re: request for comments - mortgage brokers association of bc · requirements for mortgage brokers...
TRANSCRIPT
real estate finance • investment management
210 – 2112 West Broadway Vancouver, B.C. V6K 2C8 Telephone: 604 · 688 · 5388 Facsimile: 604 · 696 · 5388 Web: www.lanyardgroup.com Email: [email protected]
January 25, 2013 British Columbia Securities Commission PO Box 10142, 701 West Georgia Street Vancouver, BC V7Y 1L2 Attention: Mark Wang Financial and Corporate Sector Policy Branch Ministry of Finance PO Box 9418 Stn Prov Govt Victoria, BC V8W 9V1 Financial Services Commission (B.C.) PO Box 12116 Suite 2800 - 555 West Hastings Vancouver BC, V6B 4N6
Dear Sirs/Mesdames Re: Request for Comments --- Proposed Registration of Mortgage Syndicators as Exempt Dealers This letter is in response to your request for comments contained in your correspondence of January, 2013 (BC Notice 2013/01). As the subject matter of this correspondence deals not only with the Securities Act (B.C.) but also with the Mortgage Brokers Act (B.C.) we are taking the liberty of also addressing this to the Financial and Corporate Sector Policy Branch and the Financial Services Commission (B.C.).
1. Introduction Lanyard Financial Corporation (“Lanyard”), a registered mortgage broker in B.C., is in the business of conducting a mortgage brokerage business (as that term is defined under the Mortgage Brokers Act B.C.)1 in relation to, inter alia, Syndicated Mortgages (hereinafter defined). Accordingly, we will restrict our comments to that narrow area of the mortgage lending industry. As will be outlined below, the activity of mortgage brokers in relation to Syndicated Mortgages is simply the long established business of mortgage brokerage (but in relation to more than one lender) and we believe the imposition of EMD regulatory oversight concerning classic mortgage brokerage activities will have unintended consequences that will be prejudicial
1 “mortgage broker” means a person who does any of the following: (a) carries on a business of lending money secured in whole or in part by mortgages, whether the money is the mortgage broker’s own or that of another person;”
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to the entire mortgage brokerage community, borrowers (including the majority of real estate developers who are heavily reliant upon non-bank financing) and lenders in the Province. Furthermore, we can see no logical reason to treat Syndicated Mortgages (which are merely mortgages involving more than one lender) any differently than a mortgage with only one lender. Mortgages have always been viewed as interests in land which require regulatory oversight that is very different from that oversight which is appropriate for the securities industry.
2. The Problem - No Definition of “Syndicated Mortgage” Section 8.12 (1) of the Securities Act (B.C.) currently provides for the following definition when describing a syndicated mortgage: “...a mortgage in which two or more persons or companies participate, directly or indirectly, as lenders in the debt obligation that is secured by the mortgage.” We believe one of the chief reasons regulators are (erroneously, we maintain) proposing that EMD oversight requirements for mortgage brokers is desirable in relation to Syndicated Mortgages arises from confusion surrounding the very definition of the term “syndicated mortgage.” A fair interpretation of the definition above allows for two distinctly different commercial transactions (each deserving of very differing regulatory oversight) being reasonably viewed as “syndicated mortgages”. Specifically, this confusion enables one person to legitimately assume the term “syndicated mortgage” means:
i. a group of lenders (hence, “lending syndicate”) agreeing to lend on a single mortgage loan transaction,
whereas another person might assume the expression means:
ii. a mortgage or pool of mortgages that is in place (or in a constant state of replacement) and which is syndicated (by way of the selling of fractional interests) to members of the public (the identity of whom might also might be in a constant state of change).
The former definition describes one of the most customary and well understood commercial transactions in relation to real estate – a group of lenders making a mortgage loan arranged by a mortgage broker. The latter definition describes a form of investment (involving an issuer of securities) in a fund or pool of underlying assets (that happens to be comprised of mortgages). The former, in substance, is a lending transaction secured by a mortgage against an identifiable piece of realty. The latter, in substance, is an investment transaction in a fund or pool which holds securitized assets (which happen to be comprised of mortgages). Lanyard’s business (as is the business of all other mortgage brokers in B.C. we are aware of who frequently deal with syndicated mortgages) is strictly confined to category (i) above; that is, in substance, we are in the classic mortgage brokerage business (“lending money secured...by mortgages, whether the money is the mortgage broker’s own or that of another person”), not in
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the business of distributing or trading in securities which involve underlying securitized mortgage interests. Lanyard’s business (and that of other so-called “syndicators” with whom we are familiar) does not involve it first securing mortgage loans or mortgage portfolios and then go about finding participants who would subscribe for fractional interests. If we did, this conduct would properly fall under the category (ii) interpretation above. Rather, as mortgage brokers, on a deal by deal basis, we source mortgage opportunities for prospective client lenders and then, if requested, assist in the particular mortgage loan’s servicing needs (a traditional and customary service rendered by mortgage brokers to lender clients). The size of the mortgages we source often are so large that groups of our client lenders join together to lend as a group, in which case Lanyard will usually administer the loan for the group. To shield themselves from unlimited liability such lending group would usually (and prudently) form itself into a single purpose limited partnership in order to make the specific loan (and no other). That is what our business involves – period. As alluded to above, we are not aware of the existence of any mortgage industry players in the Province who refer to themselves as mortgage syndicators and who are involved in a business such as that described in category (ii) definition above. Accordingly, for purposes of this submission, we have elected to define “Syndicated Mortgage” to mean: “ A mortgage in which two or more persons or companies participate, directly or indirectly, as the orig inating lenders in the debt obligation that is secured by the mortgage” [Note this is identical to the current definition found in the Securities Act (B.C.), save for the addition of the words “the originating”. The bolded words are meant to indicate that we are talking about the lenders who actually fund the loan]. Under the above definition a Syndicated Mortgage is re-defined as a specific mortgage loan opportunity which is funded by more than one lender. This definition connotes the active determination by lenders to fund a specific loan opportunity. This definition excludes a passive investment in a pre-existing mortgage or fund of pooled mortgages. The definition chosen by us would have application to customary and well understood lending transactions of the following sorts:
i. A mortgage brokered by a mortgage broker amongst several of its lender clients;
ii. A mortgage organized by a solicitor amongst several of his/her lender clients; or
iii. A mortgage organized by one lender who regularly invites one or more other lenders to join it as a member of a lending syndicate.
