In response to higher interest rates and inflation, as well as a tighter housing market, the Financial Services Regulatory Authority of Ontario (FSRA) made two recent announcements aimed at offering further consumer protection when it comes to mortgage fraud and supervision in the mortgage brokering sector.

While the mortgage brokering industry supports these measures, there are additional steps some believe would also benefit both mortgage consumers and industry professionals.

Zeroing in on mortgage fraud

The first announcement focuses on mortgage fraud guidance – setting out key steps for detecting and preventing mortgage fraud, including the development of policies and procedures that prohibit providing false or deceptive information and a duty to conduct identity verification.

“When mortgage professionals provide false or deceptive information, it can lead to devastating outcomes for consumers, including defaulting on unaffordable mortgage payments or losing their homes,” says Huston Loke, executive vice president of market conduct at FSRA. “We have developed this guidance to better protect consumers from mortgage fraud and build public confidence in the mortgage brokering sector.”

All mortgage professionals must do their best to deter and identify fraud, which in this day and age with technology can be difficult, says Christa Tessier, mortgage broker and owner at The Mortgage Advisors, based in Ottawa.

“Being on high alert and investigating a little deeper when something feels off is important,” Tessier explains. “Ask more questions and cross reference. Google names and websites and look at social media profiles.”

When in doubt, Tessier recommends that mortgage brokers/agents call the lender and ask for additional help scrutinizing any situation that just doesn’t feel right.

“I also believe lenders need to be more transparent with brokers when they’ve identified something unusual, as they have different tools and different training available to detect fraud,” Tessier says. “Working together, we can better protect each other.”

FSRA consulted Mortgage Professionals Canada (MPC) on guidance aimed at preventing and detecting fraud. “We are supportive of this change and measures that will help crack down on money laundering and fraud, insidious problems that contribute to challenges for honest actors to find homes,” says Lauren van den Berg, MPC president & CEO.

Mortgage fraud prevention is one of MPC’s key advocacy priorities, as the association continues to engage with the federal government to allow for digital income verification, and look to the province for support on this measure to help deter mortgage fraud. To that end, MPC was in Ottawa last week speaking with government representatives and ensuring these important issues are understood and kept top of mind.

Annual mortgage supervision plan

The second announcement emphasizes the need for effective supervision of mortgage professionals and product recommendations, especially for financially vulnerable consumers. Recent FSRA research shows this group is especially likely to work with a mortgage broker and more prone to consider an alternative or private mortgage.

FSRA is concerned about consumer protection, with the number and value of private mortgages in Ontario continuing to climb. Preliminary figures from FSRA’s 2022 mortgage brokerage Annual Information Return show that private mortgages are up 8.2 per cent from 2021 – with the total number of private mortgages in 2022 totalling 39,565. Also, the value of private mortgages in 2022 is $25.9 billion – up 15.9 per cent compared to 2021.

“Consumers looking to obtain or invest in a mortgage are facing greater risks due to rising interest rates, higher inflation and a volatile housing market,” says Antoinette Leung, head of financial institutions and mortgage brokerage conduct at FSRA.

Tessier believes it’s an alarming trend when rising mortgage rates are squeezing more consumers out of traditional lending and into situations where they need alternative or private funding.

“I think if some of the stress test requirements were eased up a little – perhaps using the greater benchmark or contract rate is sufficient in this current environment — the need for an extra 2.0 per cent just isn’t necessary and is hindering the consumer from traditional financing, basing their qualifications on a fictitious number,” Tessier emphasizes.

She says, “Running a brokerage is a huge responsibility, especially when it comes to the supervision of agents and ensuring vulnerable consumers are protected.” Tessier recommends that any brokerage with agents processing private mortgages should have a second set of eyes on all private transactions.

“A practice that we do at our brokerage is to have all private mortgages, lender approvals and Form 1 disclosures to investors and borrowers reviewed and signed by a broker/owner or principal broker,” Tessier explains. “It ensures that all options are looked at and that the mortgage is suitable for all parties, and any extra due diligence for risks and disclosures are complete and clear to the consumer and lender.”

CAMLA weighs in

“The Canadian Alternative Mortgage Lenders Association, CAMLA, is committed to assisting Canadian homeowners in providing suitable home financing options across all real estate markets in Canada”, says Dean Koeller, executive board committee chair.

He notes, “It’s critical that homeowners work with licensed mortgage professionals who are able to advise them on suitable immediate and long-term financing options. It’s also important to recognize that there are many factors, not just interest rates, that need to be considered when making a decision as to which mortgage is right for Canadian homeowners and their families.”

With interest rates, inflation and housing market volatility not looking like it will ease any time soon, it’s crucial that everyone is on the same page and vocal about ensuring homeowners and homebuyers are protected.