Canadian Mortgage Broker Magazine - Winter 2020 by CMBA (National)

WINTER 2020 $6.95

THE MAGAZINE FOR PROFESSIONAL MORTGAGE BROKERS

THE GOOD LIFE

PM No. 41297283

How one mortgage broker balances finance and farming p.36 ways to modernize Ontarioâ&#x20AC;&#x2122;s mortgage brokering sector p.14

I N S I DiEd d l e

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inside VOLUME 5 ISSUE 1 WINTER 2020

FINANCIAL SERVICES REGULATION

Best practices in market conduct and consumer protection compliance can and should be derived from a broad range of sources on an enterprise-wide basis BY LAWRENCE E. RITCHIE, VICTORIA GRAHAM AND ELIZABETH SALE

features 12

HOW OTTAWA CAN TACKLE THE HOUSING SHORTAGE

Restoring broad affordability to Canada’s most expensive cities and towns requires addressing both sides of the home-price equation – demand and supply BY JOSEF FILIPOWICZ

ONTARIO PROPOSES CHANGES TO MODERNIZE REGULATION OF PROVINCIAL MORTGAGE BUSINESSES If adopted, the seven key recommendations will usher in significant changes BY MENA BELLOFIORE, DAWN JETTEN AND KATIE PATTERSON

IRELAND JOINS IMBF

Call for mortgage broking industry to be innovative and better informed about global market practices

BY SAMANTHA GALE

KEEPING PROSPERITY IN PERSPECTIVE

Defining the middle-class is complicated, but indications are this demographic in Canada is doing better BY VINCENT GELOSO

FORECLOSURE: FRUSTRATING BUT NOT FRUSTRATED Enforcing judgments against fraudulently transferred properties

BY RAY BASI

MOVING TO THE COUNTRY Referrals count in small-town markets

BY KATHLEEN FREIMOND

departments 8 Editorial summary: The real stress test 46 Advertisers Index

columns 24 Legal Ease: The Balancing Act: Illustrating the need for lenders to be reasonable BY RAY BASI

36 Off the Clock: From finance to fuzzyfaced alpacas, it’s all in a day’s work for Kathy McConnell BY KATHLEEN FREIMOND

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VOLUME 5 ISSUE 1 WINTER 2020

THE CANADIAN MORTGAGE BROKERS ASSOCIATION CO-CHAIRS:

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CANADIAN MORTGAGE BROKER magazine is produced by the Canadian Mortgage Brokers Association (CMBA) EDITOR: Samantha Gale STAFF WRITERS: Samantha Gale, Ray Basi MANAGING EDITOR: Kathleen Freimond

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ART DIRECTOR: Scott Laing CONTRIBUTORS: Ray Basi, Mena Bellofiore,

$3,750,000 2nd Mortgage

Josef Filipowicz, Kathleen Freimond, Samantha Gale, Vincent Geloso, Victoria Graham, Dawn Jetten, Katie Patterson, Lawrence E. Ritchie, Elizabeth Sale, Cory Van Ieperen IMAGES: Adobe Stock, Hubbert Farms, iStock,

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BILLING: Debra Hiller CANADIAN MORTGAGE BROKER © All rights reserved. The views expressed in CANADIAN MORTGAGE BROKER are those of the respective contributors and are not necessarily those of the publisher or staff. Publications mail agreement 41297283. Please return undeliverable Canadian addresses to 902-777 Broadway W Vancouver, BC V5Z 4J7 Printed in Canada by Transcontinental Publishing.

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editorialsummary

THE REAL STRESS TEST

An emerging new stressor for condo owners, which extends to their mortgage lenders, is rising and often astronomical premiums and deductibles on strata building insurance BY SAMANTHA GALE

here has been a lot of discussion – both in the media and in political discourse – around the implementation of the stress test to qualify for mortgages. However, the Office of the Superintendent of Financial Institutions’ (OSFI) B-20 mortgage underwriting guidelines represent just one element of the cacophony of new rules, taxes, fees, fee increases, insurance premium increases and new insurance strategies to mitigate an ever-escalating series of potentially crippling liabilities for mortgage borrowers, investors and brokers. This collection of burdens and obligations really and truly is a very stressful test! One emerging new ‘stressor’ for condo owners, which extends to their mortgage

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lenders, is rising and often astronomical premiums and deductibles on strata building insurance. Ironically, while housing affordability challenges make condos the primary choice for housing in Canada’s urban centres, such as Vancouver and Toronto, their affordability is being whittled away by insurance costs. By their very design, condo buildings – with shared walls, floors and ceilings – pose a substantial risk of floods, fire and other perils spreading damage from one unit to another. A simple problem like water leaking from a cracked toilet can readily flood into one or more adjacent units creating exponentially higher repair costs than similar

problems in a single-family home. Many condo owners experience sticker shock at the cost of their building’s insurance policies. The sticker shock can come on both the front and back ends of the insurance process, with higher insurance premiums and what are some truly astronomical insurance deductibles – both of which are passed onto individual owners through raised condo fees. In December 2019, the CBC reported on a story about a Fort McMurray condo owner who recently walked away from condo ownership and a $278,000 mortgage debt after being assessed with a $6,000 special levy for an insurance policy that covered

editorialsummary

only 15 per cent of the building’s value. The condo corporation was unable to obtain any additional coverage due to its exposure to fires in the area and past claims. The owner paid $350,000 for the home several years ago but believed it was worth less than $200,000 in 2019 due to its insurability challenges. Typically, insurance companies will spread their risk by only insuring a portion of a building, with a policy being underwritten by as many as a dozen different insurance companies. With the number of insurance companies willing to insure condo buildings dwindling, this means that second quotes are near impossible to obtain. In cases where strata owners are responsible for the building damage, deductible costs can be assessed directly against the owner. Deductibles have now increased from typically about $10,000 to as much as $100,000, with some even hitting the $250,000 mark. This means many insurance claims will not be pursued by the strata/condo corporation as repair costs may fall below the deductible payment. For instance, a leaking toilet or a triggered fire sprinkler causing water damage to multiple units below might easily result in repair costs of $80,000. However, if the building’s insurance deductible is $100,000, the strata/condo corporation could elect not to make an insurance claim and might instead seek compensation from the responsible owner. If the cost of repair was $120,000, the strata/ condo corporation might opt to utilize the building’s insurance coverage and then assess the $100,000 deductible cost against the responsible condo unit. Condo owners are therefore being urged to ensure that they have their own insurance policy to cover either the cost of repairs incurred by their condo corporations or the insurance deductibles for instances where they may be found responsible. At this juncture though, it is not entirely clear whether owners are currently able to obtain such insurance coverage at an affordable cost. The same challenges in obtaining insurance coverage that condo buildings experience also apply to individuals. Without insurance coverage, being hit with a sizable insurance deductible or repair bill can readily zap an owner’s equity and undermine a lender’s security in its mortgage loan.

Unaffordable deductibles may weed out most claims, and not just those of a nuisance or fraudulent nature. Insurance policies might seldom be triggered and reserved for only the most catastrophic events, while the financial risk of lesser events is borne by the individual owner or owners.

