Inadequate or Non-existent Suitability Assessments
The key question every litigator will ask as is, “was this mortgage appropriate for this borrower at the time it was arranged”? A good Mortgage Broker would have clearly answered this question in the affirmative and documented it in the mortgage file. In my experience, most Mortgage Brokers and Mortgage Agents fail to document their assessments and some fail to even consider if the mortgage they arranged was suitable for the borrower.
Failure To Verify Information
Mortgage Brokers need to take reasonable steps to verify the veracity of information they receive from borrowers. They cannot ignore obvious red flags and must review supporting documentation with a critical eye.
A litigator will be asking, “Would a reasonably competent Mortgage Broker have investigated further?”
Failure To Disclose Material Risks
This is a big one that applies to Mortgage Brokers that are acting for a private lender and or a borrower. Does the private lender fully understand the risk they are taking on prior to agreeing to fund the mortgage? Were there hidden, or foreseeable, risks that the Mortgage Broker failed to identify? Was the borrower made aware of the fact that the private lender may not offer to renew the mortgage at maturity?
A litigator will want to see that all the risks of the transaction were communicated effectively, clearly, and in plain language!
Conflicts of Interest
Mortgage Brokers and Mortgage Agents must disclose any conflicts of interest. Is the Mortgage Broker investing in the transaction, receiving undisclosed compensation, representing multiple parties or steering borrowers toward products that benefit the Mortgage Broker more than the client?
Litigators will focus on files where there is even the appearance of a potential conflict of interest, so disclosure of any potential conflict is always the best practice.
Lack of A Realistic Exit Strategy
Many private mortgages fail because the exit strategy was never realistic to begin with. I can’t count how many times I’ve seen Mortgage Brokers or Mortgage Agents suggest that the exit strategy is to refinance with an “A” lender at maturity. That sounds great until you ask them how the borrower’s situation is going to improve in the next 12 months to allow that to happen.
If you haven’t discussed, and documented, a clear and reasonable exit strategy with the borrower you’re opening yourself up to litigation.
Misrepresenting Borrower Income
Sometimes Mortgage Brokers or Agents fabricate income verification but often they’re just careless. Are they using unverifiable income, inflating self-employed income, ignoring inconsistencies in supporting documents, or failing to investigate suspicious information?
A Broker who “should have known” information was inaccurate may face significant liability.
Poor Documentation
Good advice that is not documented is often difficult to defend years later.
If you want to avoid litigation, it’s important to keep good file notes. Document conversations and suitability assessments. Make sure all disclosure documents are signed, dated, and saved.
In litigation, judges and lawyers often focus heavily on what is documented rather than what participants remember.
Chasing the Deal Instead of Exercising Independent Judgment
Courts, regulators, and expert witnesses often examine whether the Broker acted as an independent professional or merely as a salesperson. Did the Mortgage Broker ignore warning signs, accept weak explanations, or just rationalize away any concerns about the deal? If your only goal is to get the deal funded, then you’re not doing your job as a Mortgage Broker or Mortgage Agent. At all times, you should be acting as a professional. It’s not just about closing the deal!
Using Multiple Co-Borrowers
In the last several years Mortgage Brokers and Agents have been adding multiple co-borrowers to files to get deals approved. Often these individuals have no significant interest in the property, yet they are signing up for 100% of the liability.
If the Mortgage Broker has not clearly, and plainly, explained, and documented, the risks to the co-borrowers they are opening themselves to litigation.
The best practice would be to explain and document the risks to the co-borrowers and to insist that they receive Independent Legal Advice.
Andy MacDonald is a Mortgage Broker with over 35 years of experience in the mortgage industry. He acts as an Expert Witness for litigation dealing with mortgages, Mortgage Brokers and Mortgage Agents in Ontario.