A softening real estate market, concerns over money laundering in the industry and an apparent uptick in private – and potentially predatory – lending has B.C.’s regulator of mortgage brokers firing warning shots.
Broker behaviour is bound to be under greater public scrutiny these days, said Chris Carter, acting registrar of mortgage brokers for the B.C. government’s Financial Institutions Commission (FICOM), in a speech Monday to the Canadian Mortgage Brokers Association (CMBA) in Vancouver.
And, in fact, “most certainly we’ve seen an increase in enforcement action,” over the past two years, Carter told Glacier Media Tuesday.
“Broadly speaking, you can narrow that down to two reasons. We’ve grown our enforcement program – we’ve added investigators and we’ve added examiners who are looking for problems out there in the industry. It is fair to say the more we look the more we find.”
Brokers are supposed to act as intermediaries, or middlemen, between lenders (banks or private companies and funds) and borrowers, helping the latter efficiently obtain a loan at a rate not otherwise commonly available. Brokers make a commission on the loans and are regulated by FICOM, which is in the process of becoming a more independent and powerful Crown agency.
Brokers should not overleverage their clients; this may be done by fudging applications – overstating the income of a borrower to obtain a bigger loan (and hence a bigger commission), said Carter, who also warned brokers of working with unregistered fixers.
Carter told brokers in Vancouver that the days of “how to get to yes” are over with new market uncertainty, and slumping sales and prices. Now, brokers need to be extra vigilant and learn “when to say no.”
He said Canadians could be in for a rude awakening if real estate prices fall and they’re still saddled with big mortgages and even loans against their equity, suggested Carter. And the brokers who brought loans to those homebuyers will face extra scrutiny, he said, which is why he’s calling on the industry to ease back the throttle on new mortgages that may be contrary to the best interests of the public.
CMBA-BC CEO Samantha Gale told Glacier Media it has become “much tougher now” to underwrite a mortgage – something she doesn’t necessarily agree with because while it is important not to overleverage a client, access to credit is important.
Gale said she welcomes a new Crown agency so long as industry has a stake at the table. She said brokers are already sufficiently self-regulated.
“It’s important for our regulator to have a different take than industry … and that’s a good thing,” Gale said.
The Canada Mortgage and Housing Corp. (CMHC) reports British Columbia has the largest average credit debt at $124,000 for those who have tapped into their home equity line of credit line.
Household debt to income was only 66 % in 1980, according to Statistics Canada, but has grown to 170 % in 2018, according to the Bank of Canada. Low interest rates and higher house prices have fuelled the rise, said the bank’s governor, Stephen Poloz.
With recent, tighter requirements for new homeowners to access credit, Carter sounded the alarm for brokers who may be overly engaged in third party lending, such as with syndicate mortgages and mortgage investment corporations (MICs), which tend to offer loans with higher interest rates, fees and penalties to clients with poorer credit ratings.
While Carter prefaced by saying private lending with higher interest rates has a place in the market, “actual, or perceived, predatory lending” practices is “an area we’re looking at.
“We’re conscious of the ways risk flows through the system. That’s one reason we’re monitoring the private lending space quite closely.”
Gale’s group disagrees with the new federal stress tests based on higher interest rates.
“Do we need to save people from something that hasn’t happened? We’re limiting access to financing.”
In 2015 the estimated value of MIC mortgage credit outstanding was less than 1% of total mortgage credit outstanding, according to CMHC. But the federal entity concedes actual numbers are unknown and Carter said reports indicate the sector is growing fast.
Carter stopped short of answering whether he was worried about household debt and the prospect of even more if market prices dip. Rather, he said his main concern was “consumers getting the best advice from their brokers.”
Because brokers are intermediaries between borrowers and lenders, they may witness suspicious activity, Carter told his audience Monday. But while brokers have no requirements to report to the federal financial transaction monitoring program, Carter suggested they do so anyway as money laundering in real estate is taking centre stage with two provincial government-sanctioned reviews.
“The absence of a formal legal requirement does not make for a compelling excuse to avoid reporting,” he said.
Carter noted it is ultimately the realtors and banks that must report suspicious transactions.