Problems faced by condo corporations in obtaining building coverage challenge our current concepts of insurance. Insurance is intended to be a means of hedging against contingent, uncertain financial losses, while an insurance deductible generally has two purposes. One is to reduce the number of smaller claims, which keeps premiums affordable. A second purpose is to reduce instances of fraud or ‘moral hazard,’ which is where insureds fail to mitigate risks with the expectation of an easy insurance payout. However, when the insurance policy loads the risk of financial loss onto individual owners through exorbitant deductibles, these rationales no longer make sense. Unaffordable deductibles may weed out most claims, and not just those of a nuisance or fraudulent nature. Insurance policies might seldom be triggered and reserved for only the most catastrophic events, while the financial risk of lesser events is borne by the individual owner or owners – surely this is not a scenario intended by the authors of the various provincial condominium statutes that mandate insurance coverage for the full replacement value of buildings. What is the real purpose of statutory mandatory insurance requirements

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editorialsummary

when the insurance is too expensive to be useful or is simply unattainable, as in the case of the Fort McMurray building? We are advised by most insurance experts that insurance costs are determined in part by catastrophic, worldwide events, which are increasing in frequency. A solution to the insurance affordability problem, therefore, does not seem evident. In Ontario and British Columbia, recommendations for legislative reform focus on making rules around the assessment of deductible costs against individual owners less muddy. In B.C., strata corporation insurance deductibles are common expenses, which are ultimately paid for by all owners, but an owner who is responsible for damage can be sued by the strata corporation to recover the deductible expense. The challenge for the strata corporation is that lawsuits require considerable litigation funds with no guarantee of success in an unpredictable court process, which requires proving that the owner was â&#x20AC;&#x2DC;negligent.â&#x20AC;&#x2122; Some strata corporations have sought to work around this challenge

We are advised by most insurance experts that insurance costs are determined in part by catastrophic, worldwide events, which are increasing in frequency. A solution to the insurance affordability problem, therefore, does not seem evident.

with indemnity bylaws that assign liability to responsible owners and use a different standard of liability than that ascribed by the common law of negligence. These bylaws have created further uncertainty. Provinces such as Ontario have adopted proposals to amend relevant legislation by expressly providing that owners are responsible for repair costs or the insurance deductible, whichever is lower, as a result of damage to other units or common property caused by the unit ownerâ&#x20AC;&#x2122;s acts or omissions. The goal here is to create greater certainty and consistency by eliminating the obligation on a strata corporation to sue an owner to recover the deductible expense. The BC Law Institute has recommended that B.C. adopt this course. Clearly these reforms do nothing to solve the insurance affordability problem, which requires a more in-depth review. In the interim, condo owners and their mortgage lenders should continue to ensure that owners have sufficient deductible insurance to cover all potential claims.

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demandsupply

How Ottawa can tackle the housing shortage

Restoring broad affordability to Canada’s most expensive cities and towns requires addressing both sides of the home-price equation – demand and supply BY JOSEF FILIPOWICZ

fter years of the federal government tinkering with housing demand (the mortgage stress-test, the First-Time Home Buyer Incentive and other stick-andcarrot approaches to how people can purchase homes), it’s clear that housing affordability remains a top issue in many Canadian cities from Victoria to Charlottetown. Of course, this is because housing demand is only half the equation. To really get at the root of this issue, it’s painfully clear we must also talk about supply. The thing is, the most important policy levers influencing the supply of housing are local and provincial – not federal. So what, if anything, can Canada’s next federal government do to help tackle housing shortage by boosting supply?

Again, the feds may not control the thicket of local land-use regulations that hamstring homebuilding, but they do control billions of dollars transferred every year to municipalities all across Canada, aimed either at everyday operating costs or infrastructure projects. For example, the federal government recently committed $1.37 billion to two major rapid transit projects in Metro Vancouver, and another $1.3 billion to extend Montreal’s metro system. In fact, more than two-thirds of direct federal-municipal grants relate to infrastructure, representing hundreds of millions of dollars every year, and this doesn’t include the billions transferred annually from the federal gas tax or federal funding

funnelled through provinces and advocacy groups such as the Federation of Canadian Municipalities. In short, the feds don’t control how long or complicated it may be for homebuilders to obtain a building permit, but they hold the purse strings for billions in transfer funding. By attaching expedited homebuilding as a condition for funds, Ottawa can encourage a growing housing supply. Conditionality for federal funding is nothing new, and after all, if Ottawa is going to disburse billions of tax dollars to fund major transit or roadway projects, it only makes sense that those projects benefit the greatest number of Canadians possible. There’s no point extending a subway line to serve a low-density neighbourhood, only for that neighbourhood to remain low-density and the new line under-utilized. Otherwise why undertake the project in the first place? Ultimately, restoring broad affordability to Canada’s most expensive cities and towns requires addressing both sides of the homeprice equation – demand and supply. So far, most governments in Canada have either ignored the supply side or only started to consider it after years of lacklustre results following demand-side interventions. If the next federal government is serious about tackling the chronic shortage of homes in the country’s least-affordable regions (Toronto, Vancouver, etc.), it should attach supply-friendly conditions to the billions it sends to junior levels of government every year. Josef Filipowicz is a senior policy analyst in the Centre for Municipal Studies at the Fraser Institute. This article originally appeared in Fraser Forum, the Fraser Institute blog. More at fraserinstitute.org

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BRIDGING GAP THE

RESIDENTIAL MORTGAGE LENDING CRITERIA Mortgage Type

Loan to Value (up to)

Loan Amount Range

COMMERCIAL MORTGAGE LENDING CRITERIA

Interest Rates Starting at

Mortgage Type

Loan to Value (up to)

Loan Amount Range

Interest Rates Starting at

Retail/Office/Industrial

75%

$1 M - $20 M

7.25%

Land (urban infill)

65%

$1 M - $20 M

7.75%

Apartments

75%

$1 M - $20 M

6.50%

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65%

$1 M - $20 M

7.25%

Single Family + Condo

65%

$500K - $5 M

6.50%

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60%

$500K - $5 M

6.50%

Rentals/Vacation

60%

$500K - $5 M

6.50%

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Christine Perkins - Residential cperkins@lanyardgroup.com

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regulatoryreview

ONTARIO PROPOSES CHANGES TO MODERNIZE REGULATION OF PROVINCIAL MORTGAGE BUSINESSES

TIME FOR NEW RULES If adopted, the seven key recommendations to increase accessibility to the mortgage market will usher in significant changes BY MENA BELLOFIORE, DAWN JETTEN AND KATIE PATTERSON

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he Ministry of Finance recently released Protecting and Modernizing Ontario’s Mortgage Broker Industry, a report on the legislated five-year review of the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA) led by Attorney General of Ontario Doug Downey and Parliamentary Assistant to the Minister of Finance Stan Cho. The review first launched in November 2018 with a view to improve efficiencies and reduce regulatory burden, objectives that are closely aligned with the Ontario government’s commitment to reducing regulatory requirements by 25 per cent by 2020.* The report, which follows an extensive open consultation process, provides an overview of the issues raised and input received from 35 different stakeholders representing a variety of financial services sectors, including feedback received from these industry participants through detailed

written submissions, roundtable discussions as well as many one-on-one meetings. According to the report, the seven key recommendations are “aimed at modernizing and streamlining the MBLAA to increase accessibility to the mortgage market, reduce regulatory burden, and improve consumer and investor protection.” Interestingly, the report comes shortly after the establishment of the Financial Services Regulatory Authority of Ontario (FSRA). On June 8, 2019, FSRA replaced the Financial Services Commission of Ontario as the regulator for mortgage brokers, insurance, credit unions, loan and trust companies and pensions. If adopted, the recommendations will usher in significant changes to the MBLAA.

RECOMMENDATIONS

Of the seven key recommendations, the first four recommendations (Recommendations 1, 2, 3 and 4) are aimed at reducing regu-

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regulatoryreview

latory burden for lenders and brokers and increasing access to the housing market for homeowners and investors and the last three recommendations (Recommendations, 5, 6 and 7) are intended to strengthen consumer protection and anti-money laundering oversight.

RECOMMENDATION Reducing red tape for commercial mortgage transactions

The report recommends that the Ministry of Finance and FSRA work together to “reduce the regulatory burden on commercial mortgage transactions between sophisticated entities, such as large companies and financial institutions.” This recommendation flows from the fact that, currently, the MBLAA applies the same regulatory framework to both residential and commercial mortgages. The report recognizes that commercial mortgages are unnecessarily

subject to consumer and investor protection regulation and recommends removing the red tape by exempting sophisticated entities from these requirements when they are dealing in commercial transactions.

RECOMMENDATION Reducing regulatory burden by establishing new classes of licensing

The report recommends that the Ministry of Finance work with FSRA and the industry to develop different licensing schemes to better reflect the specifics of different segments of the mortgage market. This recommendation stems from the understanding that various types of mortgages are accompanied by different sets of risks and the current “one size fits all” approach to licensing does not ensure that mortgage brokers and agents have the appropriate competencies and skills required to best serve their clients.