(collectively, Example 1)
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As an aside, it should be noted that the existing definition of “syndicated mortgage” found in the Securities Act, by inclusion of the words “directly or indirectly,” contemplates that syndicated mortgages might be advanced by lenders through a vehicle (such as a single purpose limited partnership) as a liability shield. This important concept has obviously been kept in the definition we have suggested above. In substance, all of the Example 1 illustrations are simple mortgage transactions that a group of lenders (hence, a syndicate) have agreed to make. The dominant business activity here is the lending of money (one’s own or that of others) secured by mortgages (which falls squarely within the definition of a mortgage broker’s business). The dominant business is not the creation and distribution of a security such as would occur with the sale of shares of a mortgage investment corporation (“MIC”) or in relation to the sale of units of an income trust. Our definition would not have application to the following transactions (which some might also refer to as “syndicated mortgages”):
i. A circumstance where a holder of mortgages (perhaps through a bare trust arrangement), as issuer, distributes and trades in fractionalized interests (such as “co-ownership interests”) in one or more (perhaps a very large pool of) pre-existing mortgages to members of the public; or
ii. A circumstance where a partnership, limited partnership, income trust or corporation holding title to pre-existing mortgages (or to an ever changing pool of mortgages) was in the business of distributing its securities so that the public might indirectly acquire and/or trade in fractionalized interests of such investments.
(collectively, Example 2)
The examples immediately above, in substance, are investments in pre-existing securitized mortgage instruments. The dominant business activity here is not that of lending. Rather, it is the business of investing in securitized financial instruments (mortgages) or in entities that hold such securitized instruments. The lending activity involved in Example 1 requires consideration of a specific mortgage loan opportunity, the determination to make that specific loan and then the actual funding of that specific loan. Investing in a pool of securitized assets is a passive form of investment and requires the conceptual determination to make an investment, whether through a corporation, a trust or some other commercial structure, in a fund (the underlying securitized assets may actually be irrelevant to the investor) that will have a manager who will exercise its discretion concerning the fund’s current and future investments. In Example 1 the lenders hold title to their identifiable mortgage investment (directly or through a single purpose limited liability vehicle) and have control over the administration of the mortgage in question. In Example 2 the investors do not hold title to their mortgage
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investment. Rather, such investors make an investment in an ever changing pool of mortgage backed investments with virtually all investment discretion and decision making in the hands of the fund manager. In Example 1 the lender will study the elements of the single mortgage loan opportunity before committing to make its loan. In Example 2 the investor, amongst other matters, should study: (i) the identity of the manager, (ii) the composition of the fund’s existing mortgage portfolio, (iii) the investment criteria utilized by the fund (jurisdiction of permitted lending, proportional mix of investments that might be first, second or third mortgages, proportional mix of investments that might be bare land, commercial or residential), and (iv) the quality, collectability and state of impairment of the existing underlying pool of mortgages. As is evident, the transactions described as Examples 1 and 2 above represent completely different commercial transactions from the perspective of the investor.
3. Steps Involved in a Typical Syndicated Mortgage
Not only is the substance of the two transactions being considered entirely different, but also the steps taken to consummate the transactions are entirely different. Example 1 transactions, before lender commitment, requires a detailed consideration by the prospective lenders of an actual mortgage loan opportunity, as well as the receipt and review of industry specific due diligence materials (narrative appraisals, environmental studies, rent rolls, actual lease documents for review etc.). In addition to the receipt of such documents there will, of course, also be the delivery and receipt by the prospective lenders of FICOM mandated disclosure forms 9 and 11 as well as mandated Risk Acknowledgement forms. Copies of forms 9 and 11 (as well as the Risk Acknowledgement appearing on page one of the form 9) are attached hereto as a schedule and readers are urged to consider their extremely rigorous and industry specific disclosure requirements. An investment of the type described as Example 2 would not entail any such detailed analysis of a specific loan. Rather, as mentioned above, the consideration given by an investor would likely be similar to that of an investor in a conventional publicly traded mutual fund, MIC or income trust. Example 1 and Example 2 illustrate profoundly different commercial and investment activities, each requiring entirely different regulatory oversight.
