Cullen Commission Recommends Changes to Mortgage Brokering

industry impact

CULLEN COMMISSION RECOMMENDS MAJOR

HANGES

TO MORTGAGE BROKERING

BY RAY BASI, J.D., LL.B., DIRECTOR OF EDUCATION FOR CMBA-BC AND MBIBC

Will the report transform the mortgage brokering landscape?

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The final report of the Commission of Inquiry into MoneyLaundering in B.C. – often referred to as the Cullen Commission –recommends significant changes that would impact mortgage brokersand the environment in which they conduct business. Of the 101recommendations the recently released report makes, 17 are directed atmortgage brokers and two additional ones are directed at private lenders.Many of the other recommendations impact mortgage brokering indirectlyor because they impact a larger group that includes mortgage brokers.

The B.C. government is keenly interested in the recommendations, and other provincial governments have been keeping a watch.

The over 1,800-page report, prepared after the public inquiry headed by former B.C. Supreme Court Justice Austin Cullen, was released to the public on June 15, 2022. The report addresses how billions of dollars of ‘dirty money’ were laundered by the province’s real estate, gaming (including casinos) and luxury car market sectors. The report is the result of more than three years of work by the Commission, including testimony from over 200 witnesses (including from former CMBA-BC’s CEO Samantha Gale) and considering over 1,000 exhibits.

The Commission’s mandate was to inquire into and report on money laundering in British Columbia, including:

• the extent, growth, evolution and methods of money laundering in various sectors of the economy;

• the acts or omissions of responsible regulatory agencies and individuals that contributed to money laundering in the province;

• the effectiveness of the anti-money laundering efforts by these agencies and individuals; and

• barriers to effective law enforcement.

The Commission was also asked to recommend measures to address the conditions that have allowed money laundering to thrive.

RECOMMENDATIONS

• At a minimum, originating loans and the ability to earn fees from doing so should be limited to registered mortgage brokers.

Recommendation 15: The Registrar of Mortgage Brokers (Registrar) make it a requirement that applicants for registration provide an extended criminal and police background check, showing not only convictions and outstanding charges but also past charges relating to financial misconduct, as well as police database information about the person. (Report: p.863)

• The RCMP have access to broader information about an applicant than is made available to the Registrar. At the very least, the Registrar would benefit from an extended criminal record check that flags connections to organized crime and charges relating to financial crimes or fraud in determining if the applicant is suitable for registration.

Recommendation 16: In its revision of the MBA, the Province include a requirement that brokerages submit annual information returns to give the Registrar better insight into industry trends and risks. (Report: p.864)

• This will better allow the regulator to identify where risks lie and to target resources appropriately.

Of primary general interest is that the report recommends an ongoing antimoney laundering regime consisting of: establishing a commissioner; continuing with the Deputy Ministers’ Committee and Anti-Money Laundering Secretariat; and requiring all government agencies, regulators and law enforcement bodies with an anti-money laundering mandate to have a designated anti-money laundering liaison.

These are the Commission’s recommendations of particular interest to mortgage brokers, together with some of the rationale the report provides for each and non-exhaustive page references. The complete report can be found at cullencommission.ca

“There is an overarching need for professionalization of the mortgage brokers industry. I am hopeful that the reforms I have supported will go a good distance toward accomplishing this.” (Report: p.870)

Recommendation 14: The Province amend the Mortgage Brokers Act (MBA) definition of “mortgage broker” to harmonize it with the requirement for registration. (Report: p.862)

• The definition of “mortgage broker” in the MBA is confusing and does not align with the activities that give rise to the obligation to be registered.

Recommendation 17: The Province give the British Columbia Financial Services Authority (BCFSA) rule-making authority in respect of mortgage brokers. (Report: p.865)

• The current MBA does not give the Registrar rule-making authority.

Recommendation 18: The Province amend the MBA to create a managing broker role with clearly defined responsibilities. (Report: p.866)

• The current role of Designated Individual (DI) is created by a Registrar’s policy and not by legislation. It requires no separate licensing or enhanced education/training for DIs.

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industry impact

Recommendation 19: The Registrar require education for both managing brokers and sub-brokers, focusing on the detection and reporting of fraud and money laundering in the industry. (Report: p.867)

• Submortgage brokers are well positioned to observe fraudulent activity and should receive clear guidance from the Registrar about what fraud looks like, and when and where to report it.

Recommendation 20: The Province amend the MBA to allow for larger financial penalties, up to $250,000, to align with penalties available under the Real Estate Services Act. (Report: p.867)

• The risk/reward calculus provided by the current maximum penalty of $50,000 is inadequate.

Recommendation 21: The Province amend the MBA to give

the Registrar the power to make an order of disgorgement of profits for registered mortgage brokers found to have engaged in misconduct and for unregistered persons engaged in mortgage brokering activities. (Report: p.868)

• The person would be forced to give up any profits made from the misconduct and/or unregistered mortgage brokering activities.