RECOMMENDATION Reducing regulatory burden in guidance, bulletins and forms

The report recommends that FSRA consult with industry participants in its efforts to simplify and streamline guidance, rules, bulletins as well as forms and accompanying disclosures provided to consumers. This recommendation emphasizes the need for these documents to be written in plain language in order to enhance industry and consumer readability and understanding while simultaneously striving to reduce regulatory burden and duplication.

RECOMMENDATION Maintaining current licensing exemptions

The report acknowledges the importance of maintaining the current licensing exemptions for simple referrals, lawyers and employees of financial institutions but CMB MAGAZINE cmba-achc.ca

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regulatoryreview

recommends that FSRA and the Law Society of Ontario cooperate to ensure protocols are put in place to allow for the timely sharing of information in circumstances where either regulator takes enforcement action involving a licensee that is subject to regulation by the other. The report also recommends that the Ministry of Finance work with the Financial Consumer Agency of Canada to ensure consumers are treated consistently regardless of “whether they receive their mortgage from a provinciallyregulated mortgage broker/agent or from a federally-regulated bank employee.”

RECOMMENDATION Raising and streamlining educational and professional standards for agents and brokers

The report recommends that FSRA work with industry and mortgage licensing education providers to improve the mandatory education requirements, including licensing

Canada’s housing market (including, rising housing prices, stricter underwriting rules and federally mandated stress tests for uninsured loans) have contributed to an increase in the use of private lenders in recent years. According to the report, “although private lenders represent a relatively small portion of mortgages currently outstanding in the overall $132 billion mortgage brokerage market in Ontario, the market share of this segment has grown in recent years.” Nonetheless, despite this growth, because private lenders who work through a licensed mortgage brokerage qualify for an exemption from the licensing requirement under the MBLAA, the report highlights the difficultly in determining the extent of their market participation under the existing mortgage broker regime. It also notes the recent reports in British Columbia that have identified private lending in Canada’s real estate market as being “particularly vulnerable to the risk of money laundering.”

The report also recommends that registered private lenders “should be required to report periodically to FSRA on their lending activities”, thereby providing FSRA with valuable data to bridge the existing information gap related to private lender activities and market share in the Canadian real estate market.

RECOMMENDATION Strengthening the administrative monetary penalty framework

The report recommends that the Ministry of Finance and FSRA review the administrative monetary penalty (AMP) maximums currently imposed under the MBLAA to ensure they appropriately deter non-compliance with the legislation. This recommendation is in response to stakeholder feedback indicating that current AMP levels are not high enough and often result in non-compliance with the MBLAA being a more cost-effective option than compliance.

NEXT STEPS

...modernizing and streamlining the MBLAA in accordance with the recommendations in the report represent, in large part, changes proposed by industry participants that would be a welcome change... education courses by, among other things, expanding both the content of such courses and the types of courses offered in coordination with the new licensing regime described in Recommendation 2. This recommendation recognizes that “right-sized” education for mortgage brokers and agents should be focused on teaching the skills necessary to properly prepare agents and brokers for their careers in the mortgage industry.

RECOMMENDATION Incentivising registration for private lenders

The report makes several important observations as it relates to private lending in Canada’s real estate market. It notes that significant changes in

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In an effort to better understand and quantify the continued growth of the private mortgage lending sector and to combat fraud, the report recommends that the Ministry of Finance and FSRA create “a registration regime for private/unregulated lenders that meet certain monetary or activity thresholds” and which could also invite entities that do not meet the prescribed thresholds to voluntarily register. Under the proposed registration regime, registered private lenders that lend to sophisticated entities “would be able to carry out mortgage lending activities without the need for licensing under the MBLAA, and without the requirement to work through a licensed brokerage” which according to the report would operate to “significantly reduce regulatory burden” for private lenders.

With respect to the implementation of these recommendations, neither the report nor the Ministry of Finance announcement specify next steps. However, in light of the extensive public consultation process and industry participation, it is expected that the seven recommendations we discussed will likely be presented in the form of draft regulations, but nothing has been published at this point. Given the government’s self-stated goal of reducing the number of regulatory requirements affecting business by 25 per cent overall by 2020, and the fact that modernizing and streamlining the MBLAA in accordance with the recommendations in the report represent, in large part, changes proposed by industry participants that would be a welcome change, it’s possible that draft regulations could be released in short order. This article was first published by Blake, Cassels & Graydon LLP (blakes.com). Blakes retains all rights to the article. *For more information on the consultation, please see Blakes’ December 2018 Bulletin (blakesbusinessclass.com)

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2019-10-02 4:21 PM

IBMFupdate Managing director of FBAA and IMBF chair Peter White (centre) with Brokers Ireland’s national president Duncan Duke and Rachel McGovern, director of financial services.

Ireland joins International Mortgage Brokers Federation Call for mortgage broking industry to be innovative and better informed about global market practices BY SAMANTHA GALE

he Irish industry association Brokers Ireland has joined the International Mortgage Brokers Federation (IMBF) as the newly formed federation continues to expand into more nations. The Finance Brokers Association of Australia (FBAA) managing director Peter White, who was in Ireland recently, says Brokers Ireland understood the benefits of standing together and learning from one another in an increasingly globalized market. “The recent banking royal commission (in Australia) highlighted just how governments and regulators are looking at overseas models for guidance on how to tackle [mortgage broker] issues, so we must be ahead of the curve, learning about other markets so we can understand what is working and what isn’t,” explains White, who currently serves as chair of the IMBF.

The IMBF is an international organization for national mortgage broker and mortgage finance associations to share ideas, client referrals, market intelligence, trends, regulatory matters and best practices. It serves as the leading global forum for bringing the international mortgage brokering community and its suppliers together to collaborate on shaping market practices, while influencing regulation and legislation through global advocacy. The federation was formed last year by associations from Canada (CMBA), U.S.A. (National Association of Mortgage Brokers), New Zealand, U.K. (Association of Mortgage

Intermediaries) and Australia (FBAA). White also revealed that the Netherlands was a part of the IMBF as an associate, an important step given recent publicity around the ‘Netherlands model,’ a consumer-pays approach. “During the coverage of the royal commission (in Australia), the Netherlands model was brought up in questions by the media, and some people in our industry had no idea what it was. This is unacceptable if we are to represent our industry to government.” Changes and trends impacting the mortgage broker industry in one country can affect any number of other countries. “Now more than ever before, it is vital for the industry to be innovative,” says White, adding “the IMBF works together and is reviewing best-practice procedures to bring a global focus to the benefits of mortgage and finance brokers across the globe.” CMB MAGAZINE cmba-achc.ca

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definingmiddleclass

KEEPING PROSPERITY IN PERSPECTIVE 20

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definingmiddleclass

Defining the middle class is complicated, but indications are this demographic in Canada is doing better BY VINCENT GELOSO

fter Prime Minister Justin Trudeau introduced the men and women who will serve in his new cabinet, much attention has been dedicated to Mona Fortier, the new ‘minister for middle-class prosperity.’ To name a minister in charge of the prosperity of the middle class suggests that the middle class has had a tough time recently. This is only the latest iteration of a recurrent myth in Canadian politics peddled by members of all parties – that the middle class is stagnating. But is it really? The main problem here is ‘defining’ the middle is a complicated task. Fortier herself actually claimed to use a loose definition of the term. Some like to use the average income of the middle 20 per cent of the population (when ranked by income). Others use a certain absolute income threshold. However, the most often-used measure (even if there are

debates over it) is the median income – the income of the person in the middle of the population that cuts the remaining population into two equal shares. By that measure, there appears to be very small improvements since the mid1970s. However, this is misleading. Impressions of stagnation of the median are mathematical illusions caused by changing demographics, which create a situation where, when comparing different income statistics from year-to-year, you compare apples with oranges and then apples with bananas. These situations are known as ‘composition biases.’ Consider the following thought experiment. A group of 50 Canadians, all with incomes that go from $100 to $5,000, experience a 10 per cent increase in income. Accordingly, all statistics should go up 10 per cent – the median, the average income for the middle 20 per cent, the average for everyone. However,