4. Type of Person Involved in Typical Syndicated Mortgage The types of persons (active lender vs. passive investor) who typically involve themselves in these two contrasting types of investment activities are very different from one another. The former investment activity (Example 1) involves an actual lender (alongside other lenders) deciding to lend on an actual, predetermined mortgage loan which he and his fellow lenders must then administer (directly or through a contract administrator). The latter activity (Example
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2) involves a passive investor investing in a security in respect of which the underlying asset is a mortgage or, more likely, a pool of ever changing mortgages over which the investor has no practical control. Small investors would much more likely find Example 2 investments (funds) appealing. Example 1 investments (actual mortgage loans requiring, at a minimum, the consideration of: (i) an actual mortgage lending opportunity, (ii) actual underwriting and due diligence materials, and (iii) FICOM forms 9 and 11; (iv) the entering into of a co-ownership agreement or a limited partnership agreement; and (v) the administration of the subject mortgage (by the lenders or their agent)) would not have a broad appeal to the investing public. This is an important consideration for the regulators when they must ultimately determine whether added regulations to a particular activity are warranted or even desirable.
5. Timing Issues Pertaining to the Syndicated Mortgage Transaction “Timing issues” customarily involved in mortgage financing transactions also dictate against their appealing to large populations of small investors. Individual mortgages (including Syndicated Mortgages) are typically short fused transactions which must be funded by the lender (or lending group) within a very short time following the submission of a loan application by a prospective borrower. This usually means that the lender or lending group (syndicate), at most, has one or perhaps two weeks to consider the loan application, review the due diligence material (including the FICOM mandated disclosure documentation) and determine whether to proceed. In many instances the subject mortgage is required to be funded for a real estate “closing”, which frequently is but a few days off in time. Accordingly:
i. practically speaking, this requires the mortgage broker have, in place, an existing client pool comprising potential lenders who are interested, experienced in mortgage lending, and who are able to quickly assess the loan opportunity and, if interested, commit to fund within a tight timeline;
ii. practically speaking, this type of lending activity is not compatible with the marketing of fractional units of securitized mortgages broadly to the public. If an issuer was inclined to trade in fractional mortgage interests, he/she would need to first have a portfolio of mortgages in place and then go about conducting a business of offering fractional investments in same (see Example 2 above).
6. Economics of the Syndicated Mortgage Transaction
By their nature Syndicated Mortgages arise only periodically for mortgage brokers, namely, when they are able to secure mortgage loan applications from prospective borrowers for suitable loans of an adequate size. The mortgage opportunity must then be underwritten by the mortgage broker who, if unable to find a sole client lender, must approach a group of client lenders to fund the transaction. The financial remuneration to the mortgage broker for its brokerage services is limited by industry standards to a thin margin (typically between 1-2% of the loan amount) and often paid to the mortgage broker from the lender fee customarily charged the
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borrower. Accordingly, it would be prohibitively expensive (and effectively put the mortgage broker out of business):
i. If it were required to establish and maintain itself as an EMD to handle one or perhaps a few mortgage transactions per month for lender clients who organize themselves as a syndicate to make a loan;
ii. If it were required to contract with a third party EMD to provide the requisite compliance services for such activity. (Our advice is that a third party EMD would charge fees that will exceed the entire 1-2% mortgage brokerage fee referred to above).
Accordingly, we strongly believe that the imposition of EMD regulatory oversight will have the unintended consequence of needlessly putting many mortgage brokers (particularly those that specialize in Syndicated Mortgages) out of business, with all that would entail for borrowers, lenders and the general economy.
7. Type of Advice Required and Sought in Relation to a Syndicated Mortgage
It is not common for members of lending syndicates to seek suitability advice from a mortgage broker in relation to a Syndicated Mortgage opportunity. This is due to the following factors:
i. More often than not, members of a lending group are experienced mortgage
lenders who are “regulars” (i.e. standby lenders) on the mortgage broker’s client list. As such, they are knowledgeable, experienced lenders who know how to assess a mortgage themselves and are retaining the services of the mortgage broker to merely source the opportunity and present it with customary underwriting/due diligence materials;
ii. The mortgage broker, in addition to sourcing the loan opportunity, provides prospective lenders with customary underwriting and due diligence materials (which includes all of the mandated FICOM disclosure materials (which is very detailed and comprehensive), a full narrative appraisal, environmental materials, tenant lists, etc.). This is typically all the prospective lenders (with or without the assistance of their professional advisors as they see fit) require in order to make an informed decision whether to participate;
iii. If, infrequently, a prospective lender does make an inquiry in relation to a
prospective loan, this will usually be a request for factual details (i.e. further or more detailed information concerning the identity of the borrower or a tenant, detailed information concerning zoning, environmental issues etc.). The mortgage broker is knowledgeable, trained (even to the extent of adhering to mandated continuing education requirements), and licensed to respond to such inquiries.
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Just as he/she customarily does when acting for a single client lender, a mortgage broker acting for a syndicate of lenders will customarily contractually provide that those lenders (and their professional advisors) are entirely responsible for their own analysis of any underwriting and due diligence materials supplied and for their determination whether to participate in extending a loan. This is not only a matter of commercial custom in the mortgage brokerage business, it is also is an entirely fair and essential allocation of risk between informed persons dealing at arm’s length in the real estate industry. To statutorily impose an obligation on a mortgage broker to give any greater amount of advice would have grave, unintended consequence for the mortgage brokerage business in B.C. That said, if the regulators felt it was important to provide prospective lenders with further cautionary warnings concerning the inherent (i.e. generic) risks in lending on mortgages, we feel this could easily be accomplished by merely expanding the current Risk Acknowledgment advice appearing on page one of the Form 9 and requiring its delivery to all prospective lenders. In addition, in respect of lenders who were not Accredited Investors, consideration might be given to requiring some basic suitability advice (i.e. concerning only the suitability of investing in mortgages generally; not concerning the specific mortgage at hand. Advising as to the suitability of a specific mortgage would create a circumstance where the mortgage broker became a de facto guarantor of a loan and, hence, subject to an unreasonable risk for any impaired loan vis a vis suitability claims.
