Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 4 CONTENTS

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4 CONTENTS Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 4 About the review... 5 Your Feedback... 6 Background... 7 Scope of the Act ISSUE 1: Definition of mortgage broker ISSUE 2: Exclusions from licensing requirements ISSUE 3: Expansion of licensee types ISSUE 4: Definition of commercial mortgage loan Compliance with the Act ISSUE 5: Record-keeping requirements ISSUE 6: Trust money requirements ISSUE 7: Inspections, enforcement, and penalties ISSUE 8: Mortgage broker and lender accountability Good business practices ISSUE 9: Proficiency and educational requirements ISSUE 10: Place-of-business requirements ISSUE 11: Standards of practice, disclosure, and fraud prevention ISSUE 12: Mortgage brokers fees ISSUE 13: Reverse mortgages ISSUE 14: Errors and omissions insurance Appendices Appendix A: Federally regulated deposit-taking institutions Appendix B: Provincially regulated financial institutions Appendix C: Roundtable attendees, December 5,

5 About the Review Context: Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 5 The Mortgage Brokers and Lenders Registration Act (MBLRA) was introduced in Nova Scotia in Since then, there have been many changes in mortgage brokering in Canada. To respond to these changes, in the fall of 2008, the provincial government started to review the Act and regulations. The review aimed to do the following: Examine the mortgage broker and lender industries in Nova Scotia and across Canada to gain an overview of the industries. Consider whether the Nova Scotia government should continue to regulate the industries. Identify the best regulatory practices, emerging industry trends, and areas where consumer protection needs to be improved. This discussion paper summarizes the findings to date. It offers industry stakeholders and consumers an opportunity to give feedback on several proposals to update the Act and regulations. Review process: The Consumer and Business Programs section of Service Nova Scotia and Municipal Relations is responsible for this review. Its role, in general, is to promote fairness in the marketplace and to champion consumer protection by educating consumers, regulating businesses, and resolving complaints about businesses. The department regulates mortgage brokers and registers certain lenders. The Financial Institutions Division of the Nova Scotia Department of Finance also regulates lenders. The review team for this project included the following members: C.A. Mark Coffin, Senior Program Executive (team lead ) Gerald Hashey, Deputy Registrar of Mortgage Brokers (former) Maureen Houlihan, Business Licensing Officer Mary Knox, Business Licensing Officer Maggie MacDonald, Senior Policy Analyst Elaine Smith, Senior Consumer Protection Officer During their discussions about the possible amendments to the Act, the team reviewed legislation from elsewhere in Canada, especially from Alberta, British Columbia, Ontario, Quebec, and Saskatchewan. To help prepare for this discussion paper, team members hosted a stakeholder s roundtable on December 5, Several representatives from large and small mortgage brokerages, and from the Canadian Association of Accredited Mortgage Professionals, gathered to discuss all aspects of the mortgage brokering industry and its regulation. Three hours of discussion yielded comments on most issues being considered in the review project. The review team thanks the participants from the roundtable session for their interest and input. For a list of participants, see Appendix C.

6 Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 6 Your Feedback This discussion paper addresses 14 key issues identified through the preliminary review process. It describes the issues, proposes changes to the Act and regulations, and poses questions about the proposals. The issues are numbered for convenience only, and are not arranged in order of importance or priority. They are grouped into three broad categories: Scope of the Act (Issues 1 to 4) Compliance with the Act (Issues 5 to 8) Good Business Practices (Issues 9 to 14) The paper is being circulated to industry stakeholders and has been posted online at A shorter consumer survey, based on the discussion paper, is also available online at We invite your feedback on the proposals and questions in this paper or in the shorter consumer survey. We also invite comments on any other issues related to the regulation of mortgage brokering and lending. All feedback received by April 26, 2010 will be considered when we draft changes to the Act and regulations. Please send your comments by June 15, 2010 to: Maggie MacDonald Senior Policy Analyst Service Nova Scotia and Municipal Relations PO Box 1003 Halifax NS B3J 2X1 MBLRA@gov.ns.ca

7 Background Why regulate? Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 7 The first question to consider in reviewing the Act is whether regulation is needed. Government regulations can be broadly divided into two types: social and economic. Social regulations address health, safety, welfare, working conditions, and the environment. Economic regulations aim for adequate competition, efficient markets, fair trade, and consumer protection. Economic regulations usually apply to specific industries, such as utilities, financial services, transportation, or communications. The regulation of financial markets typically has two main policy objectives: to promote confidence in a jurisdiction s markets to protect consumers The ability to buy, sell, and finance real estate is the biggest and most important economic driver in any market economy. Therefore, public confidence in all aspects of the real estate market, including mortgage brokering and lending, is essential to the health of the provincial economy. The mortgage brokering sector has undergone significant changes over the years (see Figure 1). A growing number of Canadians are going to mortgage brokers when shopping for a mortgage. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), 40 per cent of mortgage shoppers consulted a broker in 2007 up from 28 per cent in 2005 and 35 per cent of new mortgages were arranged through a mortgage broker. Many consumers are unfamiliar with the complexities of a mortgage and with their range of options. They rely on their service providers to guide them to a fair deal. An under-regulated market puts these consumers at risk, and that puts the economy at risk. Consumer awareness and protection go hand-in-hand. Well-informed borrowers are better equipped to assess their mortgage options and make choices that meet their needs. Service Nova Scotia and Municipal Relations has an important role in promoting confidence in the marketplace and in protecting consumers. It can fulfill this role by revising the Mortgage Brokers and Lenders Registration Act to prevent behaviour that profits the broker at the borrowers expense educating consumers about mortgage issues for example, through the department s website licensing mortgage brokers and lenders, and listing the licensees on the department s website The department must be able to monitor and ensure that licensees comply with regulations, without creating undue hardship on the industry. It must ensure that the Act and regulations are easy to understand and accessible to the public and brokers; and it must give brokers the tools they need to comply with requirements. Other provinces in Canada have updated the way they regulate mortgage brokers and lenders, and their work informs the review now underway in Nova Scotia.