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definingmiddleclass

Real median income (2002$) gains during each 5-year periods, 1982-2017 0.25 0.2 0.15 0.5 0.05

if an extra 10 people with incomes of $100 enter the group, then all of these statistics will fall, despite the fact that everyone else gained 10 per cent extra income. This is because a key factor is not held equal between the two points – the composition of the population. Is there a similar process at play in Canada? Yes! Take the example of immigration. When immigrants enter a given country (while they often enjoy massive income gains relative to incomes in their countries of origin), their incomes tend to be inferior to the native population. The addition of immigrants is thus equivalent to the example above. But as long as the immigrant population remains steady, there’s no creeping composition bias. From the 1950s to the mid-1980s, the share of foreign-born Canadians remained steady at around 7 per cent. However, starting in the mid-1980s, the share began to increase and exceeded the 10 per cent mark. This means immigrants are dragging down the distribution. It does not mean that people were becoming poorer. The same applies to other demographic changes. For example, an aging population will cause the same effect. Older people tend to have lower earnings because they are consuming their savings. Because seniors are growing more numerous in Canada, the median income will be pushed down even 22

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if no one experiences a decline in living standards. Both examples illustrate the problem caused by changes in demographic composition, which may cause some people to make false judgments about the living standards of certain populations. The best way to see this is to track the same people over time. The type of data needed to provide this portrait is known as ‘longitudinal data.’ By tracking the same individuals over time, longitudinal data circumvent composition bias, where the apples of 1985 are compared with oranges from 2019. We simply evaluate how the apples of 1985 fare later on. Statistics Canada has such data, which track individuals over five-year periods between 1982 and 2017. What happened to the median income for the same people over each five-year period? With the exception of 1988 to 1996, the real median market income of the same people tracked over each five-year period increased by around 15 per cent (see chart above). If you track people over a longer period of time, the gains are even clearer. The main limitation with the Statistics Canada data mentioned above is that they’re subsequent sets of longitudinal groups over five years. This is a relatively short period of time, which could lead skeptics to shrug at the evidence above.

2012 to 2017

2011 to 2016

2010 to 2015

2009 to 2014

2008 to 2013

2007 to 2012

2006 to 2011

2005 to 2010

2004 to 2009

2003 to 2008

2002 to 2007

2001 to 2006

2000 to 2005

1999 to 2004

1998 to 2003

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1996 to 2001

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1993 to 1998

1992 to 1997

1991 to 1996

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1986 to 1991

1985 to 1990

1984 to 1989

1983 to 1988

1982 to 1987

However, the Fraser Institute produced a study that covered the years from 1993 and 2019. The 20 per cent of the population in the middle of the income distribution in 1993 had – by 2012 – enjoyed real income gains of 70 per cent (and this is a conservative estimate of the gains because only wages and salaries are included – adding other sources of income will only add to these gains). Moreover, that study also finds that the poorest 20 per cent of the population enjoyed income gains equal to 781 per cent. This means that many of the poorest of 1993 had propelled themselves into the middle class (and above) by 2012. Do such gains indicate stagnation? Clearly not. Rather, everything indicates that the middle class in Canada is doing better. Could things have improved at a faster pace? Obviously. However, it’s better not to peddle inaccurate depictions of the situation when constructing public policy. Let’s hope our new federal minister for middle-class prosperity keeps this in mind. Vincent Geloso, senior fellow of the Fraser Institute, is an assistant professor of economics at King’s University College, Western University Canada. This article originally appeared in Fraser Forum, the Fraser Institute blog. More at fraserinstitute.org

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legalease

THE

BALAN ACT A case involving a vulnerable 89-year-old borrower illustrates the need for lenders to be reasonable BY RAY BASI, J.D., LL.B., STAFF, EDUCATION AND POLICY REVIEW

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legalease

CING BACKGROUND

Your lender client has considerable money to place. You are aware of a borrower who is so desperate for mortgage funding that she will agree to any terms whatsoever proposed by a lender. The borrower faces imminent foreclosure and no other lenders have come forward. Your lender can fund the transaction quickly. Might you be doing the lender-client a disservice by encouraging overly harsh mortgage terms? After all, what choice has the borrower but to accept any terms proposed? Could you provide a better service by suggesting that the lender charge a premium that recognizes the borrowerâ&#x20AC;&#x2122;s

circumstances (for example the urgency and the risk), but not ask for grossly excessive terms? The BC Supreme Court in Astina Mortgages Group Ltd. v Galpin, 2019 BCSC 1811 (CanLII) provides some guidance.

ISSUE

The foreclosing lender obtained a court order to sell the security property to itself.

The borrower claims that: n the mortgage was unconscionable;

n the lender engaged in predatory lending;

n the lenderâ&#x20AC;&#x2122;s purpose in lending the money was to collect an excessive lenderâ&#x20AC;&#x2122;s

fee, collect the interest, and to then take her property; and n the lender preyed on the inequity of power and her desperate position and breached their duty to act in good faith. The borrower has made application to have the mortgage declared invalid and the property transferred back to her. While that application is waiting to be heard, she wants a court order: n allowing her to stay in her home; n prohibiting the lender from obtaining an order to take lawful possession of the home while the matter is waiting to be heard; and n ordering the other parties to disclose documents relevant to the application.

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legalease

The lender counters that: n there is nothing unconscionable about the

mortgage; n they saved the borrower from certain foreclosure of the other two mortgages and bought her another 15 months in her house; n the interest rate of their mortgage was less than the second mortgage that was paid out with their funds; and n the borrower did have the ability to pay off the mortgage when the mortgage was taken out (she could have sold her home, paid off their mortgage and been left with the excess sale proceeds).

WHAT HAPPENED?

An 89-year-old retired teacher was living on pension income totalling approximately $3,000 per month. In 1986, she inherited the home her parents had built in 1954. She resided in that home with her daughter and two grandchildren. In 2009, the borrower met Langenberg. He befriended her and started helping around her house and calling her “mom.” After the borrower’s husband died in 2010, she took out a reverse mortgage to help her daughter and grandchildren. The house was pledged as security. In about 2010, Langenberg approached the borrower about investing in a real estate development project he was starting. He promised her that if she invested money from her reverse mortgage, she would never have to worry about money again. When she agreed, Langenberg set up a company in which they each held a 50 per cent interest. The borrower had no business experience and did nothing more than provide capital. All decisions about the company were made by Langenberg. Over the following years, Langenberg convinced the borrower to take more and more money against her home to assist the company, advising her that if she did not provide more capital, she would lose all of the money she had already invested. Langenberg continually reassured the borrower that there was no risk and that she would receive a significant return. She trusted him. By the fall of 2016, the borrower had two mortgages registered against her home, totalling over $2.6 million. Both mortgages were in default.

In October 2016, Langenberg, through a mortgage broker, arranged a 15-month mortgage with a lender for $3.275 million. There was a suggestion that Langenberg was connected to the mortgage broker; that connection was however unclear. The borrower swears that Langenberg advised her that the broker was his good friend and that the broker was going to invest in the project and pay off all the debt. The borrower swore she was never contacted by the lender or anyone connected to them about the mortgage. No inquiries were made about her income or ability to pay, nor was she asked to provide information. The mortgage commitment was stated as being subject to: n Independent Legal Advice (ILA) confirming the borrower’s legal capacity to sign the loan documentation; and n confirmation that the existing mortgages were not in default. The borrower swore she did not receive ILA and did not know the lawyer who had signed the ILA certificate. The certificate appears to be a standard form with little to no information regarding the specific advice rendered; it says nothing regarding

deducted and retained by the lender ($24,562.50 a month for 12 months and $32,750 a month for three months) Langenberg advised the borrower that her home was safe as the payments toward the mortgage would be made from the proceeds of the mortgage. Further, he said that he had a relationship with the lender. The specifics of the relationship were not clear to the court at the time of this early hearing. n $147,375 deducted and retained as the lender’s fee; n $32,750 to pay the mortgage broker’s fee; n approximately $179,000 was paid to the borrower/Langenberg company; n nothing was paid to the borrower; n any balance stayed with the lender. In March 2018, the mortgage was in arrears and the lender sent demand letters to the company and to the borrower. The amount owing was claimed to be $3.4 million, increasing by over $1,000 per day. Langenberg told the borrower not to worry as he would take care of it. The borrower did not file any response in the eventual court foreclosure proceedings and so was not served with, or made aware of, any further documents in the process.