8. Some Basic Questions that should be Asked
Before making a very significant change to the manner by which mortgage brokers can conduct business in British Columbia, at least the following questions should be asked:
1. Is there a compelling need to add yet another layer of regulatory oversight onto this simple and transparent commercial transaction, namely, acting as a mortgage broker? We feel the answer is a resounding NO. Any objective analysis of the Syndicated Mortgage business as conducted in B.C. will lead to the opposite conclusion – namely, there are few investment opportunities anywhere that offer the transparency, simplicity and protection to the lender (investor) as are offered by a single, identifiable, mortgage loan opportunity that is underwritten and brokered by a registered mortgage broker in the Province in compliance with very industry specific legislation and FICOM oversight.
2. Will an EMD regime mean that lenders (investors) will be dealing with investment professionals who are more educated or qualified in the realm of mortgage lending? We feel the answer is NO. The opposite will be the case. The education that a mortgage broker undertakes, and the licensing he/she is required to secure and maintain, is sophisticated and specifically tailored to deal with mortgage lending. The EMD educational requirements are not mortgage industry specific and deal extensively with irrelevant areas of economics as well as stock and derivative investments, all of which have no bearing whatsoever on the mortgage industry.
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3. Will an EMD regime mean that the lenders (investors) will be provided with more relevant and appropriate mandated disclosure documents? We feel the answer is NO. The opposite will be the case. The FICOM Forms 9 and 11 (which includes a Risk Acknowledgment) are specifically focused on, and tailored to, mortgage lending. As an aside, we understand that the Province of Ontario (that has specifically exempted Syndicated Mortgages from their Securities Act) has heavily relied on FICOM’s regulatory regime (including its well conceived disclosure forms) in modelling their own agency for the regulation and oversight of Ontario mortgage brokers, including those involved with Syndicated Mortgages. In our view a general regime of securities legislation that is not at all industry specific to the mortgage industry will offer inferior protection to the public than the current industry specific regime of the Mortgage Brokers Act and FICOM.
4. Do Syndicated Mortgages lend themselves to being used by fraud artists or con- men? No. The opposite is the case:
i. Significantly, anyone dealing with Syndicated Mortgages in B.C. must be
licensed as a mortgage broker by FICOM. Such registration, inter alia, requires a bi-annual criminal record and suitability assessment by FICOM (in addition to industry specific education requirements);
ii. In accordance with MBA and FICOM requirements, all client funds must be handled through a trust account which is subject to a mandatory annual audit and audit report to FICOM;
iii. Syndicated Mortgages, by definition, are stand alone transactions; not pooled
investments. If a mortgage goes bad, the lending group knows this immediately when the monthly payment is not received!
iv. Once the mortgage loan is funded the loan is made; there is no further
introduction of new capital. Accordingly, there is really no practical way (certainly no simple way) for any kind of “ponzi scheme” to be perpetrated;
v. The lenders (either directly or through a single purpose lending vehicle (such
as a limited partnership or a corporation)) actually own the registered mortgage; so again, the ability to commit fraud is greatly reduced.
5. Is there currently widespread abuse of investors in the realm of Syndicated
Mortgages? By reason of the very transparent nature of a Syndicated Mortgage transaction, the mandated disclosure requirements of Forms 9 and 11, and the other characteristics of the Syndicated Mortgage outlined above, we doubt that very much.
6. Will there not be confusion between the relevant provisions of the Mortgage
Brokers Act of B.C. and the Securities Act of B.C., insofar as the governance of
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Syndicated Mortgages is concerned? If a mortgage broker handling a Syndicated Mortgages is to become an EMD must he still comply with the relevant FICOM mandated requirements? Must a mortgage broker become educated and licensed under the Mortgage Brokers Act (B.C.), adhere to all requirements for continuing education thereunder and, as well, become educated and licensed as an EMD and adhere to all relevant continuing education requirements in relation thereto? If Syndicated Mortgages fall under both the Mortgage Brokers Act and the Securities Act, the number (and nature) of extensive disclosure and reporting documents related to a single mortgage transaction brokered to more than one lender will numb the most seasoned investor and cause commerce in this important realm of business to freeze up. If such regulatory redundancy and conflict is not desired, will the regulators choose to substitute an EMD regime (which is not tailor made for the mortgage industry) for a currently existing FICOM regime that is?