8 Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 8 Background...cont. Figure 1. An overview of changes in the mortgage brokering sector in Canada The Law Society of Upper Canada, in comments about Ontario s Mortgage Brokers Act, explained the changes in the mortgage brokering sector in the following way:* The mortgage-brokering marketplace today is very different from the one that existed when the [Ontario] Mortgage Brokers Act was first designed. In particular: historically, the principal business of mortgage brokers was to find lenders suitable for their borrower clients, at the expense of their borrower clients, often because the borrower clients had characteristics that made them less attractive to institutional lenders often, the lenders were private individuals today, institutional lenders (banks, trust companies, credit unions) dominate the marketplace, and they are actively seeking mortgage clients through mortgage origination services, at their expense competition in a saturated domestic market has produced a complex array of mortgage products which are not necessarily easily understandable to the average consumer (fixed or variable, purchase, refinancing or preapproval, conventional or line of credit) excess capacity and the desire to capture the best borrowers (and to have the opportunity to sell them related financial products) means that there is bargaining room on posted rates, and more difficult loans are being placed with institutional lenders * Law Society of Upper Canada, Submission to the Parliamentary Assistant, Ministry of Finance, on Improving the Mortgage Brokers Act: A Consultation Paper (September 2004).

9 Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 9 Background...cont. Federal and Provincial Jurisdiction: Mortgage brokers are regulated by the province, but mortgage lenders are regulated by a combination of federal and provincial laws. Figure 2 lists three types of mortgage lenders, and shows how each type is regulated in Nova Scotia. For more information about federally and provincially regulated lenders, see Appendices A and B at the end of this paper. Figure 2. Federal and provincial authority to regulate lenders Type of lender Federal Authority Provincial Authority ( for NS) Banks Regulated by the Office of the Superintendent of Financial Institutions (OSFI) Legislation: Bank Act (Canada) Trust and loan companies If the company is federally incorporated, then it is regulated by the Office of the Superintendent of Financial Institutions (OSFI) Legislation: Trust and Loan Companies Act (Canada)* *The Trust and Loan Companies Act does not include disclosure requirements for consumer loans and mortgages, and so federally incorporated trust companies must also meet the disclosure requirements in the provincial Mortgage Broker s and Lenders Registration Act. If the company is provincially incorporated, then the following provincial authorities share jurisdiction: NS Department of Finance, Financial Institutions Division Legislation: Trust and Loan Companies Act (NS) (for some lenders) Service Nova Scotia and Municipal Relations, Consumer and Business Programs Section Legislation: Mortgage Brokers and Lenders Registration Act (NS) Credit unions and caisses populaires National and provincial credit union centrals (such as Credit Union Central of Canada and Credit Union Central of Nova Scotia) are regulated by the Office of the Superintendent of Financial Institutions (OSFI) Legislation: Cooperative Credit Associations Act All credit unions and caisses populaires are provincially incorporated and provincially regulated by the NS Department of Finance, Financial Institutions Division. Legislation: Credit Union Act (NS) Information for this table was drawn, in part, from the Department of Finance (Canada), The Canadian Financial Services Sector (Monograph, June 2005) (accessed July 10, 2009).