The borrower swore she was never contacted by the lender or anyone connected to them about the mortgage. No inquiries were made about her income or ability to pay, nor was she asked to provide information. the borrower’s capacity or the status of the then-current mortgages. The mortgage proceeded with the funds being disbursed or allocated as follows: n approximately $2.6 million to discharge the existing two mortgages; n paying for fees associated with the mortgage, including for the independent legal advice; n just over $4,000 to pay outstanding property taxes; n interest-only payments totalling $294,750

The borrower obtained a court order to conduct the sale of the property. When the borrower asked Langenberg about a real estate agent having knocked at her door, he again told her not to worry and that he would deal with the lender. Ultimately the lender obtained a court order, without the borrower’s involvement in the process, selling the property to itself. The borrower claims she had no idea her home was in jeopardy until Langenberg told her that the lender had foreclosed on her CMB MAGAZINE cmba-achc.ca

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property and purchased it. The borrower immediately contacted a lawyer.

LEGAL REQUIREMENTS

The BC Supreme Court Civil Rules provide the following test for preserving the status quo of property pending trial: n the applicant has a proprietary interest in the property at issue; n the applicant would otherwise suffer irreparable harm; n there is a serious issue to be tried; n the balance of convenience favours the granting of the injunction.

The project was never approved by the local authority. In fact, the conditions required to obtain approval were never met. The project was listed as inactive. In addition, the conditions that had to be satisfied before the mortgage was approved were not met. Finally, the fact that the lender bought the borrowerâ&#x20AC;&#x2122;s home itself after only three months on the market raises concern. The fourth part of the test is satisfied as the potential prejudice to the borrower in not having the opportunity to bring her application greatly outweighs any prejudice to the lender by the making of the order.

The mortgage was granted in circumstances that could and possibly should have raised concern that an 89-year-old woman was being taken advantage of by the company and was at risk of losing her home. OUTCOME

The first part of the test is satisfied as the borrower has an interest in the property. The second part of the test is satisfied as the borrower would have, even if successful in the main case, lost the home that has been in her family for five generations. The threshold to satisfy the third branch of the test is low and is satisfied. There is some evidence upon which an argument can be advanced that this was an unconscionable mortgage that took advantage of a vulnerable elderly woman. The mortgage was granted in circumstances that could and possibly should have raised concern that an 89-year-old woman was being taken advantage of by the company and was at risk of losing her home. Yet there was no investigation as to her ability to make the payments and no direct contact with her by the mortgage broker. There is no evidence that the lender looked into the company either. If they had, they would have seen that it had little to no prospect of getting off the ground. 28

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Accordingly, the Court made the following orders: n The borrower retains custody of the home until the matters are finally dealt with. n The lender is prohibited from obtaining/ executing any order to possess the home until the matters are finally dealt with. n The lender is to produce all documents relating to the mortgage [including the relationship of the petitioner to the said lawyer(s) providing ILA]. n A Certificate of Pending Litigation (CPL) is issued for registering against the property. Registering a CPL in the Land Title Office gives notice to the world that there is litigation concerning the property and a person is claiming an interest in the land. In effect, it protects the claimant by tying up the registered owner from transferring or mortgaging the property.

TAKEAWAYS

While this case is in the early stages and a final decision has not yet been made, it provides guidance for brokers who are

faced with borrowers who are in difficult circumstances: n The best deal available to a lender might not be the one containing the harshest terms a borrower is willing to accept. n While borrowers in difficult financial circumstances are vulnerable to lenders legitimately charging more, particularly if there are few willing lenders or above-usual risks, lenders are best protected by being reasonable in the circumstances. n A broker would be wise to document the relevant circumstances in which a loan is made, the advice provided, the reasons for the advice, and (if available) the reasons why the proposed terms were accepted by the borrower. A lender would be well served to ensure an ILA certificate covers the substance of the reason for the ILA having been required.

POINT TO PONDER

Even if the lenderâ&#x20AC;&#x2122;s argument is correct and the borrower, by entering into the new mortgage, created time to sell her property, the new mortgage could nevertheless be predatory by virtue of very substantially reducing the equity that would have otherwise been available to the borrower. The Court will need to consider all the circumstances in which the mortgage was granted to determine whether the terms of the mortgage and fees were acceptable, or at least not predatory.

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bestpractices

FINANCIAL SERVICES REGULATION:

toward integrated consumer protection initiatives 30

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bestpractices

Current regulatory trends mean that best practices in market conduct and consumer protection compliance are not industry-specific but can and should be derived from a broad range of sources on an enterprise-wide basis BY LAWRENCE E. RITCHIE, VICTORIA GRAHAM AND ELIZABETH SALE

ISTOCK.COM

n the decade that immediately followed the financial crisis, financial services regulatory reform largely focused on solvency and capital adequacy. Over the past few years, there has been a notable shift in focus as market conduct and consumer protection has become a point of regulatory convergence across the financial services sector. At the same time, policy makers have been actively promoting not just changes in law, but significant reform in the regulatory framework and approach to regulation. Regulators (perhaps at long last) seem to be becoming more modern, nimble, responsive and collaborative. Consequently, we are seeing a trend towards regulatory harmonization among jurisdictions, financial service providers and financial services and products. This means that best practices in market conduct and consumer protection compliance are not necessarily industry-specific but can and should be derived from a broad range of sources on an enterprise-wide basis across the sector. Below we highlight in more detail notable recent developments in the market conduct and consumer protection space that reflect these themes of regulatory harmonization and collaboration. These developments highlight the need for integrated compliance measures.

NEW REGULATORY AUTHORITIES IN ONTARIO AND BRITISH COLUMBIA

In 2019, two new regulators, the Financial Services Regulatory Authority of Ontario (FSRA) and the British Columbia Financial Services Authority (BCFSA), commenced operations and assumed the regulatory duties of their provincial predecessors. The mandates of the two new regulators are similar and include fostering effective and consistent regulation across Canada, promoting the adoption of industry codes of market conduct and enhancing regulation of insurance intermediaries and mortgage brokers.

FSRA launches its business plan

FSRA assumed the regulatory responsibilities of the Financial Services Commission of Ontario (FSCO) and the Deposit Insurance Corporation of Ontario on June 8, 2019. These bodies formerly oversaw insurance products and provincially regulated insurers, credit unions, loan and trust corporations, pension plans, mortgage brokers and certain auto insurance service providers. Based on FSRAâ&#x20AC;&#x2122;s published statements and remarks to the industry, as well as our experience with FSRA to date, stakeholders can expect a more collaborative, flexible, principles-based approach to

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bestpractices

aim to achieve legislative objectives and regulation than was the norm under FSCO. protect the public interest through enhanced FSRA’s mandate includes fostering effective consumer, industry and regulatory expertise; and consistent regulation across Canada. through collaboration, transparency and With this in mind, FSRA has stated that efficient processes; and by using technology it may press upon other regulatory authorand enabling innovation. ities to act, if the entity or individual in In addition to its general mandate, FSRA’s question is under the jurisdiction of more business plan sets out regulatory initiatives than one regulator. This could occur across with respect to specific sectors. provincial boundaries (e.g., a mortgage broker may be registered in both Ontario and British Columbia) or across industries Credit unions: FSRA intends to integrate (e.g., an individual who deals in more than prudential conduct supervision, modernize one regulated product). the regulatory framework and adopt an FSRA’s 2019-2022 business plan, as industry code of conduct, which could be approved by the Ontario Ministry of identical to or based on the Market Conduct Finance, has two over-arching priorities: Code recently released by the Canadian Credit Union Association. FSRA further n Burden reduction: FSRA will review intends to ensure an appropriate resolution all 1,100 pieces of regulation and guidance and deposit insurance reserve fund (DIRF) inherited from its predecessors and streaml line u ormremove B iunnecessary a • material a l where B e r framework t a •for credit o nunions. t a r i o possible. This is consistent with the Ontario government’s 2018 plan to cut regulatory red Insurance: FSRA’s goal in this sector is to adopt effective conduct standards tape by 25 per cent by 2020. and improve licensing effectiveness and n Regulatory effectiveness: FSRA will We don’t rely on credit, income, or age.

