New rules for the Ontario mortgage broker industry effective July 1, 2008

May 22, 2008
Advance licence application period now underway


Ontario's new Mortgage Brokerages, Lenders and Administrators Act, 2006 (the "New Act"), which sets forth a comprehensive and expansive regulatory regime for individuals and businesses in the lending industry, will be fully in force as of July 1, 2008.

Replacing the current Mortgage Brokers Act (the "Existing Act"), the New Act requires persons and businesses to be appropriately licensed where they are "carrying on the business of" any of the following:

  • dealing in mortgages (which includes the solicitation of persons to borrow or to lend on the security of real estate; the assessment of borrowers on behalf of lenders; and the negotiation or arranging of mortgages on behalf of others);
  • trading in mortgages (which includes buying, selling or exchanging mortgages on one's own behalf or on behalf of others);
  • lending money in Ontario on the security of real estate; or
  • collecting and remitting payments under a mortgage on behalf of others.


Foreign entities and individuals must be licensed under the New Act where they carry on the business of the regulated activities in Ontario.
As of July 1, 2008 and unless an exemption applies, mortgage brokerages and all directors, officers, partners, employees and agents of a mortgage brokerage who are engaged in dealing in, trading in, or administering mortgages, must obtain the appropriate licence to engage in such activity. Individual mortgage brokers and agents must be licensed through the mortgage brokerage with whom they are employed and may only act on behalf of such mortgage brokerage.

Parts of the new legislation came into force on March 1, 2008 to facilitate applications in advance of the new rules and to allow registered mortgage professionals to apply for time-limited exemptions from new education and experience requirements.

Further, the Financial Services Commission of Ontario (FSCO) is currently processing applications from mortgage brokerages and brokers who were registered under the Existing Act. Forms for new applicants have only recently become available on FSCO's website.

Types of Licences

Four types of licences will be issued by FSCO under the New Act:

  • Brokerage licence - authorizes a corporation, partnership or sole proprietorship to carry on the business of dealing in or trading in mortgages or acting as a mortgage lender in Ontario.
  • Mortgage Broker's licence - authorizes an individual to deal or trade in mortgages in Ontario on behalf of a specified mortgage brokerage.
  • Mortgage Agent's licence - authorizes an individual to deal or trade in mortgages in Ontario under the supervision of a mortgage broker on behalf of a specified mortgage brokerage. Agents who are employed by a currently registered broker, but who have not yet obtained the new education requirements by July 1, 2008 will be granted a conditional licence if they agree to complete an approved mortgage agent education course by July 1, 2010.
  • Mortgage Administrator's licence - authorizes an organization to carry on the business of administering mortgages in Ontario.

Principal Broker

Each mortgage brokerage is required to designate a "Principal Broker." The Principal Broker must be a licensed mortgage broker and be either a director or officer (if the brokerage is a corporation); a partner (if the brokerage is a partnership) or the sole proprietor of the brokerage, as the case may be. The Principal Broker is subject to various obligations under the New Act and is generally required to take reasonable steps to ensure that the brokerage and all of its brokers and agents comply with the New Act.

Education and Experience Requirements and Exemptions

Mortgage Agents must complete an approved mortgage agent education course.
Mortgage Brokers must have two years experience as a mortgage agent, complete an approved mortgage broker education program and pass a mortgage broker qualifying exam.

Exemptions
There are some limited exemptions from the education requirements prescribed by the New Act. They include:

  • mortgage professionals authorized to deal in mortgages on behalf of a brokerage under the Existing Act may be exempted from meeting the new education and experience requirements if they apply for a licence before July 1, 2008;
  • licensed real estate brokers who were deemed registered mortgage brokers under the Existing Act are exempted from the education and experience requirements if they apply for a licence before July 1, 2009, but must now be licensed in order to engage in regulated mortgage brokering activities;
  • active officers and directors of corporations registered under the Existing Act are exempted from the new education requirements, provided that they apply for a mortgage broker's licence before July 1, 2008; and
  • individuals employed by publicly traded finance companies (a term which is defined in detail in the New Act) that make or finance loans are exempted from the agent education requirements if FSCO is satisfied that the finance company will provide adequate training to these employees.

Licence Exemptions

There are limited exemptions from the licensing requirements under the New Act. These include:

  • financial institutions, including banks, insurers, credit unions and caisses populaires and their directors, officers and employees. However, it is important to note that subsidiaries of financial institutions are not exempted by virtue of these provisions and accordingly must be licensed in order to engage in the regulated activities (unless another exemption applies);
  • dealers registered under the Securities Act who trade in mortgages and entities engaged in trading in mortgages in the context of a mortgage securitization;
  • individuals or businesses making simple referrals that provide limited information about borrowers to prospective lenders, or vice versa;
  • persons and entities that provide simple referrals and limited information to introduce prospective lenders and prospective borrowers  to one another and who comply with additional requirements that may be prescribed by regulation; and
  • lawyers, acting in their professional capacity as long as they do not hold themselves out as dealing or trading in mortgages.


The provisions in the Existing Act which deemed licensed real estate brokers (under Ontario's Real Estate and Business Brokers Act) to be licensed as a mortgage broker; have not been carried into the New Act.  Accordingly, a real estate broker who engages in mortgage brokerage activities must now be licensed as a mortgage brokerage, mortgage broker or mortgage agent, unless an exemption applies.

There is no provision in the New Act for reciprocal recognition of registration as a mortgage broker or equivalent in another provincial jurisdiction, although there may be some dispensation available from the educational pre-requisites for individual applicants.

Foreign ownership restrictions on brokerage corporations removed

In order to be licensed as a brokerage under the New Act, a corporation must be incorporated under the laws of a Canadian jurisdiction, have an Ontario mailing address and specified errors and omissions insurance.

Mortgage brokerages that are corporations will no longer be subject to the limits on non-resident ownership and control that were in place under the Existing Act.

Enforcement

FSCO has several tools to enforce compliance with the New Act.  In addition to orders to freeze assets or trust funds, which are available under the Existing Act, FSCO is now authorized to issue compliance orders, make applications to court to appoint a receiver or trustee and to impose administrative penalties. Administrative penalties for contraventions of or failures to comply with the New Act may be levied in amounts up to $10,000 in the case of a contravention or failure to comply by a mortgage broker or agent, or $25,000 in the case of a contravention or failure to comply by a brokerage, mortgage administrator or any other person or entity. In addition, penalties for an offence committed by an individual can include a fine of up to $100,000 or imprisonment for up to one year, or both. The maximum penalty for a corporation is a $200,000 fine and every director or officer of the corporation who approved, acquiesced to or participated in the commission of the offence, or who failed to take reasonable care to prevent the corporation from committing the offence, is also guilty of an offence.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.