Hundreds of millions of dollars are lost to mortgage fraud each and every year. That cost and a recommendation from Ontario’s Minister of Finance has prompted the Financial Services Commission of Ontario (FSCO) to step up fraud prevention.
One of the regulator’s strategies in this fight is education. To meet that goal, FSCO recently issued a fraud prevention checklist developed in cooperation with industry stakeholders (see it here; see the FAQs here).
If you’re a mortgage agent, it should be required reading. Not only does it help protect your clients, your lenders and you as a mortgage professional, but it outlines some regulatory requirements that may surprise you.
When we read FSCO’s new fraud checklist, it sparked immediate questions. So we asked FSCO for guidance, which it helpfully provided in the feedback below.
CMT: Best practices aside, what are the actual regulations in Ontario that require mortgage agents or brokers to actively identify fraud in their mortgage dealings?
FSCO: Mortgage Brokerages: Standards of Practice Ontario Regulation 188/08 has a number of sections requiring brokerages to take actions to identify possible fraud:
Section 10 [speaks to] the duty to verify the customer’s identity;
Section 11 [speaks to] the duty to verify the other party’s identity;
Section 12 does not allow a brokerage to act for a borrower, lender or investor if the brokerage has reasonable grounds to believe the mortgage or its renewal is unlawful;
Section 13 requires a brokerage that has reason to doubt the borrower’s legal authority to mortgage a property to advise each prospective lender at the earliest opportunity;
Section 14 states that if a brokerage has reason to doubt the accuracy of information contained in a borrower’s mortgage application or in a document submitted in support of an application, the brokerage shall so advise each prospective lender at the earliest opportunity. The requirements in section 13 and 14 continue after the borrower enters into the mortgage agreement (after it is signed).
CMT: Your FAQs note that “regulations that are going into effect on January 1, 2016, which require that mortgage brokers, agents and administrators not ignore suspicions of fraud.” Do you have more details on that?
FSCO: Mortgage Brokerages: Standards of Practice Ontario Regulation 188/08, section 14.2, which will go into effect on January 1, 2016, states:
“14.2 A brokerage shall not act, or do anything or omit to do anything, in circumstances where the brokerage ought to know that by acting, doing the thing or omitting to do the thing, the brokerage is being used by a borrower, lender, investor or any other person to facilitate dishonesty, fraud, crime or illegal conduct.”
Mortgage Brokers and Agents: Standards of Practice Ontario Regulation 187/08, section 3.1, and Mortgage Administrators: Standards of Practice Ontario Regulation 189/08, section 10.1 have similar requirements for brokers and agents and administrators.
CMT: One of the suggestions is: “Verify driver’s licences with the Ministry of Transportation.” How does a broker do that? Is there a website that validates drivers’ licenses, or do brokers have to call the Ministry of Transportation (MTO)? And what info will the MTO disclose given privacy rules?
FSCO: There is a website: http://www.ontario.ca/page/uncertified-drivers-record/#recordlist. It states, “You can order a 3-year uncertified driver record for any driver with an Ontario driver’s licence.” MTO will provide “a 3-year uncertified driver’s record containing driver and licence details, and lists conviction information, any applicable demerit points, and suspensions.” This should enable brokerages to verify that the driver’s licence provided as identification is not a forgery.
CMT: Your guidelines say “FSCO will not consider a client’s signature on disclosure documents, on its own, as sufficient proof the client was adequately informed about the mortgage and its risks.” This means the broker must also make other verbal disclosures, correct? What other types of steps does this require a broker to take, by law (not just best practice)?
FSCO: FSCO expects the mortgage brokerage to ensure the client understands the information that is being disclosed so that the client can make an informed decision. Having a client sign a disclosure document that he or she has not read or does not fully understand does not fulfill this obligation. Ensuring that the client understands the mortgage product being offered is part of the brokerage’s duty to ensure the mortgage is suitable for the client. Section 24(1) of Regulation 188/08, Mortgage Brokerages: Standards of Practice requires that a brokerage ensure that mortgage products it presents to a client [are] suitable to the client, having regard for the client’s needs and circumstances. To do so, the mortgage broker or agent must document his or her assessment of the mortgage products available and then demonstrate how the recommended mortgage product, its structure, its features and its risks meets the client’s needs and circumstances.
FSCO: One thing that brokers might question is the expectation that they must ensure a client has read and fully understands a disclosure, assuming that the disclosure:
a) Is written in clear English and is not misleading; and
b) Has been signed by the client which, barring notice from the customer to the contrary, generally implies agreement and understanding of the terms.
FSCO: In addition to wanting mortgage brokers to ensure a client has read and fully understands the disclosure documents, we also want mortgage brokers to have a good sense that the products they’re selling are a good fit for the client. As a mortgage broker and client go over the disclosure documents, the broker should have a good idea whether the client can afford the mortgage products being sold. We don’t want a client to be put in a situation where he or she will fail, or be put in financial peril. We want brokers to be confident that the products they sell meet the needs and circumstances of the client.
Special thanks to FSCO and its Senior Communications Officer, Malon Edwards, for assistance with this story.