10 SCOPE OF THE ACT Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 10 ISSUE 1 Definition of Mortgage Broker Background: The current definition of mortgage broker in the Act does not clearly describe who must be licensed. Also, it does not refer to mortgage administrators that is, people who collect mortgage money from lenders for lending to borrowers. The trend in mortgage broker legislation across Canada is to describe those who work in the sector based on their activities. Proposal: A. Expand and clarify the definition of mortgage broker in the Act to describe what a broker does. (See the sample wording in Figure 3. Also see the related wording for mortgage brokerage in Issue 3, Figure 5.) B. Amend the Act to separate mortgage brokers/brokerages from lenders. Figure 3. Sample wording for an activity-based definition of mortgage broker Mortgage broker means a person who, on behalf of a specific mortgage brokerage arranges, negotiates, trades, or deals in mortgages indicates for example, by presentation, advertisement, notice, or sign that they are a mortgage broker or a person who deals in mortgages For the purposes of this act, a person or entity is dealing in mortgages in Nova Scotia when they do any of the following activities in Nova Scotia, or present themselves as doing them: 1. Solicit another person or entity to borrow or lend money for real property. 2. Provide information about a prospective borrower to a mortgage lender, whether or not this act governs the lender. 3. Assess a prospective borrower on behalf of a mortgage lender, whether or not this act governs the lender. 4. Negotiate or arrange a mortgage on behalf of another person or entity, or try to do so. 5. Administer mortgages in Nova Scotia. 6. Do other activities that may be prescribed in the regulations. Any person or entity that deals in or is paid to deal in mortgages in Nova Scotia (directly or indirectly, as an employee or otherwise) must have a mortgage broker s licence and be acting on behalf of a licensed mortgage brokerage, or be exempt from the requirement to have a broker s licence. Other Jurisdictions/Comments: Saskatchewan and Ontario adopted activity-based definitions for mortgage brokers. Ontario instituted a new brokerage model, which split the term mortgage broker into several categories of service providers, depending on the role they played. Questions: 1.1 Do you agree with defining mortgage brokers according to the types of activities they do? 1.2 Should mortgage brokers be treated separately from mortgage lenders in the Act?

11 Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 11 ISSUE 2 Exclusions from Licensing Requirements Background: The MBLRA does not specifically exempt any class of person from the requirement to be licensed as a mortgage broker. It makes sense to exclude some individuals or corporations for example, lawyers or institutions regulated by the Bank Act. Other jurisdictions exempt certain people from having to be licensed. Proposal: Allow some individuals or corporations to be exempt from licensing, and name the exemptions in the regulations. See Figure 4 for a list of proposed exemptions. Figure 4. Likely exemptions from the Act The following kinds of individuals or institutions would likely be excluded from the Act: (a) institutions that are regulated under the Bank Act (Canada). Note: Lending institutions not regulated by the Bank Act should be required to license as a brokerage in Nova Scotia and to maintain a place of business in this province if they deal in mortgages (b) employees of the financial institutions mentioned in (a) (c) members of the Nova Scotia Barristers Society who are certified as practicing lawyers (d) corporations, partnerships, or individuals who make a loan for a commercial or industrial purpose. For the purpose of this regulation, a loan for a commercial or industrial purpose includes a loan made for an apartment building of four or more rental units, or for an office building (e) people who lend money for real property to a person related to them by blood or marriage (up to $100,000 per mortgage) (f) people providing referrals without being paid (g) other entities or individuals as prescribed in the regulations Other Jurisdictions/Comments: All other jurisdictions that the review team examined explicitly outline who is exempt from the legislation governing mortgage brokers and lenders. Questions: 2.1 Do you agree with exempting sectors or classes of people from the Act (and so exempting them from having to be licensed)? 2.2 Do you agree with the proposed exemptions list? 2.3 Would you like to see any other exemptions? Please list them and explain your reasons.

12 ISSUE 3 Expansion of Licensee Types Background: Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 12 The MBLRA does not require that individual brokers become licensed. As a result, freelancers can move from one brokerage s umbrella licence to another. This means the registrar does not know who is working under each licence. The trend elsewhere in Canada is to license brokerages, brokers, and sub-brokers (apprentices) separately. In this way, activities can be tracked more thoroughly. Proposal: A. Create separate licences for brokerages and brokers. B. Require brokerages to name a principal broker. The principal broker would oversee the activities of all licensees in the brokerage and report to the registrar the names of all licensees who work in the brokerage. The principal broker would advise of any changes in licensees working at the brokerages, as the changes happen. When a broker s employment ends, the principal broker will notify the registrar and indicate whether the employee was terminated with cause. The principal broker would be the primary point of contact between the regulator and the brokerage, its employees, and its associates. Figure 5 offers possible wording for the term mortgage brokerage. (For a related definition of mortgage broker, see Issue 1, Figure 3.) Figure 5. Sample wording for the definition of mortgage brokerage Mortgage brokerage means a corporation, partnership, or sole proprietorship that arranges, negotiates, trades, or deals in mortgages indicates for example, by presentation, advertisement, notice, or sign that it is a mortgage brokerage or company that deals in mortgages Other Jurisdictions/Comments: Ontario requires separate licences for brokers and brokerages and has created the position of principal broker. British Columbia requires that a mortgage brokerage appoint a Designated Individual who is responsible for the regulatory requirements of the office. The Designated Individual must be an officer or director of a corporate mortgage broker, a general partner in a mortgage broker partnership, or the sole proprietor. Questions: 3.1 Do you agree that all individuals and companies working in the sector must be licensed? 3.2 Do you agree that licensing must be required not just for brokers but also for brokerages? 3.3 Do you agree that each brokerage must name a principal broker to be the primary contact between the regulator and the brokerage, and that the principal broker would represent all employees and associates of the brokerage?

