Since the first of the year, those of us who are keenly "tuned in" to the real estate market have been privy to a number of rather ominous predictions. Everywhere you turn, in the media and in your professional capacity, you or your clients are likely to be bombarded by a number of dismal trends and forecasts. A downward trend in the housing market? Check. Stagnation in commercial real estate? Check. Reports in the media about rising cases of real estate fraud? Check. The coming "credit crunch"? Check.

Yet despite all of this seemingly immediate gloom and doom, many in the corporate world have been wary of these possibilities for years. Amidst a robust economy, a number of lawmakers and financial planners – to name just a few – never lost sight of the fact that, inevitably, the pendulum always swings in both directions. As such, problem areas were recognized early. More specifically, new regulations were proposed in a number of areas of the financial sector in order to limit the damage that Ontario's economy may, one day, experience first-hand.

Fortunately for some – and unfortunately for most – that pendulum is now on the move. As a result, there is a renewed focus on the damage-control measures that have gradually been introduced. One such measure is the new Mortgage Brokerages, Lenders and Administrators Act (the "New Mortgages Act"). Passed in 2006, interim measures in preparation for the New Mortgages Act came into effect on March 1, 2008. And the entire piece of legislation officially comes into force on July 1st. So what do you need to know about who the New Mortgages Act affects directly, and how it may protect you? Read on to find out.

A New Sheriff In Town: Who Does the New Mortgages Act Regulate?

Beginning on July 1, 2008, the New Mortgages Act will create four licensing categories in the Province of Ontario for the mortgage business: (1) Mortgage Agents, (2) Mortgage Brokers, (3) Mortgage Brokerages and (4) Mortgage Administrators.

Agents and brokers are individuals on the front line, actively matching lenders with borrowers and vice-versa. Under the New Mortgages Act, the main differences between an agent and a broker is that an individual licensed in the latter category must have at least two years of work experience in the industry, and must also pass an educational course approved by the Financial Services Commission of Ontario ("FSCO").

A mortgage brokerage is a corporation, partnership or sole proprietorship that employs one or more licensed mortgage agents and mortgage brokers, and provides a certified environment within which that broker or agent can deal in mortgages on the brokerage's behalf. Under the New Mortgages Act, brokerages are required by law to obtain errors and omissions insurance. This insurance must also cover fraudulent acts up to a minimum of $500,000 for any one event and $1,000,000 for all events that occur within a one-year window. Each brokerage must also designate one broker as its Principal Broker. The Principal Broker must act as the brokerage's Chief Compliance Officer and is charged with ensuring that provisions under the New Mortgages Act are followed precisely. Most importantly, in order to obtain a license under the new legislation, individual representatives of the brokerage will also be reviewed by the FSCO vis-à-vis financial responsibility and honest business practices.

A mortgage administrator acts as a conduit between lender and borrower, routinely transferring payments between the two parties. In the ordinary course, mortgage administrators are also authorized to take steps to enforce mortgages in default. While individual employees of a mortgage administrator are not required to be licensed under the new legislation, the business itself must still be incorporated or formed in Canada, must still obtain errors and omissions insurance (and insurance against fraud) in amounts identical to mortgage brokerages, and must also prove that the business has a financial guarantee for at least $25,000.

In sum, all individuals or business that fit into the above categories must obtain a license under the New Mortgages Act. If they don't, they won't be able to do business in Ontario. With that in mind, let's find out how and why this new legislation protects you.

To Catch The Crook: How Will The New Mortgages Act Protect You?

Beyond the catchphrases – the "credit crunches" and the "housing bubbles" – mortgage fraud is a true crisis point in Ontario, and is a growing concern across the province.

Fraud in the mortgage industry can manifest itself in a number of ways. A borrower may try to obtain a larger loan than she is entitled to by lying to the lender about her anticipated income. Another borrower may fail to disclose prior debts. A mortgage fraud ring may scheme to defraud a lender by acting in concert. Or a "shotgunning" borrower could take out multiple mortgages on the same property in order to gain a financial windfall (prior to vanishing). And what does this fraud mean to you? With each and every default, rates go up and the pool of available funds goes down. The bottom line is, while these crimes may not affect you directly, when it comes time to negotiate your mortgage you may experience "collateral damage".

Worse still, you may be affected directly. Instances of identity theft in the mortgage industry are increasing at an alarming rate, whereby a scam artist will assume the persona of an innocent homeowner and place a mortgage on his property. Long before the scheme is ever uncovered, the crook will "take the money and run", leaving a mortgage on title – and payments to be made.

By ensuring that every Mortgage Agent, Broker, Brokerage and Administrator in Ontario gets licensed, the New Mortgages Act will reduce the instances of fraud in the mortgage industry. The requirement that each brokerage name a Principal Broker will introduce true accountability into the equation, and legislating mandatory insurance coverage introduces another layer of protection. Most importantly, this new legislation will act as deterrent vis-à-vis identity theft, encouraging brokers and agents to get to know their client by asking the important questions.

In theory, the New Mortgages Act creates a licensing regime across Ontario for those involved in the mortgage industry. In practice, however, it aims to accomplish a whole lot more. This framework, which comes into full force and effect on July 1st, will protect lenders and borrowers alike by introducing mandatory controls into the world of mortgages. It will also act as a deterrent vis-à-vis identity theft. In light of the cloudiness that currently envelops our economic outlook, it's a positive development despite the forecast.

By Eli M. Udell

To contact Eli, email eudell@perlaw.ca or call 613 566-2274.