7. Conceptually how can the regulators distinguish between a mortgage involving only one lender and a Syndicated Mortgage involving more than one lender and determine that the former should be regulated under the Mortgage Brokers Act, while the latter should be regulated under the Securities Act (and perhaps also the Mortgage Brokers Act)? As mentioned above, we believe that the only reason syndicated mortgages have been selected for treatment different than a mortgage involving only one mortgagee (i.e. only one lender) has to do with a definitional problem outlined above. Otherwise, in our view it makes no sense to require mortgages with multiple mortgagees to be regulated in a fashion entirely different from a mortgage with one mortgagee. As anyone familiar with the lending industry understands, lenders frequently co-lend, in order to diversify risk. Any active mortgage broker will invariably, from time to time, be involved with mortgages that will meet the definition of being a syndicated mortgage. That being the case, the reality is that the current proposal by the BCSC, if followed to its logical conclusion, will mean that all mortgage brokers in the Province should become EMD’s. Is this what is desired? Also, if brokering mortgages with more than one mortgagee (i.e. more than one lender) would require a mortgage broker to become an EMD what about a mortgage broker who simply structured loans involving multiple lenders as individual mortgages that ranked pari passu at the Land Title Office? That is also a common technique for structuring mortgages amongst multiple lenders. Presumably pari passu mortgages would not be considered syndicated mortgages and would fall under the exclusive jurisdiction of the Mortgage Brokers Act. The foregoing, we believe, illustrates that there does not seem to be any good reason for differentiating a mortgage transaction involving only one mortgagee with a Syndicated Mortgage (i.e. of the Example 1 variety above) involving more than one mortgagee. Indeed, from an investor protection perspective, it can be cogently argued that investors are far better off participating in a Syndicated Mortgage than in a single mortgage transaction where they are the sole lender. Participation in a Syndicated Mortgage assures that: (i) other lenders have also scrutinized the subject loan and the relevant mandated due diligence materials; and (ii) there is obviously the
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significant benefit of diversification(that is, each lender takes only a percentage of the entire loan), which is wholly absent in a single mortgage!
8. What is the point of requiring mortgage brokers to provide suitability advice to mortgage lenders when no such advice is needed or sought? It is not customary (or commercially reasonable) for a mortgage broker to advise a lender on the appropriateness of granting a particular loan or as to the suitability of a particular loan in light of a lender’s personal financial circumstance. The business of commercial lending depends on the concept of caveat emptor. There are inherent risks in mortgage lending (which, ironically, is mitigated by diversification amongst co-lenders). If the regulators felt that additional generic risk warnings (as to such inherent risks in mortgage lending) should be given to prospective lenders, this could be simply achieved by adding verbiage to the existing Risk Acknowledgment provided lenders. Note moreover that such Risk Acknowledgment disclosure is contained in the first section of the Form 9 which must be provided to each lender in a syndicated mortgage transaction. For potential investors who are not Accredited Investors (i.e. small investors), there might appropriately be a new requirement that one time basic suitability advice (as to the wisdom of investing in mortgages as an investment asset class) be required at the commencement of the mortgage broker and client’s relationship.
9. Will investors in the Province be better served by the Government making Syndicated Mortgages unavailable? For reasons explained above, if EMD regulatory oversight is mandated for mortgage brokers involved with Syndicated Mortgages, such lending opportunities will cease to be readily available to the investing public. In consequence, lenders who have enjoyed participating in mortgage investments as an easily understandable and transparent high yield investment opportunity would rightly feel aggrieved by the removal of such an investment option. Ironically, the Government will have essentially forced such investors to seek similar returns elsewhere – and one might wonder if the majority of such investors will redirect their investment funds: (i) into equity markets (which, we suggest, are frequently far more speculative than, for instance, a conservative first mortgage investment over an income producing property); or (ii) to unscrupulous and unregistered mortgage providers (as previously registered providers will be driven from the business). Alternatively, and equally ironic, most Syndicated Mortgage lenders choose to co-lend in order to: (i) diversify their risk (i.e. they can lend $300,000 along with two other equal lenders on one $900,000 loan, instead of making one $900,000 loan themselves); and (ii) in order to benefit from the underwriting savvy of those who co-lend alongside themselves. If the regulators have their way, the result will be that most mortgage investors who wished to be relatively small lenders (along with other co-lenders) in Syndicated Mortgages, will be forced to be sole mortgagees who make 100% of the loans themselves. That is, they will be forced to make loans without the benefit of diversification and without the benefit of reliance on the lending savvy of co-lenders.
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10. Will borrowers in the Province be better off by making Syndicated Mortgage
loans unavailable? The answer is obviously NO as borrowers will experience a loss of an important competitive lender to bid for their borrowing needs. It should be noted that private lenders often provide lending opportunities that traditional lenders, such as banks, do not provide: (i) short term bridge loans, (ii) loans underwritten on expedited basis to meet urgent time constraints of the borrower, or (iii) loans underwritten more on the strength of the underlying secured asset than on the strength of the borrower’s covenant. The Provincial economy will suffer from the removal of this important source of capital. In this regard, we understand that research apparently undertaken by the BCSC suggests that if Syndicated Mortgage business is lost in B.C., the quantum of lending funds that would be removed from the marketplace in consequence thereof would be insignificant (less than two million dollars). With respect, we submit that is not the case. From the writers’ personal knowledge and observations of lending activity carried on by ourselves and several other B.C. private lenders who are involved with Syndicated Mortgages, the dollar amount must certainly be in the many hundreds of millions of dollars. To the extent this apparent flawed research had any impact on the decision making process of the Government or regulators, we would urge you to revisit your deliberations.
