The Canadian Association of Accredited Mortgage Professionals is hoping that new Ontario regulations will put mortgage brokers on the same professional footing as other sectors of Ontario’s financial services industry. But many players in the mortgage sector are concerned that the new rules go too far and could hurt mortgage brokerage sales.

The new regulations, which came into force at the beginning of the year, are made under the Ontario Mortgage Brokerages, Lenders and Administrators Act, which took effect on July 1, 2008. That act generally imposes new licensing and education requirements on mortgage brokers.

But, as is often the case, many of the act’s practical aspects are contained in the lower-profile regulations. These include new standards for training, accountability, advertising, disclosure and consumer protection, including product suitability. As CAAMP members adopt the new regulations, they are also preparing for compliance audits by the Financial Services Commission of Ontario.

The changes are already generating debate. Some critics argue that the new rules are too onerous, and are concerned they could hurt the business of mortgage brokerages by placing them and their agents at a disadvantage in relation to mortgage specialists at banks, who are exempt from the new rules because they are governed by federal banking laws.

But supporters of the changes say that although there may be some kinks to work out, increased oversight and tougher standards can only improve the mortgage sector, which has moved from the fringes of the financial services sector two decades ago into the mainstream.

Few argue that regulation is not needed. More than one in three residential mortgages in Canada are now obtained through a mortgage broker, says Jim Murphy, president and CEO of Toronto-based CAAMP, which has about 12,000 members drawn from 1,400 companies in the sector, including mortgage lenders, brokers and insurers. “All of these things, from our perspective, raise the bar of professionalism in the [mortgage sector].”

In the past, a mortgage broker was seen as a “lender of last resort,” Murphy acknowledges, but notes: “That’s changed dramatically.”

Now, mortgage brokers are routinely used by consumers who have solid credit but who are looking for any edge they can find when it comes to interest rates and features. Murphy and other mortgage sector leaders are hoping the sector will evolve even further under the updated regime.

Some of the changes involve educational requirements and licensing, not just for brokerages and brokers but also for their agents, who must be at least 18, undergo a police check and carry errors and omissions insurance. (A recent CAAMP audit revealed that 400 brokerages in Ontario did not have approved E&O coverage.)

The legislation creates a new posi-tion of “principal broker,” who acts as compliance officer. That person is accountable for all the activities of the brokerage, including supervising regulatory filings, ensuring staff are fully trained and licensed, and monitoring agents and administrators to ensure that they are following all policies and procedures.

“Practise what you preach as a principal broker,” says Anatol Monid, director of market conduct for the FSCO in Toronto. “Always set the tone from the top of your organization.”

Under the new rules, brokerages must also show greater transparency when dealing with clients. This includes disclosing whether the broker is acting on behalf of the buyer or lender; disclosing fees, commissions and conflicts of interest; ensuring the mortgage product is appropriate for the client; and making sure the client understands the risks of buying the product.

“When in doubt, disclose,” Monid cautions, adding that it’s vital that clients grasp every aspect of their contracts. “They must go into any transaction with their eyes wide open.”

For instance, clients should be asked if the payments are affordable, whether they have a budget and the extent to which they have other financial responsibilities, such as children and elderly parents. Clients should also be asked about job stability, Monid adds, and even family stability.

This risk disclosure and other broker/agent actions must be documented in paper so that brokers and agents can protect themselves in the event of an audit or a complaint. “You are not expected to be a financial planner, but you do need to understand your clients’ financial circumstances,” Monid says. “You cannot turn a blind eye to the facts before you.”

Thus, it’s critical that the mortgages are suitable for the clients, Monid warns. This kind of screening is already done by other advi-sors in the financial services sector, he says: “This brings the mortgage [sector] in line with other financial services professionals.”

@page_break@There are other, more sinister reasons for carefully reviewing a client’s situation in depth, Monid notes. Mortgages are a common method of raising funds for terrorism and for laundering the proceeds of crime. “We are not asking you to become the police,” he says. “But the act does place the onus on you to be reasonable. You cannot take a ‘Don’t ask, don’t tell’ approach. By proactively managing the risk, you can avoid problems.”

Monid advises using common sense: “We are not expecting you to have a crystal ball and be private investigators.”

Veteran independent mortgage broker Arnold Molder, who owns a Toronto franchise of the Mortgage Centre of Canada (an arm of CIBC Mortgages Inc. ) complains that the extensive grilling he will now have to give clients will hurt his business: “I have come to the conclusion that I have to talk every client out of a mortgage.”

Another issue that rankles is what some see as different regimes for bank employees and independent brokers, even when a bank employee facilitates the placement of a mortgage through a third-party lender. Bank employees who help place such mortgages are exempt from the new Ontario rules and are instead covered under the federal legislation that governs banks.

Murphy says mortgage specialists at banks should be exempt from the new rules if they are placing the mortgages with their banks. “But if they are placing it with a third party,” he adds,” then we believe they are brokering and should be licensed. The government did not accept this.” IE