Brokerage arms itself against potential litigation

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One major network is implementing the use of an indemnification form for private lenders to sign to avoid suits brought forth against brokers.

“In the last few years the industry has experienced an increased number of lawsuits from private lenders,” Ron De Silva, president of RMA, writes in an email sent to all of the network's brokers. “Many of these suits are as a result of losses incurred from the non-performance of the mortgagor who we have no control over.

“However, the lender’s intent is to sue the broker and try and recover losses from our Errors & Omissions insurance provider.”

The email, which was shared with MortgageBrokerNews.ca, explains that an increase in E&O claim payouts results in higher insurance coverage costs for brokers.

“Therefore, RMA is taking its own steps to try and protect you and the company and reduce the instances of lawsuits from private lenders,” De Silva writes. “We are implementing an indemnification form that all private lenders will be signing along with the Form 1.”

The form indicates the private lender will not take legal action against RMA and its brokers and agents in case of borrower default or because of any other mortgage or market issues. It will be required for all privately funded deals as of October 31.

Private lending has become more prevalent in the mortgage industry over the past few years, with many clients, including self-employed Canadians, falling outside the lending parameters of more conventional lenders.

And their increase in use appears to have resulted in an increase in suits filed against brokers.

As De Silva explains in the email, it’s a similar reciprocal indemnity agreement the network currently has in place with institutional lenders.
  • James on 2015-10-07 9:49:19 AM

    Have a central list of private lenders who do this....brokers shouldn't have to put up with this waste of time.

  • Ron Butler on 2015-10-07 10:59:31 AM

    There is an important fact to understand: under torte law, prior indemnification is meaningless in the face of fraud, misconduct, or any form of negligence and let's face it, at least one of those elements is going to be part of any private lender's litigation.

    I am not saying this is a terrible idea because it may stop a few private lenders from going to a lawyer in the first place but as soon as the lender sees a lawyer the lawyer will laugh out loud at the indemnification.

  • Ron Butler on 2015-10-07 11:23:05 AM

    James, I suggest you re-visit the mortgage broker's coarse. As brokers we have a profound responsibility to review, vet, investigate and carefully judge each private mortgage offering we make to investors.

    It seems only reasonable that if facts about the borrower, the property or any other covenant issue were missed, or willfully ignored by the mortgage broker recommending the investment that an investor have recourse to the law.

  • Ad Lakhanpal,Mortgage Alliance on 2015-10-07 11:41:48 AM

    Ron Butler could be correct from legal point of view. If the default occurs because of fraud,misconduct or negligence of the broker, he/she should held accountable regardless of indemnification form. However, if the default occurs because the borrower's inability or unwillingness to pay, the lender should take legal action against the borrower/property instead of the broker. An indemnification form would prevent frivolous law suits in such circumstances.

  • Jerry Quigley on 2015-10-07 12:00:24 PM

    Well said, Ron. In 30+ years of dealing with private lenders, I've not seen even one talk about a law suit; not even close.
    Make sure you disclose all you know, brokers!

  • Ron De Silva on 2015-10-07 12:45:58 PM

    Well the indemnity form is not meant to prevent litigation because of broker negligence.... but the world is changing. Everyone wants a share of the upside of the real estate boom but looks for others to blame on the downside. We're simply being pro-active in looking into the future of the private lending arena. Jerry, you've been lucky in 30+ years. Larger (longer) Form 1's and higher private lending defense deductibles for E&O didn't come about by accident. To use the famous words of Radar O'Reilly... "Wait for it....."

  • James on 2015-10-07 1:38:23 PM

    @Ron

    The article states:
    - MANY (ergo, not ALL) of these cases are related to non-performance. Therefore, there are cases that are NOT related to non-performance right?
    - the topic was about POTENTIAL litigation (NOT exclusive to non-performing loans). This was merely used as an example.
    - HOWEVER, the INTENT is to recover from the E&O
    - You are also assuming that brokers who are victims of these frivolous claims did not do any DD and still choose to deal with the lender despite knowing consequences. I am certainly humble enough to understand that NOT ALL brokers are lazy or do not disclose facts properly....but to infer that all of those victimized by these frivolous claims were possibly guilty of being horrible at their business reeks arrogance.