9. Summary Recommendation -- Business of Syndicated Mortgages Not
Appropriate for Regulation by EMD Regime In substance, Syndicated Mortgages are isolated mortgage lending transactions organized by a mortgage broker. This customary mortgage brokerage activity involves: (i) locating a mortgage loan opportunity (ii) locating a lender or lenders who will fund same; (iii) closing the loan transaction; and (iv) if desired by the lending group, having a third party administer the mortgage. The only relevance of the word “syndicate” in relation to the transaction is that the loans in question, because of their size, favour multiple lenders (i.e. a syndicate). In substance, the enterprise has nothing to do with trading in securities or being involved with the continual offering of securities. In the context of mortgage brokerage and the regulation of that activity, we see no apparent reason for distinguishing between mortgage loans with a single lender or more than one lender. FICOM has created exceptionally high calibre and well conceived disclosure and reporting documentation (Forms 9 and 11) and an equally high calibre and well conceived education, continuing education, licensing, audit and reporting oversight apparatus that is unparalleled when compared to that found in other Provinces. In our view B.C. regulators should follow the lead of the Province of Ontario and should exclude Syndicated Mortgages as a security under the Securities Act (B.C.) with FICOM being the sole regulatory oversight agency for mortgage brokers involving themselves in such activities. We understand that in Ontario Syndicated Mortgages are regulated by their own Provincial oversight agency which is equivalent to FICOM, and that they heavily relied on
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FICOM Forms 9 and 11 when conceiving of their own disclosure forms for use by mortgage brokers in Ontario. It would be ironic if B.C., after having pioneered the “gold standard” of mortgage brokerage (including Mortgage Syndication) oversight in Canada, were to surrender this leadership role to the Province of Ontario. It would compound matters in a further, negative fashion, if B.C. were then to adopt an EMD regime for its own mortgage brokerage industry that is not at mortgage industry specific and that is punitive to mortgage brokers, with the inevitable result that investor freedom, borrower need, mortgage brokers’ livelihoods, and commerce within the Province, in general, all suffer. Finally, and truly ironically, the B.C. Government would have opened the door for Ontario Syndicated Mortgage lenders to lend in B.C., filling the void created by reason of the demise of B.C.’s own Syndicated Mortgage industry.
10. In the Alternative, There No “Business Trigger” That Has Been Pulled in the
Conventional Syndicated Mortgage Transaction In the alternative, to the extent the Ontario model is not followed as suggested above, we believe that the EMD requirements of NI 31-103, nevertheless, should not have any bearing on simple syndications such as those described above in Example 1. When one objectively examines the mortgage broker’s involvement in relation to a Syndicated Mortgage transaction the tests described in section 1.3 of the Companion Policy to NI 31-103 (Registration Requirements, Exemptions and Ongoing Obligations) are not, in a requisite fashion, met (whether viewed technically or, more importantly, viewed broadly in the context of the intended policy underlying the legislation). We do not believe that a mortgage broker involved in conventional mortgage brokerage business can be construed as a Securities Issuer. Its activities are limited to sourcing mortgage loan opportunities, delivering due diligence and FICOM mandated disclosure materials to lenders, organizing funding of the loan and to administering mortgages if requested. Specifically, a mortgage broker carrying out such activities for prospective lenders in relation to a Syndicated Mortgage:
i. is not “in the business of trading;” ii. is not “in the business of advising;” iii. is not “holding itself out as being in the business of trading or advising;” iv. is not acting as an “underwriter”, as that word is used in the particular context; v. most certainly is not acting as “an investment fund manager;” vi. is not “promoting securities or stating that it will buy or sell securities”; vii. is not “intermediating a trade between a seller and a buyer of securities”; and viii. does not “contact anyone to solicit securities transaction or to offer advice”.
Of course, the answer to the above is entirely different if the mortgage broker were involved in conduct such as that described under Example 2 above.
11. Transition To Any New Regime
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While we are hopeful the BCSC, MOF and FICOM will find our views persuasive, we take this opportunity to state that we believe it is only fair and reasonable to afford all industry participants (including, of course, MICs) a reasonable period of time to position themselves for any new mandated regulatory changes. The vast majority of industry players are small businesses with only small workforces. They should be afforded a comfortable period of time to transition into any radically changed regulatory environment, or, to elect to wind down their businesses in an orderly fashion if the transition is too costly or too painful. We would be pleased to provide any needed clarification sought in relation to the foregoing. Respectfully submitted, LANYARD FINANCIAL CORPORATION
per: Ben Goldberg /Brian Chelin Benjamin Goldberg/Brian Chelin Cc [email protected] [email protected] [email protected] [email protected] [email protected] Attachments – see Form 9 and 11
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form 9 june 2011.doc
Registrar of Mortgage Brokers 1200 – 13450 102nd Avenue Surrey, BC V3T 5X3
LENDER DISCLOSURE STATEMENT FORM 9- Section 17.1
Neither the Registrar of Mortgage Brokers nor any other authority of the government of the Province of British Columbia has in any way passed on the merits of the matters dealt with in this information statement. This information statement has not been filed with the Registrar of Mortgage Brokers and the registrar has not determined whether or not it complies with Part 2 of the Mortgage Brokers Act. Please write or print clearly. If additional information is required, reference and attach a schedule to this form. A – CAUTIONS
1. All mortgage investments carry risk. There is a relationship between risk and return. You should very carefully assess the risk of the transaction described in this Lender Disclosure Statement and in the supporting documentation before making a commitment.
2. You are advised to obtain independent legal advice regarding your decision to invest and to ensure that the transaction is structured appropriately to protect your interests.
3. You should only provide mortgage funds “in trust” to a registered mortgage broker or a licensed lawyer or notary. Never provide funds directly to the mortgage borrower or an individual submortgage broker.