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efficiency. A further goal is to harmonize the Treating Financial Services Consumers Fairly Guideline with national direction such as the guidance document from the Canadian Council of Insurance Regulators and the Canadian Insurance Services Regulatory Organizations, Conduct of Insurance Business and Fair Treatment of Customers. Mortgage brokering: In this sector, FSRA intends to provide oversight of syndicated mortgage investments, but will transfer oversight responsibility for non-qualified syndicated mortgages to the Ontario Securities Commission (OSC). FSRA will also work to improve licensing effectiveness and efficiency, and to adopt an industry code of conduct. Further to these goals, the Ontario government noted in its fall economic statement, released November 6, 2019, that it will conduct a legislative review of the Credit Unions and Caisses Populaires Act, 1994, the

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bestpractices

Mortgage Brokerages, Lenders and Administrators Act, 2006 and the Co-operative Corporations Act. Review of the credit union legislative framework is already underway, as comments on the consultation document, A Modern Framework for Credit Unions in Ontario: Reducing Red Tape and Increasing Investment, were due by August 16, 2019. Among other things, the consultation asked for input on: how to make it easier for credit unions to do business and compete in Ontario; dispute resolution processes and the need for an ombudsperson; regulatory treatment for centrals and leagues, noting that most Ontario credit unions are members of Central 1, a British Columbia central; a securitization and funding framework; business and investment powers, particularly in respect of investments in FinTechs; access to capital; improving the consumer experience and consumer protection; unclaimed deposit framework; corporate governance; and enabling innovation. Review of the mortgage broker legislation is also underway. The Report on Legislative Review of the Mortgage Brokerages, Lenders and Administrators Act, 2006 (Report), which is the outcome of the five-year statutory review of the Act, was released on September 30, 2019. The Report notes that the creation of FSRA represents an opportunity to “right-size” regulation for the sectors it oversees. The Report included a recommendation to require specialized licensing education for brokers who deal and trade in areas of practice that demand added knowledge and skills. We expect to see themes emerge across the credit union, insurance and mortgage broker industries as FSRA works to modernize legislation, harmonize and consolidate its guidance, and develop or adopt industry codes that reflect the common issues that arise in regulating all of these sectors.

BCFSA assumes responsibilities

On November 1, 2019, the BCFSA started operations and assumed the responsibilities of the Financial Institutions Commission of British Columbia (FICOM), including overseeing credit unions, trust companies, insurance providers and

intermediaries, and mortgage brokers, and administering the Credit Union Deposit Insurance Corporation. Like FSRA, the BCFSA is also tasked with taking a more modern approach to regulation and ensuring consistency with other regulators. The creation of the BCFSA resulted from a 2017 independent review which followed the B.C. auditor general’s report of deficiencies at FICOM, including a failure to keep up with international industry standards. As a result, we expect to see the BCFSA undertake similar modernization and harmonization initiatives to those announced by FSRA.

that are incidental to their business activities (e.g. credit insurance). This regime may be similar to the restricted agent licensing regimes in Alberta, Manitoba and Saskatchewan. The rules and requirements of this regime will be established by the Insurance Council of British Columbia.

NOTABLE DEVELOPMENTS IN CONSUMER PROTECTION LAWS

Customer suitability – which has traditionally been the focus of insurance intermediary and securities advisor regulation – has been more broadly adopted within the financial

We expect to see themes emerge across the credit union, insurance and mortgage broker industries as FSRA works to modernize legislation, harmonize and consolidate its guidance, and develop or adopt industry codes that reflect the common issues that arise in regulating all of these sectors. Also on the horizon are changes proposed by The Financial Institutions Amendment Act, 2019 (Bill 37), which received Royal Assent on November 28, 2019. These include: n new rules for the online sale of insurance in B.C. that will be set out in the regulations (not yet released), as well as in additional rules adopted by the BCFSA; n a requirement for insurance companies to adopt and comply with a code of market conduct that will be established by the BCFSA; n a requirement for credit unions to adopt a code of market conduct, which, as in Ontario, may be derived from the Canadian Credit Union Association’s Market Conduct Code, that must be filed with the BCFSA; n a requirement for credit unions to establish complaints resolution procedures, which must be published on the credit union’s website and made available upon request; n the introduction of a regime for restricted insurance agent licensing for parties such as lenders that sell specific types of insurance

services sector. A particular focus has been on enhanced regulation to protect vulnerable consumers such as seniors and high cost of credit borrowers. We discuss four developments on trend below.

Code of Conduct for the Delivery of Banking Services to Seniors

After numerous consultations, the Canadian Bankers Association released the Code of Conduct for the Delivery of Banking Services to Seniors. This voluntary code of conduct applies to banks when delivering banking products and services to Canada’s seniors and is overseen by the FCAC. The term ‘seniors’ is defined in the code as an individual in Canada who is 60 years of age or older and who is transacting for a non-business purpose. While some aspects of the code will not come into effect until January 1, 2020 or January 1, 2021, as of July 25, 2019, banks should: take into account market demographics and the needs of seniors when proceeding with branch closures (Principle 6); CMB MAGAZINE cmba-achc.ca

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bestpractices

and endeavour to mitigate potential financial harm to seniors (Principle 5). Principle 5 may be challenging, as it requires front line staff to balance security with autonomy and many providers report difficulties in convincing seniors of the reality of romance scams and other types of financial scams and abuse aimed at seniors.

New high-cost credit regimes

Alberta followed Manitoba’s lead and implemented a high-cost credit regime on January 1, 2019, while Québec’s regime came into force on August 1, 2019.

were the new requirements regarding credit cards. Controversial changes include higher mandatory minimum payments, a subject which was widely covered by the Québec media. Credit grantors and lessors are also required to assess the consumer’s capacity to repay a loan or make their lease payments, which is not required under any other provincial lending legislation.

Bill C-86

Industry consultations regarding the regulations under the new federal consumer protection framework introduced in October

In addition to following these developments closely, we are also interested to see if and how governance and compensation frameworks will converge across the sector to align with these market conduct objectives and themes. We are still waiting for regulations to be published that will implement the proposed high-cost credit regime in British Colombia (set out in Bill 7 – 2019: Business Practices and Consumer Protection Amendment Act, 2019). This regime will impact lenders and lessors in British Columbia who charge rates that meet or exceed the “high-cost” threshold. If British Columbia follows Alberta and Manitoba’s lead, this threshold will be an effective rate of 32 per cent or above per year.

Implementation of Bill 134 in Québec

Financial services providers operating in Québec were extremely busy in the first half of 2019 as they worked to implement the numerous changes set out in Bill 134, an Act mainly to modernize rules relating to consumer credit and to regulate debt settlement service contracts, high-cost credit and loyalty programs and the accompanying regulations. The most significant changes set out in Bill 134 came into force on August 1, 2019. Among the most challenging to implement 34

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2018 (Budget Implementation Act, 2018, No. 2) took place over the course of 2019. Federally regulated financial institutions continue to grapple with the wide-ranging implications of the Bill, including the enhanced sales practices provisions.

FINAL THOUGHTS

With so many developments in progress, 2020 will be a busy year. In addition to following these developments closely, we are also interested to see if and how governance and compensation frameworks will converge across the sector to align with these market conduct objectives and themes. This article was first published by Osler (osler. com). The authors are partners at Osler, a leading business law firm practising internationally from offices across Canada and in New York. Lawrence E. Ritchie is partner, Litigation; Victoria Graham is partner, Corporate; and Elizabeth Sale is partner, Banking and Financial Services. Osler retains all rights to the article that was originally published on legalyearinreview.com

Judith Robertson, appointed commissioner of the Financial Consumer Agency of Canada in 2019.

