would be up to $100,000 or a year in jail, and the penalty for corporations would be up to $200,000.
The goal of the new licensing regime, which in Ontario came into full force and effect on July 1, 2008, is to protect lenders and borrowers alike by introducing mandatory controls into the world of mortgages. Hopefully, ensuring that every mortgage agent, broker, brokerage and administrator gets licensed will reduce the instances of fraud in the mortgage industry. However, only time will tell whether the New Act will actually have this desired effect.