    Using your logic, brokers should get used to ANY lender suing the broker and recover from its E&O DESPITE the fact that the lender should have done its own DD before agreeing to fund the deal...

    I'll take the high road and not comment on your comment about re-visiting the broker program...

  • Ron Butler on 2015-10-07 3:20:17 PM

    @ James, my response was towards you making a distinctly "blanket" statement. As someone who has been sued (although never by an investor and that's for 20 years and over $150 million of private lending) I will tell you that EVERYONE who ever looked at the file and their dog is named in litigation so the "potential " and "intent to collect" is just a function of lawyers looking for many pockets to explore. Also "the lender should have done its own DD" well I am afraid I must go back to my "brush up on the coarse" comment because I assure you FSCO does not believe we as brokers should throw private mortgage deals at investors and the investor should figure it out for themselves.

    @Ron I am sympathetic to litigation, it is a phenomenal pain in the rear but that being said there are private mortgage specialists in the most litigious markets: Vancouver and Toronto who have effectively zero litigation even now. I will agree with you completely that if property values take a turn even the most careful broker will feel some heat but honestly I think we as mortgage brokers owe a debt of care to our private investors more than just showing them a private deal and asking them what they think.

    I throw out 3 private lending opportunities for every one I show an investor. I think we as mortgage brokers should realize if we think we are just purveyors of opportunities and the investor is always the fall guy we deserve to be litigated.

    The fact is if the borrower stopped paying there should have been enough equity in the property to give the lender a fighting chance of getting out whole on remedy action or if there was not enough equity, was there a possible co-signer with another property we could blanket? Maybe would should have done a private first and not a second if we were worried about non-performance. Or maybe we should just have said "No" to the borrower and let another broker do that deal and that broker can end up litigated. There must be a reason some private mortgage specialists are not being litigated and others are.

    Ron, you maybe right and sooner or later all of us will be sued but right now some of us not so much.

  • Jay Knox on 2015-10-07 4:15:07 PM

    Ms. RMG is hoping that home cooked legislation she is hoping to force upon that ignorant, greedy little private lender in hope to avoid wasting time and money on their own defense lawyer. . . . the attempt is, is, is just amazing.

  • GW on 2015-10-07 9:16:37 PM

    As one of those horrid greedy little private lenders who has never sued a mortgage broker yet I gotta say Ron Butler has got it right:

    "I assure you FSCO does not believe we as brokers should throw private mortgage deals at investors and the investor should figure it out for themselves."

    Of the 50+ second mortgages now on my books, in only two or three cases did the mortgage brokers present an ILD (Investor Lender Disclosure) in the regulated time frame. Instead, they asked me to "backdate" my signature, presented the ILD a day or two before closing. Or never bothered at all with that pesky 11-page form.

    Standards of Practice are such a bore. And so hard to find: http://www.ontario.ca/laws/regulation/080188



  • James on 2015-10-09 10:06:43 AM

    @Ron
    ...what "blanket" statement did I state?

    Aren't frivolous lawsuit a waste of time?

    However....
    ALL brokers are at risk of being sued. Bluntly, crappy brokers who do not disclose properly should be sued.

    What I'm against is the "practice" of these unscrupulous lenders (who have/should have done their DD) suing a broker (who have disclosed everything upfront) for a non-performing loan.

  • Jay Knox on 2015-10-09 6:10:56 PM

    @GV
    Better yet, I've been in the business since 2001 brokering/lending and from my observation, over those years I can count those agents who know on fingers of one hands. Absolute majority of those so called licensed agents who describe themselves as brokers have no idea what the Disclosure to Private Lenders is and what it stands for and legal implications arising from details. Everytime I see one is full of mistakes and signs of incompetency. And that goes against the Brokers too. The problem is in training and understanding complexity of Filogix application system or rather lack of as the integration between various documents is self explanatory. Little private lenders who never sue are doing their homeworks instead of relying on "professionals". What else would you expect from everyday house buyer resulting in insanity of Canadian Real Estate market if majority of our "professionals" are nothing more than incompetent fools?

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