A NEW FCAC COMMISSIONER

Lucie Tedesco stepped down as commissioner on June 3, 2019 after 11 years with the Financial Consumer Agency of Canada (FCAC). After a brief interim period, Ms. Judith Robertson was appointed commissioner effective August 19, 2019 for a five-year term. At the time of her appointment, Ms. Robertson sat on the FSRA Board as one of its founding Board members and was previously a commissioner of the Ontario Securities Commission (OSC) from 2011 to 2017. Prior to that, she had extensive experience as an executive in the capital markets and financial services industry. As of November 2019, the FCAC had not posted any new decisions for the period following former commissioner Tedesco’s final Decision #134, posted on June 4, 2019. Consequently, we do not have any published evidence as to how the FCAC may approach decisions differently under Ms. Robertson. Given the breadth of the new commissioner’s experience, and in particular her experience with the OSC, it will be interesting to see how the FCAC evolves under her tenure.

SMART

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HUBBERT FARMS

brokersoff-the-clock

s n serie r new fu u o in ond ry issue the sec . In eve K C O L This is t THE C us wha RS OFF r to tell e k o r b BROKE age ey’re a mortg when th k o s d a l to ’l e we they lik . Be it a desk d in h e not b imals, with an g in k r , wo places exotic to l e v a tr unity r comm o y g lo genea you ow how n k to t rld of wan the wo ing, we e r r e lo te p x n ee volu issue w ll from In this Conne . c d M in y w th un be with Ka like to farming ld you u o W . alpaca io , Ontar ggest a orough – or su n io it Peterb d re e in a futu profiled oker? age br tg r o m c.ca fellow ba-ach fo@cm in t c ta Con

From finance to fuzzy-faced

ALPACAS

Peterborough, Ontario, mortgage broker Kathy McConnell says farming is a stress relief after a busy day at the office BY KATHLEEN FREIMOND

ike most mortgage brokers, Kathy McConnell’s workdays are filled with financial details – combing through the advantages and disadvantages of a myriad potential lenders, comparing rates and considering credit histories – all to ultimately find the best product for each client. Meanwhile, back on the

family farm, a herd of alpacas are nibbling hay, watched over by Hungarian sheepdogs. McConnell, who is the broker of record at Mortgage Plus in Peterborough, Ontario, has been a mortgage broker for more than 30 years and says after a busy day at the office in Reid Street, focusing on the alpacas is relaxing.

Opposite, clockwise from top left: Alpacas grazing on the farm; mitts, gloves and hats are made from alpaca fleece; Kathy McConnel with two alpacas at an event; Komondors (Hungarian sheepdogs) protect the alpacas from coyotes; the fleece is dyed to produce an array of colours; this alpaca is enjoying the sunshine.

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Not to be confused with llamas that are similar but considerably larger, alpacas are gentle South American camelids that typically reach just under a metre at shoulder height. “Farming is actually a stress relief to brokering, which can be very busy. When you come home, you can relax with the animals – it’s a very complementary balance to a day-to-day business,” she says. Farming in McConnell’s family dates back to her grandparents, William and Florence Steinkrauss. They received a piece of land as a wedding gift in 1928 and were dairy farmers until they retired

maximize fleece production and importing a new sire – called a macho – every three years. All the animals have had their DNA analyzed and recorded in the United States and Canada. “It’s important to know the characteristics of each animal you are breeding to get the fleece you want,” says McConnell. Fineness, colour and length are the major determinants in quality fleece, and the animals – depending on their size and age – yield from three to 15 pounds of fleece when they are shorn in April or the first week in May, just after the show season.

Farming is actually a stress relief to brokering, which can be very busy. When you come home, you can relax with the animals – it’s a very complementary balance to a day-to-day business.”

and sold the property in 1966. By chance, when McConnell and her husband Larry Hubbert were looking for a small farm in 2002, the 100-acre property previously owned by her grandparents in the beautiful Kawartha Lakes area was on the market, and they jumped at the opportunity to bring it back into the family. “We love animals and we had previously boarded horses, so we knew we would have animals on the farm; we just weren’t sure what,” recalls McConnell. After challenges for beef farmers with bovine spongiform encephalopathy (BSE) – or mad cow disease – they decided instead to farm alpacas for their fleece and laid the foundation of their herd with four females, known as hembras, in 2006. Today they maintain the herd at about 75 animals on Hubbert Farms. They sell surplus animals to other farmers or export them to Norway or the United States. Successfully managing the herd requires documenting the bloodlines to 38

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“Alpacas come in many different colours. The light-coloured fibre can be dyed to get some of the bright colours people like, and black and grey are also popular,” says McConnell. The fleece is spun at a mill at Twisted Sisters’ Alpaca Ranch and Custom Mill near Edmonton, and local knitters produce the hats, mitts, scarves and gloves that are sold at Hubbert Farms, the Peterborough

Farmers’ Market and at Craftworks. Socks, due to volume, are commercially made in Canada. Sales of the alpaca wool products are handled mainly by Donna Simmonds, who used to own an alpaca farm herself, and McConnell’s sister-in-law, Carol Saunders, who also lives on Hubbert Farms. The alpacas have brought home many awards from shows such as the Alpaca Ontario Spring Show at West Niagara Agricultural Centre, the Quebec Alpaca Show, Navan Fair and Rockton Fair. Transferring her talents as a mortgage broker – detail oriented, organized, research and analytical skills and a flair for communication – to delving into bloodlines and handling the paperwork that comes with running a Canadian Food Inspection Agency-approved quarantine facility for the import and export of the animals may be daunting for most people, but it seems to come easily to McConnell. “I’ve done it a number of times, so it doesn’t seem like a lot of paperwork to me. There’s more to do on the multimedia side – information for marketing and advertising – and of course knowing how to care for the animals,” she says. Alpacas are hardy and can stay outside all winter as long as they have good shelter and a safe place at night, adds McConnell. To protect the herd from coyotes and other unwelcome intruders, she relies on her two Komondors, large Hungarian sheepdogs with a fearsome reputation as livestock guardians. While it sounds like it’s all fun on the farm, McConnell says she doesn’t plan to give up mortgage broking anytime soon. “I’d like to have something to do when I retire – I don’t sit still for very long – but the farm will be part-time for the next 10 years or so, then I don’t know what will happen down the road,” she says. Watch this space.

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Enforcing judgments against fraudulently transferred properties BY RAY BASI, J.D., LL.B., STAFF, EDUCATION AND POLICY REVIEW

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FORECLOSURE:

FRUSTRATING BUT NOT FRUSTRATED INTRODUCTION

You are a lender and just finished foreclosure proceedings. The sale of the security property was not enough to pay out your mortgage, and you obtained a judgment against the borrowers for the balance. In trying to enforce the judgment, you discover the borrowers have transferred the property into the name of someone else. You suspect the transfer is a sham, with the purpose of frustrating your efforts to enforce your judgment. Will the sham stand? Will a court void the transfer? The British Columbia Supreme Court in Balfour v. Tarasenko, 2019 BCSC 2212 provides some guidance.

WHAT HAPPENED?

By at least January 2009, a husband was aware he was the subject of an Ontario arbitration case in which a claim was being made against him. In early 2009, his wife and he (the couple) were registered as the owners of the subject real estate property. The property was subject to three registered mortgages,

a judgment in favour of the province, a judgment in favour of the first lender, and outstanding property taxes. On February 17, 2009, the first mortgage in default and was called due. On March 15, 2009, the couple agreed to transfer the property to the husband’s parents (parents), with the transfer being registered on May 14, 2009. The couple continued to live on the property. In July 2009, the Ontario arbitration case resulted in a judgment against the husband for $293,000 in favour of a person not involved in this case. In August 2014, the parents transferred the property to a company owned by a friend and business associate of their son (the husband’s friend). On July 17, 2015, a creditor obtained judgment against the couple for $200,000. In 2016, the friend sold the property to an unrelated party. The creditor claims that the property transfers in 2009 and 2014 were made to delay, hinder or defraud the creditors of the couple, contrary to the provisions of the

Fraudulent Conveyance Act, and as such are void. The creditor claims that the property transfers in 2009 and 2014 were made to delay, hinder or defraud the creditors of the couple, contrary to the provisions of the Fraudulent Conveyance Act, and as such are void.