4. If you are one of several investors in this mortgage, you may not be able to enforce repayments of your investment on your own if the borrower defaults.
5. You should ensure you have sufficient documentation to support the property valuation quoted in this Investor/Lender Disclosure Statement.
6. You should be satisfied with the borrower’s ability to meet the payments required under the terms of this mortgage.
7. A mortgage broker must not administer, or arrange for another person to administer, a mortgage on your behalf unless the mortgage broker has a written agreement with you that covers matters set out in the Mortgage Brokers Act.
8. This Investor/Lender Disclosure Statement and the attached documents are not intended to provide a comprehensive list of factors to consider in making a decision concerning this investment. You should satisfy yourself regarding all factors relevant to this investment before you commit to invest.
.
B – BORROWER / GUARANTOR / CONVENANTOR INFORMATION FULL NAME OF BORROWER:
FULL NAME OF GUARANTOR/CONVENANTOR (if applicable):
ADDRESS - include postal code ADDRESS – include postal code
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C – OTHER PARTIES TO THE TRANSACTION REPRESENTED BY THE MORTGAGE BROKER The Mortgage Broker represents the following parties to the transaction:
The lender: __________________________________________________________________ Name
The borrower(s):
Syndicate mortgage lenders: (attach list if more space required)
Name
Name
A person or entity which will acquire
the mortgage from the investor/lender:
Name
Other – please describe:
Name
NOTE: If the Mortgage Broker has NOT indicated that it represents you, the Mortgage Broker must still exercise a duty of care to you and deal with you fairly. It is recommended that you obtain independent advice with respect to the transaction. D – PRE-EXISTING OR EXISTING MORTGAGE IN DEFAULT Will the lender/investor be acquiring an interest in a currently registered mortgage ? Yes No If yes, please explain any defaults by the borrower over the past 12 months which the mortgage broker is aware of: If the mortgage is new, was there a previous mortgage registered against title with the same borrower?
Yes No If yes, please explain any defaults by the borrower on the previous mortgage over the past 12 months which the mortgage broker is aware of: E – REGISTERED INTEREST
Your interest as a lender will be directly registered in your name on the mortgage document filed at the Land Title Office ; or
________________________________ will act as a trustee or nominee and will hold a registered interest in the mortgage in trust for you as beneficial owner; or
Your interest in the mortgage will be secured under the following arrangements: F- MORTGAGE INVESTMENT Your investment represents: the entire mortgage OR a portion of the mortgage Your portion represents _____________ % of the total. ______ other parties have an interest in this mortgage. G - TRUST FUNDS Will the funds be held in trust pending execution of the mortgage? Yes No If yes, please indicate the party that will hold the funds in trust: H – MORTGAGE ADMINISTRATION Will the mortgage be administered for you? Yes No If “yes”, name and address of administrator: Describe any fees or attach any fee agreement for the provision of administration services: ______________________
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I – PROPERTY TO BE MORTGAGED Is this an inter alia mortgage?
Yes No If yes, please skip Sections I and K of this Form and complete Sections I and K of the Form 9 Addendum for Inter Alia Mortgages Legal Description of Property: __________________________________________________________________________________________________ Municipal Address of Property: __________________________________________________________________________________________________ Type of Property:
Property with existing buildings Single family residential Two to four unit multifamily Five or more unit multifamily Commercial Industrial Other: ______________________________________
Vacant land, development or construction project. Details of project/proposed use:
Other (please describe): Property Taxes: Annual Property Taxes: $ ____________________________ Are taxes in arrears?
Yes No If yes, amount arrears: $ ____________________________________ Zoning If mortgage proceeds are to be used for construction financing, is the zoning on the property to be developed appropriate for the proposed use?
Yes No If no, details: Property Valuation: Amount: $___________________________ Based on:
Appraisal, dated ___________________________ Municipal Assessment, Year ________________________
Sale Price $ ______________________________ Other (please describe) _______________________________ If appraisal obtained: Name and address of appraiser: Valuation is: Current, as at date: ___________________ Projected Value: $ _______________________ J – MORTGAGE PARTICULARS Terms of the Mortgages Amount of your investment: $ ____________________ Maximum Indebtedness of Mortgage: $ _________________ Interest rate is fixed at _______________% per annum OR Interest rate is variable, explain: ________________________ Compounding period: ___________________________ Payment Frequency: _________________________________ Interest only payments: Yes No Payments to be made by Borrower: $ ___________________ Term: ___________ Amortization: _______________ Borrower’s first payment due: _________________________ Maturity Date: _________________________________ Balance on maturity: $ _______________________________ Mortgage secures a running account: Yes No If running account, provide details_______________________
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K – RANK OF MORTGAGE AND LOAN TO VALUE RATIO Rank of mortgage This mortgage will rank: First Second Third Other: ___________________________ Prior encumbrances (existing or anticipated)
None OR (i)Lender/Charge Holder: ________________________________ Priority: ____________
Amount Owing:$ ___________Maximum potential indebtedness allowable under Mortgage: $ _____________ In default? Yes No
(ii)Lender/Charge Holder: ________________________________ Priority: ____________
Amount Owing: $___________Maximum potential indebtedness allowable under Mortgage: $ _____________ In default? Yes No
(iii)Lender/Charge Holder: ________________________________ Priority: ____________
Amount Owing: $___________Maximum potential indebtedness allowable under Mortgage: $ _____________ In default? Yes No
(iv)Lender/Charge Holder: ________________________________ Priority: ____________
Amount Owing:$ ___________Maximum potential indebtedness allowable under Mortgage: $_____________ In default? Yes No
Loan to value ratio
a) Total amount owing or maximum indebtedness (whichever figure is higher) of all encumbrances which rank in priority:
$ _________________________________
b) Maximum Indebtedness of mortgage: $ _________________________________
c) Total amount of mortgages: $ _________________________________ (a+b) d) Value: $ _________________________________ (from Part I) e) Loan to value: ____________________ % (c/d x 100) L – ATTACHED DOCUMENTS You should review the following documents carefully and assess the risks of this investment before committing to invest. The following documents are attached:
A copy of any existing mortgage on the property; A copy of any appraisal; A copy of any purchase and sale contract entered into by borrower for the purchase of the property; Any documentary evidence respecting the borrower’s ability to meet the mortgage payments, such as a credit bureau
report or a letter from an employer disclosing the borrower’s earnings. A copy of the borrower’s application for a mortgage. If the mortgage is a new mortgage, documentary evidence of any down payment made by the borrower for the
purchase of the property. A copy of any agreement that you may be asked to enter into with the mortgage broker or other administrator. A copy of the Cost of Credit Disclosure provided to the borrower.