Recommendation 22: BCFSA impose a positive obligation on real estate licensees to report suspected unregistered mortgage brokering to it. (Report: p.868)

• In an industry where the financial incentives are oriented toward closing deals, the risk/reward calculation of participating in or turning a blind eye to abuses must be adjusted.

• The regulator can impress on the profession the seriousness of failing to report by imposing appropriately serious

consequences, including suspension and loss of licence or registration.

Recommendation 23: The Province amend the MBA to eliminate the automatic stay pending appeal found in section 9(2) of the Act. (Report: p.869)

• It is unusual and contrary to public expectation to allow a person to continue to practise despite what might be very serious disciplinary findings.

Recommendation 24: BCFSA work with the new dedicated provincial money laundering intelligence and investigation unit to develop an information-sharing partnership. (Report: p.870)

• A provincial law enforcement agency with a clear anti-money laundering mandate is needed to take up investigations at points where a regulator’s jurisdiction, mandates and/

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or capacity ends. Effective sharing of information and insights will permit the identification of money laundering vulnerabilities within each regulator’s area of responsibility.

Recommendation 25: The provincial Minister of Finance urge her federal counterpart to make mortgage brokers reporting entities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). (Report: p.870)

• PCMLTFA applies to reporting entities. Mortgage brokers are presently not included in the definition of a reporting entity; hence, they are not required to report suspicious transactions even though they are in a position to observe them first-hand.

Recommendation 26: The Province create a positive obligation on mortgage lenders to make source-offunds inquiries of investors providing capital for the lending business if such obligations are not included in the federal reforms to the PCMLTFA and associated regulations. (Report: p.886)

• Private lenders are vulnerable to facilitating, unwittingly or otherwise, money laundering either by lending out funds that are the proceeds of crime, or by providing financing to borrowers who are dealing in the proceeds of crime.

Recommendation 27: The Province amend Form B (the form for registration of a mortgage under section 225 of the Land Title Act) so that all legal owners of mortgage charges are reported, and that this information be available through the land titles registry. (Report: p.887)

• This can address, for example, the situation where the Form B lists a person who administers the mortgage as the lender but the person in fact has syndicated the loan by way of agreements with the real lenders.

• Not requiring the real lenders to be identified on the Form B is a

barrier to regulating mortgage lenders and may encourage money laundering.

Recommendation 28: The Province amend the definition of “interest in land” in the Land Owner Transparency Act (LOTA) to include mortgages, in order to ensure that the beneficial owners of a charge cannot obscure their ownership. (Report: p.891)

• LOTA presently does not include mortgages; hence, the true lenders can hide their involvement in mortgages.

Recommendation 29: The Province enact legislation directed at private mortgage lenders providing for registration, oversight, and enforcement. This regime should be separate from the scheme applicable to those engaged in brokering loans. (Report: p.892)

• It is not intuitive that lenders are included as mortgage brokers under the MBA.

• There is apparent confusion over when the MBA applies to private lenders – not just among registrants but within the regulator itself.

Recommendation 30: The Province ensure that the regulator of private mortgage lenders has access to land title data, including new mortgage registrations, in a form that allows it to identify private lenders that ought to be registered with the regulator but are not. (Report: p.902)

• The Province should be able to determine who is engaged in private lending and should be registered with the regulator.

Recommendation 31: The Province implement a mandatory source-of-funds declaration to be filed with the court in every claim for the recovery of a debt, such that no action in debt or petition in foreclosure can be filed (except by an exempted person or entity) in the absence of such a declaration. (Report: p.912)

• The court would then not be used as a tool to collect illicit funds.

Recommendation 32: The Province enact legislation authorizing the court, in its discretion, to refuse to grant the order(s) sought by the plaintiff in a debt action or foreclosure petition if it is not satisfied that the declaration is truthful and accurate, or if it concludes that the funds advanced by the lender were derived from criminal activity. (Report: p.913)

• As above, the court would then not be used as a tool to collect illicit funds.

Recommendation 40: The Land Title and Survey Authority make information about historical mortgage and property ownership available through an online search. (Report: p. 951)

• The availability of a person’s historical property ownership and mortgage lending is valuable information for anti-money laundering purposes, as it provides records of the movement of wealth.

• Historical searches are presently available in-person at the Land Title Office but not online.

Recommendation 41: The Province amend the Land Title and Survey Authority’s enabling legislation to direct the collection of information on real estate agents and mortgage brokers involved in a property transaction. At a minimum, this information should be available to the Ministry of Finance, the British Columbia Financial Services Authority, law enforcement, and other federal and provincial agencies with an anti-money laundering mandate. (Report: p.952)

• An ability to track the participation of individual real estate agents and mortgage brokers across transactions would be a useful tool for regulators (see Chapter 16). In certain cases, it would also be useful to law enforcement.

CONCLUSION

Mortgage brokers need to remain informed as some or all of these recommendations are enacted into legislation by the B.C. government or other governments. The potential for the mortgage brokering landscape to be very changed is considerable.

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