Guidance focuses on understanding client needs and addresses concerns about private mortgages
Ontario's financial regulator is tightening oversight of the mortgage industry to safeguard borrowers and investors from unsuitable products and shady practices.
The Financial Services Regulatory Authority (FSRA) unveiled the final guidance, which clarifies the responsibilities of mortgage professionals in understanding client needs and recommending suitable mortgage options and investment opportunities.
"For most people, getting a mortgage is the biggest financial decision they will make in their lifetime, and we want to ensure their mortgage professional is giving them the best advice possible," Huston Loke, executive vice president of market conduct at FSRA, said in a media release. "Our final guidance sets out our expectations so that a consumer's needs and circumstances are well understood before a mortgage option is recommended to them."
The guidance was developed late last year in response to an anticipated increase in consumer reliance on mortgage advice due to fluctuating interest rates and reduced mortgage affordability.
FSRA found that most private mortgage deals brokered in recent years, and they lacked documentation showing why the products were suitable choices for the consumers involved.
The new rules require mortgage professionals to thoroughly evaluate clients' finances, investment goals and risk tolerance. Brokers must also ensure customers understand the terms and risks of any mortgage or investment product before signing.
The guidance outlined other outcomes for mortgage professionals. This includes ensuring they:
- Fully understand a client's financial situation and needs.
- Have a thorough grasp of the mortgage products they offer.
- Recommend products that are truly suitable for the client.
- Clearly explain the recommended products to the client.
- Maintain proper documentation justifying the suitability assessment.
The regulator said the guidance is critically needed as more buyers turn to alternative lending amid rising rates and plunging home affordability.
“What we are concerned about is really the lack of understanding. Many private mortgages [are] less standardized, and [come with] more fees and restrictions,” said Antoinette Leung, head of financial institutions and mortgage broker conduct. “What we’re concerned about is that consumers don’t understand the features and implications when they are being recommended these mortgages.”
Leung previously spoke about the importance of mortgage suitability at an edition of Canadian Mortgage Professional’s CMP Talk, highlighting the lack of documented justification for suitability assessments in past reviews.
Read more: FSRA increasing focus on mortgage suitability in 2024
The regulations aim to clamp down on brokers pushing complex or costly loans and investments that may not be in a client's best interest. Improper documentation could leave consumers unable to dispute bad deals.
Industry groups argue that the new standards are unnecessary and will create onerous paperwork, though FSRA insisted that they merely codify existing requirements for acting in the public's interest.
“Mortgage suitability is the foundation of why a home buyer would want to work with a mortgage broker, which is to help them find the right mortgage that is suitable to the needs and circumstances,” Leung said. “When it is done well, it can really strengthen a consumer’s trust in this sector.”
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