LEGAL REQUIREMENTS

The B.C. Fraudulent Conveyance Act provides that a disposition of property made to delay, hinder or defraud creditors and others of their just and lawful remedies void and of no effect is void and of no effect. Most Canadian jurisdictions have similar provisions. Essentially, a conveyance intended to put one’s assets out of the reach of creditors is voidable by the courts. For the Act to apply, it is not enough that a transfer puts assets out of reach of creditors; there must have been an intention to do so. Even if there is a legitimate business purpose other than to defeat creditors, a transfer may still be fraudulent if one of the intentions was to defraud creditors.

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A person who was not a creditor at the time a challenged transfer was made can nevertheless challenge the transfer. The purpose of the Act is to provide a remedy to creditors who have been fraudulently denied access to the transferor’s assets. However, this remedy is not to be made available at the expense of a bona fide purchaser for value who did not have notice of the transferor’s intentions. A transfer is not void where a person for good consideration and in good faith lawfully transfers property to a person who, at the time of the transfer, has no notice of knowledge of collusion or fraud. n If the consideration is inadequate or nominal, the transfer is void if the transferor intended to delay, hinder or defraud creditors. n If the consideration is adequate, then the intentions of both the transferor and the transferee must be considered in determining whether the transfer was fraudulent.

her assets may indicate an intent to defraud creditors. n A transfer between related parties in suspicious circumstances may indicate an intent to defeat creditors unless the parties present an adequate explanation. n The state of the debtor’s financial affairs at the time of the transaction, including his income, assets, and debts, may indicate a specific intention. n A transfer of property made in haste may be indicative of a fraudulent intent. n A transfer of property made at a time when a debt or claim against the transferor is in existence or is imminent may be indicative of an intent to defraud creditors.

OUTCOME

In this case, the 2009 transfer was made with the intent to delay, hinder or defraud creditors. It is void. Indicators of the fraud include that: n The transfer had the effect of delaying,

Although the 2014 transaction was not void, the profits are not to go to the parents. The parents have obtained the property by a void transfer. The profits belong to the husband and wife, but are first to be used to pay creditors.

Where the intention of the transferor is not clear, it can be inferred from the evidence of the transferor’s conduct, the effect of the transfer and other circumstances surrounding the transaction. Some indicators of the intention to defraud creditors include: n Where a transfer of property has the effect of delaying, hindering or defeating creditors, the necessary intent is presumed. n Inadequate consideration paid for the transferred property may indicate fraudulent intent. n A transfer that renders the transferor unable to meet his liabilities or which transfers all or a substantial portion of his or 42

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hindering or defeating creditors, including the creditor in the Ontario arbitration. n The parents knew that their son was having financial difficulties. n The transfer was not arm’s length. n The transfer was made by a son and daughter-in-law to parents. n The transfer was made at a time when a financial claim against the husband was in existence and known to him. n The consideration paid for the property by the parents was of questionable value: • The consideration paid by the parents was $85,000 less than the price contemplated by the agreement to purchase.

• The parents paid no money for the property: ~The debts the parents said they had assumed in fact were continued to be treated as debts of the children. ~There was no proof of the debt owed by their son to them, which debt they said they forgave. ~The children continued to live on the property and pay the expenses for the property • After the property was transferred to the parents, the husband and wife continued to live on the property pursuant to a rental agreement with the parents. n There is no business or other financial advantage to be gained by transferring the property to the parents that could not be achieved by other means (such as the parents being guarantors under a replacement mortgage). n There is no evidence the husband and wife had significant assets other than the property. n The son entirely orchestrated matters and his parents willingly complied. The 2014 transaction was not made with the intent to delay, hinder or defraud creditors. It is voidable, but not void. n The son’s friend and associate agreed to purchase the property for $382,000 plus any profits that came out of the further sale of the property. n The friend and associate paid the $382,000 purchase price to the parents, which appears to have been paid entirely towards clearing the title of financial charges. n There is no evidence that the friend and associate was aware of any fraud or collusion to defraud the creditors of the husband and wife. Although the 2014 transaction was not void, the profits are not to go to the parents. The parents obtained the property by a void transfer. The profits belong to the husband and wife, but are first to be used to pay creditors.

TAKEAWAY

Lenders have hope to enforce their judgments against property where a borrower has transferred it to put it out of the reach of creditors.

It’s not about credit scores. It’s about life scores. Life happens. When a change in marriage, unexpected illness or even job loss come between your client and their dreams, we’re here. Let’s partner to look beyond their credit score and ask the right questions to understand the whole story. Together, we can find the best solution and help deserving clients focus on the scores that matter most in life. Visit hometrust.ca to learn more. Home Happens Here.

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Moving to the country Referrals count in small-town markets

h, life in the country. Many Canadians dream of selling up and escaping large cities like Toronto and Vancouver to live a quieter life in a smaller town where houses are less pricey, the pace is slower and they have room to breathe. Amherst, Nova Scotia, where, it was reported recently you could buy a ‘mansion’ in the city for less than the cost of a Toronto condo, is an example. Cathy LeBlanc, veteran realtor with RE/MAX County Line Realty in Amherst, says in recent years she has seen an influx of East Coast retirees who are looking for a quieter lifestyle in Atlantic Canada. She estimates this section of the market – who can sell in the city, buy a less expensive home and use the balance for their retirement – has grown from about 10 per cent to more than a third of her business. “It’s a different pace, here there’s no traffic so you get where you are going quickly – and you don’t pay for parking,” she says. Amherst real estate listings show that while larger homes are on the market, mortgage broker David Clarke, of Clarke Mortgage Group, who has a satellite office in Amherst – a community of just under 10,000 people – says he also has steady business arranging financing for people buying homes in the $30,000 to $50,000 range. 44

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BY KATHLEEN FREIMOND

“I have seen people who have sold homes in other parts of the country buy in Amherst or neighbouring towns like Springhill and Pictou,” he says. But while house prices in Amherst and surrounding rural areas are low compared to bigger cities, arranging a mortgage is more of a challenge than one might imagine and certainly more difficult than financing a home in Halifax, about 122 miles from Amherst, says Clarke. “The difficulty is that lenders don’t want to give a mortgage for such a small amount, so it limits the lenders we can use – people have fewer options with a house in the $30,000 to $50,000 range than they would have with a $100,000 home,” he says. “Banks often decline these mortgages – they don’t have the appetite for a mortgage that small. Or they don’t want to do a purchase-plus-improvements for $20,000 for a house that’s only worth $30,000,” he says. “We do a lot of creative financing for these clients that I don’t have to do for mortgages in Halifax or Dartmouth.” But Clarke says the banks’ reluctance to lend in these communities and his willingness to put in the time and effort to match lenders with borrowers has an upside. “Sometimes we have to use lenders who are a bit more expensive, but I try to take

care of every client as they come in. I do both the city and the rural work,” he says, noting that these smaller communities are often under-served when it comes to services such as mortgage brokers. Clarke benefits from many referrals from these clients and their friends and families for new construction and commercial mortgages. “I get more referrals from clients in rural communities than I do in Halifax. They’re talking about me, and I get a lot of organic business that way.” With relatively stable property prices in the area, Clarke understands why towns like Amherst are attractive to buyers who have sold their homes in more expensive cities and want to downsize and live off the remaining proceeds of the sale. As the retail centre for the Cumberland area, Amherst has several big box chains that many smaller towns in the area don’t have, like Canadian Tire and Walmart, as well as independently owned stores that contribute to the small-town charm, like Mrs. Pugsley’s Emporium and Birkinshaw’s Tea Room. It’s a beautiful community, says Clarke, and for those who dream of retiring to the seaside, there are many towns on the coast – like Digby and Tatamagouche – just a short drive from Amherst.

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Canadian Mortgage Broker Magazine - Winter 2020

Articles inside

Off the Clock: From finance to fuzzyfaced alpacas, it’s all in a day’s work for Kathy McConnell

Editorial summary: The real stress test

Legal Ease: The Balancing Act: Illustrating the need for lenders to be reasonable