Mortgage Broker Conflict of Interest DISCLOSURE Guidelines · 2017. 9. 1. · MORTGAGE BROKER...

MORTGAGE BROKER CONFLICT OF INTEREST DISCLOSURE

GUIDELINES - UPDATE

Office of the Registrar of Mortgage Brokers

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1. Introduction 2. Approach to enforcement 3. Principles based regulation4. What the law says5. Interests in transactions - examples6. FAQs – how it works7. Conclusion and questions

Overview

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INTRODUCTION

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• Update – Effective May 25, 2017• Replaces all earlier presentations• This presentation is focused on helping you

understand the requirements• This is the law; its now being fully enforced• Principles based Guidelines and FAQs

published on FICOM website• Questions – please save for the end

INTRODUCTION

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• Escalation approach:– Learning curve, natural uncertainty– Informal: education, guidance, cautions,

adjustment– Formal: notice of hearing, orders, penalties– Good faith and reasonableness

ENFORCEMENT

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PRINCIPLES BASED GUIDELINES

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• Law is not prescriptive• Allows for flexibility • Registrar will review disclosures by applying

principles• Test your own methods of disclosure against

the principles

PRINCIPLES BASED GUIDELINES

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• Three key principles:1. Clear and understandable2. Comprehensive, complete and accurate3. Meaningful to users

PRINCIPLES BASED GUIDELINES

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WHAT THE LAW SAYS

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• Mortgage Brokers Act and Regulations• Sections 17.3 and 17.4• Conflicts of interest arise by virtue of being an

independent “middle person” in deals• Transparency to both borrowers and lenders• Use the Form 10 as prescribed in Regulations

WHAT THE LAW SAYS

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• “Mortgage Broker” is the brokerage firm acting in the transaction

• “Submortgage broker” is an individual who is employed by a mortgage broker / brokerage, acting in a transaction

• Both the registered Mortgage Broker / Brokerage and the Submortgage Broker are responsible for providing Form 10 disclosure

WHAT THE LAW SAYS

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• If:– A mortgage broker / brokerage:

• Acts in a transaction• As an independent “middle person” • Arranges a mortgage between a borrower and a lender

WHAT THE LAW SAYS

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• And where:– Mortgage broker / brokerage– Associates of the mortgage broker / brokerage

• Includes submortgage brokers

– Related parties of the mortgage broker / brokerage

WHAT THE LAW SAYS

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• Will acquire• May acquire • Direct interests (benefits)• Indirect interests (benefits)

WHAT THE LAW SAYS

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• Then:– Mortgage broker / brokerage and submortgage

broker is required to describe these interests (benefits)

– To borrowers – To lenders– In the Prescribed Form 10

WHAT THE LAW SAYS

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• Who are “Associates” and “Related Parties” of the mortgage broker / brokerage?

WHAT THE LAW SAYS

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“Associate” includes, but is not limited to:• submortgage broker employed by the mortgage

broker / brokerage• Business partners • Corporations owned by the mortgage broker /

brokerage or submortgage broker• A relative, including a spouse

WHAT THE LAW SAYS

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“Related party” includes, but is not limited to:• Parties that influence the mortgage broker • Parties that the mortgage broker influences• Parties that, together with the mortgage broker,

influence a third party• Parties that, together with the mortgage broker,

are influenced by a third party

WHAT THE LAW SAYS

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• Timing of disclosure:– Section 14 of the Regulations

• To borrowers:– Earliest opportune time– No later than before the borrower signs anything that

commits the borrower to the transaction

• To lenders:– Before lender directs that any funds in a trust are released– Before funds advanced by lender

WHAT THE LAW SAYS

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INTERESTS

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DIRECT INTERESTS INDIRECT INTERESTS

WILL ACQUIRE • Benefits that arise from a transaction

• Known at time of transaction

• e.g. Base commission

• Contingent on something else

• Deal contributes to a benefit

• e.g. volume bonus already earned

MAY ACQUIRE • Future• ?

• Future Benefits• Contingent on

something else• e.g. Potential volume

bonus if hit target in future

INTERESTS

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• Direct interests – examples:– Base commissions – Known volume or efficiency bonuses – Monetary value of loyalty or rewards points– A mortgage broker or family member is the lender

or has ownership interests in the lender or is a part of a syndicate lender

INTERESTS

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• Direct interests – examples:– A family member or business partner of the

mortgage broker is the borrower – The mortgage broker receives a fee from the

borrower

INTERESTS

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• Indirect interests – examples:– Expected trailer fees at renewal– Potential volume or efficiency-based bonuses– Aggregated volume-based compensation paid by a

lender to the mortgage broker firm or a “related party” or “associate” of the registered mortgage broker / brokerage

INTERESTS

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• Indirect interests – examples:– Fees paid by a lender to a network, franchise or

mortgage broker related to mortgage transactions being directed to that lender, where that entity is a “related party” of the registered mortgage broker / brokerage

– E.g. “access fees”

INTERESTS

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• Indirect interests – examples:– Benefits mortgage brokers receive based on

achieving targets with a “preferred” lender of the firm, franchise / network

– Any benefit arising from achieving a certain status or designation with a lender

– Beneficial ownership interests the broker has in the lender or the borrower

• More than 10% of voting shares

INTERESTS

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FAQS – HOW IT WORKS

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• What version of the Form 10 should I use?– As of July 1, 2017, only the Prescribed Form 10 – Enhanced Form 10 and Form 11 discontinued– Industry and IT vendors are free to create their

own electronic forms, with drop down menus etc., provided they exactly match the content of the Prescribed Form 10

FAQs – HOW IT WORKS

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• Do commission splits between the mortgage broker / brokerage and the submortgage broker need to be described, or just the total amount of compensation to be received by the mortgage broker / brokerage?

