On July 1, 2008, the Mortgage Brokerages, Lenders and Administrators Act, 20061 (the "New Act") was proclaimed into force. The New Act replaces the Mortgage Brokers Act2 (the "Previous Act") and broadens the existing regulatory regime for individuals and businesses in the lending industry. Unlike the Previous Act, which had only one category of registration, the New Act provides for four different categories of licenses – mortgage brokerage, mortgage administrator, mortgage broker and mortgage agent. This more ambitious legislation was created with the goal of increasing the level of consumer protection and decreasing the amount of mortgage fraud in Ontario.
LICENSING REQUIREMENTS AND CATEGORIES OF LICENSES
Pursuant to the New Act, any corporation, partnership or sole proprietorship must hold a license granted by the Financial Services Commission of Ontario (the "FSCO") in order to carry on the business of dealing in mortgages, trading in mortgages, mortgage lending or administering mortgages.
Are you "Dealing in Mortgages"?
Subsection 2(1) of the New Act states that a person or entity is "dealing in mortgages" by engaging in any one of the following activities:
- soliciting another person or entity to borrow or lend money on the security of real property;
- providing information about a prospective borrower to a prospective mortgage lender;
- assessing a prospective borrower on behalf of a prospective mortgage lender; or
- negotiating or arranging a mortgage on behalf of another person or entity, or attempting to do so.
Are you "Trading in Mortgages"?
Subsection 3(1) of the New Act states that a person or entity is "trading in mortgages" by engaging in any one of the following activities:
- soliciting another person or entity to buy, sell or exchange mortgages;
- buying, selling or exchanging mortgages on behalf of another person or entity; or
- buying, selling or exchanging mortgages on the person's or entity's own behalf.
Are you a "Mortgage Lender"?
Subsection 4(1) of New Act states that a person or entity is a "mortgage lender" when he, she or it lends money in Ontario on the security of real property, or holds themselves out as doing so. Arguably, this definition appears to include all secured lending transactions in which real property security is granted, regardless of whether the real property is located in Ontario.
Under the Previous Act, mortgage lending was an unregulated market. In contrast, pursuant to the New Act, private lenders are prohibited from making mortgage loans unless they qualify as a financial institution or obtain a brokerage license. However, it should be noted that a person lending money for the purposes of investment as opposed to carrying on a business is not required to be licensed.3
Are you "Administering Mortgages"?
Subsection 5(1) of New Act states that a person is "administering mortgages" by engaging in any one of the following activities:
- receiving payments from a borrower under a mortgage on behalf of another person or entity, and remitting the payments to or on behalf of that person or entity; or
- taking steps, on behalf of another person or entity, to enforce payment by a borrower under a mortgage.
Under the New Act, each mortgage brokerage is required to designate a "principal broker." The principal broker must be a licensed mortgage broker and either a director or officer (if the brokerage is a corporation), a partner (if the brokerage is a partnership) or the sole proprietor of the brokerage, as the case may be. The principal broker is subject to various obligations and is generally required to take reasonable steps to ensure that the brokerage and all of its brokers and agents comply with the provisions of the New Act. Essentially, the principal broker operates as the brokerage's chief compliance officer and performs the duties prescribed in the Regulations.4
Notably, in the case of sole proprietorships, the sole proprietor must have both a brokerage license as well as a broker's license. However, the sole proprietor is not required to pay an additional fee for the principal broker's application.5
The New Act contains a number of general and specific exemptions from the licensing requirements. Without limitation, lawyers6, simple referrals7 and the Crown are exempt from the requirements of the New Act, subject to certain express conditions. However, unlike the Previous Act, the New Act does not contain an exemption for commercial transactions or transactions above a certain size.
Under the New Act, a financial institution and its directors, officers and employees that deal or trade in mortgages on behalf of the financial institution are exempt from the requirement to be licensed. The New Act defines a "financial institution" as:
- a bank or authorized foreign bank within the meaning of section 2 of the Bank Act (Canada);
- a credit union or caisse populaire to which the Credit Unions and Caisses Populaires Act, 1994 (Ontario) applies;
- an insurer licensed under the Insurance Act (Ontario);
- a corporation registered under the Loan and Trust Corporations Act (Ontario); or
- a retail association as defined under the Cooperative Credit Associations Act (Canada).
Notably, private equity funds and pension funds are not included within this definition and, therefore, they are not exempt from the requirement to obtain a license.
The following persons, entities and/or activities are also exempt, in certain circumstances, despite engaging in activities that would otherwise trigger the requirement to be licensed:
- trustees in bankruptcy;
- consumer reporting agencies;
- dealers registered under the Securities Act (Ontario);
- collection agencies; and
- real estate brokerages and brokers, in limited circumstances.
Unlike the Previous Act, a real estate broker that is registered under the Real Estate and Business Brokers Act, 2002 (Ontario) is not deemed to be registered as a mortgage broker.
Mortgage brokerages, administrators, brokers and agents are all required to comply with certain standards of practice which are prescribed by the Regulations under the Act. Pursuant to the Regulations, mortgage brokerages and administrators are required to carry errors and omissions insurance with extended coverage for loss resulting from fraudulent acts. Additionally, the Regulations prescribe rules regarding the disclosure of fees and other payments, tied selling, recordkeeping and trust funds. There are also rules on providing disclosure of the cost of borrowing to borrowers. For brokers and agents, the Regulations provide rules on the type of remuneration that a broker or agent is permitted to receive and set out certain reporting obligations.
PROHIBITIONS AND OFFENCES
Liability and Offences
The New Act has expanded the offence provisions.8 Under the previous regime, it was an offence to furnish any false information or statement with respect to any application under the Previous Act. Under the New Act, this type of offence is relabeled as a prohibition. Moreover, the New Act provides greater clarity by redefining false information to cover a wider gamut of prohibited activities.
The New Act also broadens the scope of liability for directors and officers of a corporation and partners of a partnership. For example, under the Previous Act, individuals had to have "knowledge" to be guilty of offences. The new regime seems to expand and clearly define what constitutes "knowledge" when defining the scope of liability for individuals. Provided that an individual or person contravenes or fails to comply with orders under the New Act or conditions vis-à-vis their license, then they are guilty of an offence.
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.9 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.10 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 its Regulations.11
The penalties for non-compliance under the New Act range from fines to imprisonment. Failure 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 could be up to $100,000 or one year in jail, and the penalty for corporations could be up to $200,000. While these penalties for individuals and corporations remain largely unchanged from the Previous Act, the courts have been given additional discretion to make orders for compensation or restitution under subsection 50(1). Read contextually with the rest of the penalty regime, it seems that subsection 50(1) allows a court to exceed the penalty ceiling established for individuals and corporations.
HOW CAN WE HELP?
We are committed to assisting our clients navigate the New Act and we would be happy to discuss the new registration and licensing process to ensure that costly penalties and remedies that may be imposed under the New Act are avoided.
1 S.O. 2006, c. 29.
2 R.S.O. 1990, c. M. 39.
3 O. Reg. 407/07: Exemptions From The Requirements To Be Licensed, s. 14.
4 O. Reg. 410/07: Principal Broker: Eligibility, Powers and Duties.
5 Supra note 3 at pp. 10-8.
6 Supra note 1 at s. 6(6).
7 Ibid. at ss. 6(4) and 6(5).
8 Supra note 1 at ss. 43-50.
9 Supra note 1 at s. 30.
10 Ibid. at ss. 32, 33 and 36.