13 Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 13 ISSUE 4 Definition of Commercial Mortgage Loan Background: The MBLRA applies to consumer loans secured by real estate, and specifically exempts commercial loans. The mandate of Service Nova Scotia and Municipal Relations includes consumer protection, but not business-to-business transactions. The current Act partially defines commercial or industrial purpose, but the definition needs to be revised to help licensees and potential licensees understand the scope of the Act. Figure 6 quotes the current definition in the regulations. Figure 6. Current definition of commercial or industrial purpose in the regulations (5) (1) A person who makes a loan of an amount of twenty-five thousand dollars or more for a commercial or industrial purpose shall with respect to that loan be exempt from all provisions of the Mortgage Brokers and Lenders Registration Act and these regulations. (2) For the purpose of this Regulation a loan for a commercial or industrial purpose includes a loan made on the security of an apartment building or office building. The current definition is ambiguous. For example, how many units qualify a dwelling to be considered an apartment building? What if one of the units is owner-occupied? Is a duplex an apartment building, especially if half is occupied by the owner? Does a home office make a dwelling commercial? Proposal: A. Clarify the definition of commercial or industrial purpose by further defining a commercial or industrial loan to include the following: (i) a loan made on the security of a building containing four or more residential units, regardless of whether the owner lives in the building, and regardless of whether any unit includes a home office; or (ii) a loan made on the security of an office building, warehouse, hotel, church, or other non-residential building B. Specify in the Act or regulations that the Act applies to lenders and brokers who have consumer mortgages as any part of their business. Other Jurisdictions/Comments: The jurisdictions examined do not distinguish between commercial and residential mortgages. Mortgage brokers and lenders are typically defined without reference to the type of mortgage involved. British Columbia s Act makes an exception in its disclosure requirements when the broker is acting for sophisticated persons, such as institutions or investment dealers. Nova Scotia s MBLRA and the consumer protection activities of Service Nova Scotia and Municipal Relations do not use the term sophisticated persons, but they incorporate the concept. They treat all commercial and industrial loans as if they are being made to sophisticated persons, because these loans are made to businesses that typically have legal advice. Questions: 4.1 Should the Act cover commercial and industrial mortgage loans? 4.2 Should a loan secured against a multi-unit building be considered a commercial loan even if the owner occupies one of the units? 4.3 Should the number of units in a building determine whether a loan is residential or commercial? 4.4 Should a home office be a factor in deciding if a dwelling is a commercial one?

14 COMPLIANCE WITH THE ACT Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 14 ISSUE 5 Record-keeping Requirements Background: The regulator needs detailed and accurate records of each mortgage broker s activities in order to ensure that the broker complies with disclosure and other requirements of the Act. Record-keeping requirements need to protect consumers without putting an unnecessary burden on the brokers. Electronic record-keeping can help streamline the inspection process. Proposal: A. Require brokers and brokerages to keep original records, such as details of money received in trust commitments received from lenders correspondence (to and from the broker/brokerage) about loans and files opened. B. If the records are scanned, allow the originals to be stored in a secure, off-site location that is approved by the registrar. C. Require brokers and brokerages to show the original records if the registrar or an inspector demands them. D. List in the regulations the records that must be kept. Other Jurisdictions/Comments: All jurisdictions examined have detailed requirements for keeping brokers records. In Ontario, if a brokerage intends to keep its records somewhere other than its principal place of business in Ontario, it must notify the superintendent and specify the place where it will keep the records. Saskatchewan defines record to include a book, paper, document or thing, whether in electronic form or otherwise, that may contain information about the finances or business of a mortgage brokerage or broker. Questions: 5.1 Do you agree with permitting off-site storage for original records, on approval of the registrar, so long as the registrar can inspect the originals? 5.2 Do you think that the Act should permit scanned images of documents, and consider them to be the original for all purposes?

15 ISSUE 6 Trust Money Requirements Background: The MBLRA does not specify how to handle money that belongs to a third party. Proposal: Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 15 A. Require all brokers, brokerages, and lenders to maintain trust accounts if they receive money from third parties. B. Require separate trust records and monthly reconciliations for money held in trust. C. Require licensees that do not handle money from third parties to submit an annual statement. Make this statement part of the annual licence renewal. Figure 7. Possible wording in the Act regarding money held in trust This wording was adapted from the Trust Accounting requirements in the Legal Profession Act and Regulations. The Governor in Council may make regulations to (a) Require licensees who receive money in trust to maintain certain books and records of accounts. (b) Require licensees who receive money in trust to establish and maintain trust accounts. (c) Regulate the investment of funds held in trust by licensees. (d) Prescribe the types of financial institutions in which licensees may deposit money held in trust. (e) Require licensees to keep books and records of accounts for money entrusted to or received by them for the benefit of clients or other persons as they carry out activities as a mortgage broker; and to produce those books and records of accounts, on demand, to the registrar or any other person designated by the Minister. (f) Require licensees who receive money in trust to have their books, records of accounts, and related files independently reviewed by an accountant or a person designated by the Minister. (g) Provide for the audit, review, or examination of a licensee s books, records of accounts and related files by a person designated by the Minister, if the licensee receives money in trust. (h) Require a licensee who receives money in trust to give the registrar, or any other person designated by the Minister, a report on the review conducted under clause (e). (i) Require a licensee who receives money in trust to answer questions about the books, records of accounts, and related files that were reviewed. (j) Require all licensees to submit reports showing whether the licensee received any money in trust during the reporting period. Other Jurisdictions/Comments: All jurisdictions examined have detailed record-keeping and reporting requirements for trust money. In British Columbia, a mortgage broker that does not handle trust funds must file a statutory declaration sworn before a lawyer or notary public that confirms the broker did not handle or receive trust funds or funds that should have been held in trust. The statutory declaration must be filed within 30 days of the broker s fiscal year-end. It is not necessary for an accountant to conduct an audit or review of the broker s books and records. Late filings are subject to late filing fees and to other regulatory action. Questions: 6.1 Do you agree that the regulations must specify how to handle, deposit, record, and report all money held in trust? 6.2 Do you agree that a brokerage/broker that has not held money in trust in the past year should be required to sign an annual statement declaring this?