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The Mortgage Broker is also required to provide you with all other information an investor of ordinary prudence would consider to be material to a decision whether to lend money on the security of the property or the credit worthiness of the borrower, so that you can make an informed decision before you commit to invest. This information might include the following:
1. If the mortgage is for a construction or development project: a. A detailed description of the project; b. A schedule of the funds that have been advanced or are to be advanced to the borrower; and c. The identity of any person who will monitor the disbursements of funds to the borrower and the use of
those funds by the borrower. 2. If the property is rental property, details of leasing arrangements and vacancy status. 3. Environmental considerations affecting the value of the property.
M – CERTIFICATION This Lender Disclosure Statement has been completed by: ____________________________________________________________________________________________________ ____________________________________________________________________________________________________
Name and address of Mortgage Broker
I have fully completed the above Lender Disclosure Statement in accordance with the Mortgage Brokers Act and regulations and declare it to be accurate in every respect. Date: ______________________________________
_________________________________________________ Signature of Mortgage Broker, or of a person authorized
to sign on behalf of the mortgage broker
_________________________________________________
Print name of person signing
N – ACKNOWLEDGEMENT I, ________________________________________________, of _______________________________________________ Print name Address acknowledge receipt of this Lender Disclosure Statement, signed by the mortgage broker. Date: ________________________________________ Signature: _______________________________________ Dated by Investor/Lender: _______________________________________
One copy of this form must be provided to the prospective lender, and one copy must be retained by the mortgage broker.
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Registrar of Mortgage Brokers Suite 2800, Box 12116 555 West Hastings Street Vancouver, BC V6B 4N6
LENDER CONFLICT OF INTEREST DISCLOSURE STATEMENT
FORM 11 – Section 17.4
This information statement has not been filed with the Registrar of Mortgage Brokers. There has been no determination made by the Registrar as to whether the disclosed information complies with the Mortgage Brokers Act. Please write or print clearly. If additional information is required, reference and attach a schedule to this form.
Name of Borrower(s):
Name of Lender:
Name of Mortgage Broker:
Telephone:
Name of Submortgage Broker:
Date of transaction:
Civic address of property to be mortgaged:
Legal description of property to be mortgaged:
Mortgage Broker’s Interest in the Transaction
The Mortgage Broker and/or its associates or related parties will not acquire a direct or indirect interest in the transaction described above.
The Mortgage Broker and/or it associates or related parties will acquire a direct or indirect
interest in the transaction described above. In particular, ____________________________ (State the name of the party) who is __________________________________ will: (State the relationship with Mortgage Broker)
be a syndicate mortgage lender with the lender; be either the registered or beneficial borrower in the transaction; acquire the mortgage from the lender; or ___________________________________________________________________ (identify nature of interest)
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Are there Other Mortgage Brokers acting in this Transaction?
No
Yes _________________________________________________________ (State Name, Relationship to Mortgage Broker, Borrowers &/or Lenders & role in transaction)
_________________________________________________________ Compensation to the Mortgage Broker The Mortgage broker has been or will be compensated in this transaction by: receiving a fee from the borrower, and/or ______________________________________________________________________ (Please explain compensation) Referrals to the Mortgage Broker The Mortgage Broker, its associates or related parties have paid or will pay a fee in the amount of $_____________________ to _________________________________ for receiving a referral or (Name)
recommendation relating to the transaction. Please state any other facts which may result in a conflict of interest with the lender: ____________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ CERTIFICATION
I certify that I am the mortgage broker or an authorized representative of the mortgage broker and based on my knowledge, belief and information provided by third parties, this Disclosure Statement contains no untrue statement and does not omit to state a fact that is required to be stated or that is necessary to prevent a statement that is made from being false or misleading in circumstances in which it was made. __________________________________________________________________________ Full Name of Mortgage Broker Address including postal code ____________________________________________________________________________________________ Signature of Mortgage Broker or Authorized Representative Date signed (YYYY/MM/DD) ACKNOWLEDGEMENT OF RECEIPT ____________________________________________________________________________________________ Signature Name (Please Print) Date signed (YYYY/MM/DD) ____________________________________________________________________________________________ Signature Name (Please Print) Date signed (YYYY/MM/DD)