FAQs – HOW IT WORKS

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• The amount each party receives needs to be described

• The Registrar will accept:– Total compensation to mortgage broker/brokerage

expressed as a dollar amount– Splits between mortgage broker/brokerage and

submortgage broker expressed as a percentage

FAQs – HOW IT WORKS

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• If a deal is co-brokered with two different mortgage broker firms involved, can a single Form 10 be provided on behalf of both brokerages? – Yes, but…

FAQs – HOW IT WORKS

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• Each participant is individually responsible regardless of who provides it

• Needs to provide complete disclosure of the interests pertaining to each participating mortgage broker/brokerage, submortgage broker and any other associates or related parties

FAQs – HOW IT WORKS

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• I have registered my personal corporation (PC) as a mortgage broker and my commission split is paid directly to my PC rather than to myself. How do I provide Form 10 disclosure?

FAQs – HOW IT WORKS

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• Similar to a co-brokering situation• Two “mortgage brokers” are now acting in the

transaction:– The main mortgage broker / brokerage of record

with the lender– The PC mortgage broker / brokerage dealing with

the borrower

• Same requirements as for co-brokering

FAQs – HOW IT WORKS

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• A lender provides me with a large marketing allowance, or pays for my expenses, or provides other benefits in addition to base compensation and volume bonus. Are these types of benefits considered to be “interests” in the transaction that need to be included in Form 10 disclosure to borrowers?

FAQs – HOW IT WORKS

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• Yes• Indirect interest (benefit) acquired from

sending mortgage deals with that lender • Each deal contributes to obtaining that

interest (benefit)• One-off small perks not anticipated by the

broker are not a concern• Substantial benefits will attract our interest

FAQs – HOW IT WORKS

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• How do I describe compensation for a particular transaction when a submortgage broker who acts in a transaction is paid a salary by the mortgage broker / brokerage?

FAQs – HOW IT WORKS

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• A salary paid to a submortgage broker is not an “interest in the transaction,” and does not need to be described

• Just describe total compensation paid to mortgage broker / brokerage

FAQs – HOW IT WORKS

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• May I provide borrowers a document to explain the costs I incur in running my business when I provide borrowers with the Form 10?

– Yes, but…

FAQs - HOW IT WORKS

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• Must be clear to users that:– Separate and distinct from Form 10– Not a regulatory requirement – Not endorsed by the Registrar

FAQs – HOW IT WORKS

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• What if mortgage brokers / brokerages, or firms, have contracts with lenders that contain confidentiality provisions preventing disclosure of compensation information?

FAQs – HOW IT WORKS

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• The Mortgage Brokers Act requires that registered mortgage brokers / brokerages describe interests, including those of “related parties” and “associates”

• The Registrar expects that registrants will make necessary business adjustments to enable full compliance with the law

FAQs – HOW IT WORKS

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• How do I disclose a possible volume bonus which may or may not be paid in the future, dependent on how much business I place with that lender for the year and/or dependent on what volume tier I might hit with different possible bonus amounts?

FAQs – HOW IT WORKS

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• Simply state the maximum potential bonus for the deal as a dollar amount

• It is an indirect interest that may be acquired• If the volume bonus amount is known at the

time, then simply state that amount directly in the Prescribed Form 10

FAQs – HOW IT WORKS

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• Some lenders award “points” for deals, which can be accumulated and exchanged for valuable goods or services. How do I describe loyalty programs to consumers?

FAQs – HOW IT WORKS

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• Rewards points have a monetary value and can be quantified and described

• If variable, just state the range• Obtain specific information from lenders

and/or check with your brokerage or network/franchise company

FAQs – HOW IT WORKS

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• Do lenders who are registered as “mortgage brokers” also have to provide a Form 10 to borrowers? – No – Disclosure is only required of brokers arranging

mortgages between the borrower and the lender – Conflicts of interest arise by virtue of being the

“middle person”

FAQs – HOW IT WORKS

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• Do I need to disclose compensation received from selling Group Creditor Life Insurance in the Form 10? – No– It is not a mortgage

FAQs – HOW IT WORKS

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• Sometimes a mortgage loan amount may vary from the time the Form 10 is provided to the consumer and the time it actually funds. How accurate does the compensation disclosure need to be?

FAQs – HOW IT WORKS

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• The Registrar expects values to be determined in good faith, and to be reasonable and defensible, as contemplated at the time the disclosure is provided

• Minor variations that, for example, result from adjustments at closing, are unlikely to attract the attention of the Registrar

FAQs – HOW IT WORKS

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CONCLUSION

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• Contact us with any questions as you continue to prepare.

• July 1, 2017• brokerconduct@ficombc.ca

CONCLUSION

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COPYRIGHT

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QUESTIONS?

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