16 Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 16 ISSUE 7 Inspections, Enforcement, and Penalties Background: The MBLRA has a wide range of provisions for the following: the inspection of brokers records and documents; enforcement of the Act and regulations; and penalties for non-compliance, including fines, licence suspension, or imprisonment. These provisions are listed in Figure 8. Figure 8. Current MBLRA `powers [provisions for inspections, enforcement, and penalties] 7. Where the Registrar is not satisfied that an applicant satisfies all the requirements of this Act and the regulations respecting the issuance or renewal of a permit and is a suitable candidate for a permit or where the Registrar is of the opinion that it is not in the public interest to issue a permit or renewal to the applicant, the Registrar may refuse to issue or renew the permit. 10. (1) The Registrar may suspend for a stated term or until a condition has been met or may cancel any permit if in the opinion of the Registrar it is in the public interest to do so. 11. Where in the opinion of the Registrar a person who holds a permit under this Act is making false, misleading or deceptive statements in an advertisement, circular, pamphlet or similar material, the Registrar may order the immediate cessation of the use of the material. 13. The Registrar, or a person to whom as his representative or representatives in writing delegates authority, may examine any person or thing whatsoever at any time in order to ascertain whether any fraudulent act, or any offence against this Act or the regulations, has been, is being, or is about to be committed. 14. For the purpose of exercising his functions under this Act, the Registrar has all the powers, privileges and immunities of a commissioner appointed under the Public Inquiries Act. 15. The Registrar or a person authorized by him for the purpose may enter the premises of a mortgage broker or any person he has reasonable cause to believe is acting as a mortgage broker and inspect the records and files of the person and make copies of or take extracts from any books, records or documents on those files. 29. (1) Every person who violates any provision of this Act or the regulations or who fails to observe or comply with an order or direction given by the Registrar under this Act or the regulations is liable to a fine of not more than five thousand dollars or imprisonment for not more than six months, or both. 29. (2) Where a corporation is convicted of an offence under subsection (1), it is liable to a penalty of not more than twenty-five thousand dollars. Proposal: A. Keep all of the current powers for inspecting records and operations; suspending and revoking licences; and prosecuting offenders for non-compliance.[see Figure 8] B. Keep penalties at the current level, as specified in sections 29(1) and (2) of the Act. C. Give the inspectors or registrar the power to issue summary offence tickets (fines) for non-compliance. Other Jurisdictions/Comments: All jurisdictions that we examined include inspection, enforcement, and penalties in their legislation. Questions: 7.1 Should inspectors or the registrar be authorized to issue summary offence tickets (fines) to brokerages or brokers that do not comply with the Act? 7.2 Would you like the registrar to have: (a) More powers than are listed in Figure 8? (b) Fewer powers than are listed in Figure 8? Why?

17 ISSUE 8 Mortgage Broker and Lender Accountability Background: Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 17 The MBLRA does not have separate provisions for lender and broker accountability. The licences and requirements for lenders and brokers are virtually identical. Proposal: A. Clearly separate the duties of the lender from the duties of the broker/brokerage in order to hold each accountable for their role in the transaction. B. Require brokers to verify the information that they provide to lenders, or to disclose in writing that they have not verified specific information. Other Jurisdictions/Comments: Figure 9 quotes from a bulletin issued to mortgage brokers by British Columbia s registrar. Figure 9. Excerpts from a bulletin about due diligence, from British Columbia Mortgage brokers need to recognize that lenders rely on the information they receive regarding potential borrowers. Mortgage brokers cannot say that it is not their responsibility to verify the information being given to them during the application process. Lenders indicate they assume that mortgage brokers have verified the information before forwarding it on. This office takes the position that a mortgage broker has a duty to ensure the information being sent to a lender has been verified. Although no one is suggesting that mortgage brokers need to conduct in-depth investigations of every transaction that they process, reasonable due diligence must be undertaken to ensure that the information being passed on to lenders is accurate. Applications containing errors or omissions need additional verification and under no circumstances should brokers be referring applications that have been shown by another mortgage broker or lender to contain false or inaccurate information. If mortgage brokers do not verify the information they are forwarding to lenders, then mortgage brokers should advise the lenders in writing that none of the information has been verified. Questions: 8.1 Would you like to see the responsibilities of lenders and mortgage brokers separated in the Act? 8.2 Would you support issuing separate licences for brokers and lenders? 8.3 Do you agree that mortgage brokers should have to verify the information they give to lenders about proposed borrowers?

