Client service agreements can be golden when arranging variable rate mortgages

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

THE PROBLEM

Is a mortgage broker responsible for losses or damages suffered by a client who entered into a variable rate mortgage? If the mortgage broker established the client relationship appropriately and conducted themself accordingly, no; otherwise, possibly.

A variable rate mortgage often provides a client with a more favourable initial interest rate than other products. It comes with the ongoing benefit that if mortgage rates decrease more of the client’s payment will be applied to the outstanding mortgage principal. However, it also comes with the ongoing risk that if mortgage rates increase less of the client’s payment will be applied to the principal.

As well, if the mortgage interest rate increases significantly, the initial payment amount may not be enough to cover the increased interest charges. In such cases, most variable rate mortgages allow the lender to require an increase of the payments amount or call the mortgage due.

Indeed, this latter situation has arisen for many variable rate mortgage borrowers in the past year due to the steep rise in interest rates. Some clients accept that the risk came with the mortgage product for which they signed up; others may claim surprise at not having been advised of the risk by their mortgage broker.

What can a mortgage broker do to reduce the chances of a client legitimately making such a claim? In answering this question, we will consider whether the mortgage broker has an obligation to discuss the risks by virtue of their position or pursuant to an agreement. We will end by suggesting some practical considerations for a mortgage broker when arranging a variable rate mortgage.

ARE THERE FIDUCIARY OBLIGATIONS?

Is a mortgage broker a fiduciary of the client? Would being a fiduciary of a variable rate mortgage client automatically make the client responsible for loss and damages suffered by the client?

No law makes a mortgage broker automatically a fiduciary of their client. No broker should, barring extenuating circumstances, enter into an agreement to become a fiduciary of their client. No broker should conduct themselves in a way that makes them a fiduciary of their client. A broker should avoid exercising discretion or making decisions for their client. They should make complete and candid disclosure to their client of all material information, provide competent advice for the client to consider, educate/ equip the client to provide informed instructions, and they should follow the instructions provided. A mortgage broker who unilaterally decides that a variable rate mortgage is best for a client or acts on uninformed instructions to arrange such a mortgage takes a step down the undesirable path of being a fiduciary.

A mortgage broker who is found to be a fiduciary of a client is more likely to be responsible for loss and damages suffered by the client due to the mortgage broker’s actions. I say more likely because it is possible the mortgage broker could be found to have been a fiduciary for some purposes but not for others. A mortgage broker who avoids being a fiduciary at all avoids having to make nuanced arguments concerning this finer distinction.

Professional Standard Of Care

A broker who fails to meet the standard of care expected of mortgage brokers may be found to be negligent and responsible for a client’s loss and damages. This begs the question: what is the standard of care expected of a mortgage broker?

In discussing the standard of care expected of professions/occupations, courts use varying language such as requiring the person to have and exercise the degree of skill of an average practitioner in the field or that of a reasonable and prudent practitioner in the field. The fine differences in language do not matter for our purposes. As indicated in more detail when discussing fiduciaries, a broker should not exercise discretion, should not make decisions for the client, should make complete and candid disclosure of all material information, should provide competent advice, and should take only informed instructions. Taking that approach would appear to satisfy the standard, regardless of its specific wording.

I do note that courts in considering whether the applicable standard was met in a certain case will take note of legislative and regulatory standards and industry practice, but in the end, it is the court that sets the standard in terms of determining whether the broker was negligent. It is not a bullet-proof defence for the broker to say that everyone in the business does it that way. It is open for a court to conclude that the industry’s standard is too low and hold the specific broker responsible for the client’s loss and damages.

Client Service Agreements

Every broker should have a client service agreement (CSA) with every client. It should establish the relationship between the broker and the client, including setting out what the broker is committing to doing and what they will not be doing. The CSA can be a valuable tool if the client later wrongly seeks to impose an obligation on the broker.

The CSA should be reasonable in setting the list of included and excluded duties. It should reflect the industry’s general practices and what a usual client would expect of a broker. Any exceptions should be highlighted for the client. While it might be tempting to try, a CSA is unlikely to be successful in negating a standard of conduct required by the court or a duty imposed by legislation or regulation. As well, it is highly unlikely a CSA would be effective in allowing the broker to contract out of negligence. For example, it would almost certainly not be effective for the CSA to state that the client is agreeing to not hold the mortgage broker responsible for any losses or damages the client suffers whether or not they arise because of an act or omission of the mortgage broker.

The CSA should be clear in stating that everything the broker does or says should be understood as the broker maintaining their role as an advisor. Anything that could be understood otherwise is to be understood as being only advice and not a decision. It should include that the broker will: disclose all material facts to the client, provide their best advice, inform the client to equip them to make decisions and instruct the broker, and will act on instructions and not make decisions for the client.

The Current Variable Rate Mortgage Issue

Having an appropriate CSA in place, it only remains for the broker to conduct themself accordingly. Specifically, with regard to arranging a variable rate mortgage, they should: n Not decide for the client that a variable rate mortgage is best for the client; n Advise the client of the benefits (including generally a lower interest) of the variable rate mortgage; n Advise the client of the risks (including those related to the interest rate increasing as discussed previously and as stated in the lender’s documentation); n Advise the client of the benefits and detriments of possible alternatives; n Equip the client to decide whether to instruct the broker to proceed with the variable rate mortgage; and n Not limit the information to the client so they are unable to decide that they do not prefer a variable rate mortgage.

Takeaway

An appropriate CSA coupled with a mortgage broker conducting themselves accordingly can assist a broker from claims concerning variable rate mortgages, particularly that the broker did not explain the benefits and risks involved.

The CSA and the broker's conduct should make and keep clear that the broker is, in relation to the client, only an advisor and not a decision-maker.

This article is not intended as legal advice. You are advised to obtain legal advice in specific instances.