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Saturday, 23 January 2016

Risk Management for Mortgage Industry Professionals Trading in Private Mortgages

For a traditional licensed mortgage brokerage firm, dealing in private mortgages or dealing with private mortgage investor-lenders can be very lucrative, yet there is substantial risk associated with such transactions, if not done in a 100% compliant manner.

Need proof of the risk to a licensed mortgage brokerage? Visit the following links to see the regulatory enforcement activities; not all contain items related to private mortgages. Many private mortgage transaction complaints are "dealt" with the mortgage broker and complainants directly, before a statement of claim is filed or a regulatory complaint is submitted. 

Alberta: Case Summaries
British Columbia: Enforcement

Time and again we have cautioned experienced mortgage industry members (owner/officers/directors/shareholders of mortgage brokerage firms) to rely upon MortgageQuote to help reduce the risk of financial and reputation liability, when dealing with private mortgages (transactions or investor-lenders). We accomplish this by having the licensed mortgage agents/employees (LMAE) forward their private mortgage applications or prospective private mortgage investor-lenders, to MortgageQuote for processing. We call it: PRIVATE SAFETM.
PRIVATE SAFETM is a certified quality managed service, designed specifically for licensed mortgage brokerages to help them reduce the risk of liability when dealing with: private mortgage applications or private mortgage investor-lenders. The service does two things: 

1 - processes a licensed mortgage brokerages non-standard (private) mortgage applications in a 100% regulatory compliant & Errors and Omissions compliant environment. Processing includes "deal" receipt, data compilation, pre-underwriting, presentation & marketing to authenticated private equity mortgage investor-lenders.

2 - maintains and manages business relationships with "legislatively defined" private investor-lenders. 

  • Dealing with private investor-lenders in matters relating to private mortgages
  • Marketing mortgage applications to authenticated private investor-lenders
  • Communicating with the private investor-lender
  • Preparing application data for private investor-lender underwriting
  • Preparing commitment letters
  • Transmitting and maintaining applicant non-public data in a secure environment
  • Advising the private investor-lender
  • Working in a certified, quality managed environment
  • Maintaining Errors and Omissions insurance designed specifically for private real estate finance brokerage
  • Operating processes and controls are subject to continual improvement and audited for effectiveness 2 times per year by 3rd-party internal and external auditors
PRIVATE SAFETM is activated when licensed mortgage agents/employees forward their private mortgage requests or prospective private mortgage investor-lender's to MortgageQuote Canada Corp.

Reduction of Exposure to Liability:

In cases where a mortgage investor-lender is known to a licensed mortgage agent/employee, there is no practical way for a traditional mortgage brokerage firm to fulfill it's regulatory (or legal) obligations to both a "legislatively defined" private lender and retail mortgage applicant because at the least, a private lender would need the LMAE's advice. While it is possible that a mortgage brokerage may permit its agents/employees to ask their mortgage applicants to waive their right to receive advice, this may not be well-received by the customer, given that the agent presumably has been working with the applicant for some time prior to making the decision to approach private financing sources.

For example, in Alberta legislation, a private lender is defined as "any persons NOT engaged in the business of making loans secured with mortgages". Given this definition, any mortgage brokerage who's agents/employees represent a private lender, must ensure that the agent correctly provides a higher standard of care to the private lender because the private lender is deemed "not to be in the business of making loans secured with mortgages". Given the inexperience, there is an expectation that the private lender will rely upon the LMAE to provide advice relating to the transaction. The moment the LMAE provides advice to the private lender, the LMAE cannot act for the borrower, nor take the role of an intermediary for both the private lender and the borrower. Other jurisdictions in Canada provide similar definitions.

While it may work in the real estate business, we do not advise mortgage broker firms to permit multiple agents in the same office to work on the same file, where one represents a private lender and the other represents the borrower.

For example, in Alberta, the regulations are very clear:

Obligations to a Lender Client 
73(1)Mortgage brokerages that represent lenders in a mortgage deal must enter into written service agreements with lender clients.

Similar rules exist in other jurisdictions in Canada, including BC and Ontario. The rule applies at a Brokerage level and not at an agent/employee level. While some obligations may be waived in writing by a lender client, there have been cases where lenders (or borrowers) have waived their rights and, at a later time (usually if a "deal goes bad"), have asserted that they were not aware of what they were doing when they signed the waiver. Further, the lender (or borrower) may claim that they were recommended to sign a waiver, without being offered the requisite legal counsel; or the lender (or borrower) may claim that they simply did not fully understand what the licensed mortgage broker was attempting to do. This type of misunderstanding may occur more frequently when dealing in private mortgages with persons who are "not in the business of making loans secured with mortgages", namely, private lenders.

By working with MortgageQuote on your private mortgage transactions (or private mortgage investor-lenders), the limited liability benefits of an arm's length relationship between different entities (the borrowing agent and the lending agent) more often exceeds the financial benefits gained from participating in a non-arms length manner. 

Additionally, most mortgage brokerages do not have the resources to implement effective or 3rd party-validated, "ethical walls"; ensuring isolation of communication and data between the agent for the private lender and the agent for the borrower. Moreover, given that the private lender would need professional mortgage advice, it stands to follow that private lender's agent would be paid a fee for providing advice to the private lender. The mortgage brokerage firm receives a fee when its agents complete a transaction and if the firm's agents act for both the lender and the borrower, additional perceived conflicts of interest may arise. 

MortgageQuote Private Mortgage Training Programs for Licensed Mortgage Brokerage Firms

Visit to learn about training programs designed for licensed mortgage brokerages who want to ensure their licensed agents/employees understand the generally accepted practice when dealing in private mortgages (transactions or investor-lenders).

To set up PRIVATE SAFETM for your licensed brokerage, or to setup a customized private mortgage training program, please email: underwriting[at]