18 GOOD BUSINESS PRACTICES Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 18 ISSUE 9 Proficiency and Educational Requirements Background: The MBLRA does not require any training for a person to become licensed as a mortgage broker. Inexperienced or untrained mortgage brokers may give borrowers bad advice, may not be aware of regulations, or may have an unrecognized conflict of interest. The extent of this problem is not known. But clients who receive poor advice face a wide range of risks. For example, clients may get an inappropriate mortgage for their circumstances pay too much for a mortgage get a mortgage that they may not be able to pay, resulting in a default Requiring training for mortgage brokers may resolve this issue by creating standards of knowledge. Training requirements should improve the quality of advice given by brokers and improve consumers choices of mortgage help ensure that brokers are aware of and comply with regulations improve awareness of ethical issues and possible conflicts of interest in the industry A secondary benefit would be to improve consumer confidence in brokers. Any training requirement must consider the special case of brokers who do not have formal qualifications, but whose experience and first-hand knowledge allows them to give excellent advice to the customer. Proposal: Require new applicants for a broker s licence to pass a test on the Act and regulations. Other Jurisdictions/Comments: In other jurisdictions, the training requirements focus on three general areas: legislation and regulations; technical mortgage-related content; and ethics. In British Columbia, to qualify for registration as a mortgage broker, an applicant must take a course and pass an exam specified by the registrar. In Ontario, the training requirement is a two-year course offered through Seneca College. New applicants in Nova Scotia should not be granted a licence until they show proficiency with the MBLRA and regulations. This may be as simple as passing an online quiz on the Act and regulations. Existing licensees should have to show a base level of education or experience in the sector in order to maintain their licence. The province should also consider regulations that require continuing broker education. Questions: 9.1 Do you agree that new applicants should have to pass a test on regulatory requirements in Nova Scotia in order to get a licence? 9.2 Do you agree that currently licensed brokers should be exempt from courses or testing if they can show that their experience equals the educational requirements? 9.3 Do you agree that brokers should have to take part in continuing education?

19 ISSUE 10 Place-of-Business Requirements Background: Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 19 Mortgage brokers and lenders are required to have a permanent place of business in Nova Scotia so that consumers can visit their broker or lender in an appropriate environment consumers information is kept securely inspectors have a site to visit and can inspect files and other documents consumers and regulators can follow up with lenders or brokers if problems occur Proposal: A. Require all mortgage brokerages licensed in Nova Scotia to have a permanent place of business in the province. B. Require that all brokers records be maintained in the permanent place of business or at a location approved by the registrar. C. If original records are stored off-site with the registrar s permission, require the brokerage to keep copies (or scanned images) at the permanent place of business in Nova Scotia. Other Jurisdictions/Comments: Alberta requires licensed mortgage brokers to work for a brokerage that maintains a registered business office in Alberta. This office must be a place where the mortgage broker conducts business the mortgage broker has access to and control over the use of the office premises the required records are kept or made available Saskatchewan requires licensed mortgage brokers to maintain a place that is satisfactory to the registrar (superintendent), from which the person conducts or intends to conduct some or all of their business as a mortgage broker. Ontario requires every brokerage to operate from a permanent place of business in that province. That place must be able to receive registered mail. A mortgage broker or agent must also maintain an address. Jurisdictions typically also require a registered address for service of notices and documents, and require that changes of address be reported to the registrar. Questions: 10.1 Do you agree that mortgage brokerages should maintain a permanent place of business in Nova Scotia? 10.2 Do you agree that off-site storage must be approved by the registrar?

20 ISSUE 11 Standards of Practice, Disclosure, and Fraud Prevention Background: Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 20 Standards of practice are regulations or guidelines that govern industry behaviour. Their purpose is to protect the consumer and to ensure the accuracy and completeness of business transactions, such as mortgage applications. The result is a lower rate of default, lower risks to everyone involved, and improved consumer choice. Standards of practice cover a wide range of practices and may meet various needs for consumer protection. The MBLRA has references to apparent fraud and to the registrar s powers if fraud occurs. These powers are appropriate and should be kept. However, the powers should be expanded and the licensees due diligence should be strengthened. Proposal: Regulate standards of practice for mortgage brokers by expanding the disclosure regulations to include these and other issues: (a) conflicts of interest; (b) material risks; (c) cost of borrowing; (d) verification of borrowers identity and information, in order to reduce fraud; and (e) payment for brokers and brokerages. Other Jurisdictions/Comments: All jurisdictions reviewed have detailed requirements for disclosure and conflict of interest. Ontario s regulations set out standards of practice for brokers. Questions: 11.1 Do you agree that disclosure requirements are the best way to govern brokers standards of practice? 11.2 Should Nova Scotia adopt standards of practice for mortgage brokers?

21 ISSUE 12 Mortgage Brokers Fees Background: Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 21 There is currently no maximum fee that a broker may charge a borrower. In addition, brokers are not required to disclose their fees before the borrower hires them or signs a mortgage commitment letter. It is possible for a broker to take on a client who has no reasonable prospect of qualifying for a mortgage, simply to collect a broker fee. Proposal: A. Require brokers to disclose their fees, either when the borrower hires the broker (if fees are payable even if the broker does not get a mortgage commitment from a lender), or before a mortgage commitment is signed (if fees are payable by the borrower or lender to the broker when the mortgage commitment is signed). B. Cap broker fees at $250 if the broker does not secure a mortgage commitment from a lender. If fees are disclosed in advance, do not cap the broker s fee if the broker does manage to secure a mortgage commitment from a lender. C. Beyond the requirements in A and B, do not regulate the fees charged by a brokerage/broker. Other Jurisdictions/Comments: In Newfoundland and Labrador, a mortgage broker s fee cannot exceed 1% of the principal amount of a mortgage plus $100. Questions: 12.1 Do you agree with capping the fees to prospective borrowers if the broker does not get a mortgage commitment for them? 12.2 Do you think that brokers fees should be capped even if the broker gets a mortgage commitment from a lender? 12.3 Do you agree that brokers must tell borrowers that they will receive a commission from a lender? 12.4 If you agree that brokers must tell borrowers about any commission they receive from a lender, should the broker have to disclose the amount of that commission?

22 ISSUE 13 Reverse Mortgages Background: Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 22 Reverse mortgages let consumers borrow against the equity in their home. Reverse mortgages are available in Canada to people over 60. They entitle borrowers to unlock up to 40 per cent of the equity in their home. Regular repayments on the loan are not made until the borrower leaves, sells the home, or dies. At this point the loan ends and must be repaid with interest. Reverse mortgages have increased in popularity in recent years, partly driven by industry marketing. But regulators around the world are concerned about reverse mortgages, and have identified key risks to consumers. For example, research in Australia has shown the following: Many borrowers did not know how much the loan was likely to cost them over time, and many did not know the consequences of breaching a loan condition. The borrowers did not always clearly understand the trade-off between accessing loan funds now and having less available in the future. Several borrowers commented about how difficult it had been to resist the constant availability of credit. Very few of the borrowers had done long-term planning about how their financial needs might change over the next 10 or 15 years... There were gaps in the financial advice received by borrowers. Statistics show that, on average, Canadian seniors have 80 per cent of their assets tied up in their house. For those with little or no income, that can create financial hardship. They may not be able to borrow against their house because they have no income to make monthly payments. With a reverse mortgage, the consumer gets a lump sum and makes no monthly payments. But the principal remains unpaid and interest accumulates. The debt is repaid only when the house is sold or the owner dies. Borrowers need to understand that the amount they owe will rise substantially over time, because interest is growing and they are not making any repayment. The amount they owe may double or triple in a decade. As an alternative to this build-up of principal and interest, many financial planners suggest that homeowners take out a secured line of credit rather than a reverse mortgage. Proposal: Require a separate form of disclosure for reverse mortgages, giving the borrower clear information about this unique type of mortgage. Other Jurisdictions/Comments: Most other provinces have the same disclosure requirements for reverse mortgages as they do for standard mortgages. Questions: 13.1 Do you agree that reverse mortgages should have their own disclosure requirements and form?

23 ISSUE 14 Errors & Omissions Insurance Background: The MBLRA does not require brokerages or brokers to have errors and omissions (E&O) insurance. If a broker makes an error, the consumer may not be able to recover losses. Proposal: A. Require all mortgage brokerages and brokers to have errors and omissions (E&O) insurance. B. If they don t have E&O insurance, suspend the licence. Other Jurisdictions/Comments: In Ontario, all mortgage brokerages and administrators must carry E&O insurance with extended fraud coverage in a form approved by the registrar (superintendent), or carry another form of approved assurance. The E&O insurance must cover a minimum of $500,000 for any one occurrence, and $1 million for all occurrences in a given year. Extended fraud coverage is included in the overall minimum policy limit. Quebec s Organisme d autoréglementation du courtage immobilier du Québec maintains an insurance fund to which each broker contributes. Legislation requires that, if no fund exists, the broker must take out civil liability insurance as specified in the organization s regulations or, in the cases prescribed in the organization s regulations, give security or a guarantee instead of security. In Alberta and Manitoba, brokers must contribute to an assurance fund. Questions: 14.1 Do you agree that mortgage brokerages must have insurance coverage for errors and omissions? 14.2 Do you think that both brokers and brokerages must meet this requirement? Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion If you do not support an insurance requirement, do you agree that an insurance fund should be created and maintained from fees paid by brokerages and/or brokers?

24 APPENDICES Appendix A Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 24 Federally Regulated Deposit-taking Institutions: The Office of the Superintendent of Financial Institutions (OSFI) is a single regulatory agency responsible for the regulation and supervision of all federally chartered, licensed or registered banks, insurance companies, trust and loan companies, cooperative credit associations and fraternal benefit societies. The information in this appendix was obtained from the OSFI website at Domestic Banks (21): The following institutions are regulated under the Bank Act, and are authorized to accept deposits. These deposits may be eligible for deposit insurance from the Canada Deposit Insurance Corporation. Bank of Montreal Bank of Nova Scotia (The) Bank West Bridgewater Bank Canadian Imperial Bank of Commerce Canadian Tire Bank Canadian Western Bank Citizens Bank of Canada CS Alterna Bank DirectCash Bank Dundee Bank of Canada First Nations Bank of Canada General Bank of Canada Jameson Bank Laurentian Bank of Canada Manulife Bank of Canada National Bank of Canada Pacific & Western Bank of Canada President's Choice Bank Royal Bank of Canada Toronto-Dominion Bank (The)

25 Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 25 Appendix A, cont. Foreign Banks (25) Foreign bank subsidiaries are regulated under the Bank Act and are authorized to accept deposits. These deposits may be eligible for deposit insurance from the Canada Deposit Insurance Corporation. Foreign bank subsidiaries are controlled by eligible foreign institutions. ABN AMRO Bank Canada (In Voluntary Liquidation) Amex Bank of Canada Bank of America Canada (In Voluntary Liquidation) Bank of China (Canada) Bank of East Asia (Canada) (The) Bank of Tokyo-Mitsubishi UFJ (Canada) Bank One Canada (In Voluntary Liquidation) BNP Paribas (Canada) Citibank Canada CTC Bank of Canada Habib Canadian Bank HSBC Bank Canada ICICI Bank Canada ING Bank of Canada J.P. Morgan Bank Canada J.P. Morgan Canada (In Liquidation) Korea Exchange Bank of Canada MBNA Canada Bank Mega International Commercial Bank (Canada) Mizuho Corporate Bank (Canada) Shinhan Bank Canada Société Générale (Canada) State Bank of India (Canada) Sumitomo Mitsui Banking Corporation of Canada UBS Bank (Canada)

26 Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 26 Appendix A, cont. Foreign Bank Branches (Full Service) (23): Foreign bank branches are foreign institutions that have been authorized under the Bank Act to do banking business in Canada. These branches may not accept deposits of less than $150,000. ABN AMRO Bank N.V. Bank of America, National Association Bank of New York Mellon (The) Capital One Bank (Canada Branch) Citibank, N.A. Comerica Bank Deutsche Bank AG Dexia Credit Local S.A. Fifth Third Bank First Commercial Bank Glitnir banki hf. HSBC Bank USA, National Association JPMorgan Chase Bank, National Association Landsbanki Canada Maple Bank Mizuho Corporate Bank, Ltd., Canada Branch Northern Trust Company, Canada Branch (The) Rabobank Nederland Société Générale (Canada Branch) State Street U.S. Bank National Association UBS AG (Canada Branch) United Overseas Bank Limited Foreign Bank Branches (Lending) (7) Allied Irish Banks, p.l.c. AmTrust Bank, Canadian Branch Credit Suisse, Toronto Branch Merrill Lynch International Bank Limited National City Union Bank of California, N.A. WestLB AG

27 Mortgage Brokers and Lenders Registration Act Issues and Proposals for Discussion 27 Appendix A, cont. Trust Companies (47) A trust company is a financial institution that operates under either provincial or federal law and is similar to a bank. However, a trust company can administer estates, trusts, pension plans, and agency contracts, which banks are not allowed to administer. The following institutions are regulated under the federal Trust and Loan Companies Act. They are authorized to accept deposits, which may be eligible for deposit insurance from the Canada Deposit Insurance Corporation. (Note: Federally regulated trust companies are also subject to the loan disclosure requirements in the provincial Mortgage Brokers and Lenders Registration Act.) AGF Trust Company B2B Trust Bank of Nova Scotia Trust Company (The) BMO Trust Company BNY Trust Company of Canada Caledon Trust Company Canada Trust Company (The) Canadian Western Trust Company CIBC Mellon Trust Company CIBC Trust Corporation Citi Trust Company Canada Citizens Trust Company Community Trust Company Computershare Trust Company of Canada Concentra Trust Desjardins Trust Inc. Effort Trust Company (The) Equitable Trust Company (The) Equity Transfer & Trust Company Fiduciary Trust Company of Canada General Trust Corporation of Canada (In Liquidation) Home Trust Company Household Trust Company HSBC Trust Company (Canada) Industrial Alliance Trust Inc. Investors Group Trust Co. Ltd. Laurentian Trust of Canada Inc. LBC Trust Legacy Private Trust M.R.S. Trust Company Maple Trust Company MD Private Trust Company Montreal Trust Company of Canada Natcan Trust Company National Trust Company Northern Trust Company, Canada (The) Oak Trust Company Peace Hills Trust Company Peoples Trust Company RBC Dexia Investor Services Trust ResMor Trust Company Royal Trust Company (The) Royal Trust Corporation of Canada Standard Life Trust Company State Street Trust Company Canada Sun Life Financial Trust Inc. Valiant Trust Company