Brokers defends position on representing private lenders

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It may go against the grain of many brokers, but one seasoned mortgage professional makes it clear to borrowers that he represents the lender in private deals and not, in fact, them.

“When working with private lenders, it is our office policy to indicate in our disclosure that we are only representing the lender,” said Ron Butler, broker in charge of private lending at VERICO Butler Mortgage Inc., in Toronto. “We want to make sure the borrower understands that in this case our primary duty is to look after the lender’s interest.”

As more and more borrowers are shut out by banks institutional alternative lenders, private investors are becoming more popular in the channel. While other brokers claim to represent both parties in the transaction, Butler told MortgageBrokerNews.ca he believes he is “morally bound” to choose one master, as it were. It then falls to the borrower's lawyer to act as advocate.

"The borrower's own independent lawyer must carefully explain and warn the borrower about possible future outcomes," he said.

As for Individual investors acting as private lenders, they may overlook issues such as poor credit, bankruptcy and zoning issues and are therefore putting their money under considerable risk when they fund deals probably turned down by the banks, he said.

“Private lenders are the ones seeking my assistance in finding a suitable mortgage to invest their money on,” he said. “If they are giving me this responsibility, I am morally bound to represent their best interest.”

He said it is his duty to make sure that the mortgage’s he presents to such lenders suit their risk tolerance.

Butler pointed out that this is not a Verico-wide policy but rather one that he has chosen personally to implement in his own company alone. It also only applies to individual private lenders.

“Most of the lenders I come across are individuals who are not very sophisticated investors they often need guidance and protection throughout the deal,” he said. “MICs (mortgage investor corporations) are more seasoned investors and in those cases we revert to representing the lender and borrower equally”

 

 

 

 

  • Dale Koeller on 08/11/2012 7:33:06 AM

    Notice that his final quote is that if you choose a sophisticated private lender that you can represent both the lender and borrower equally. You should choose a sophisticated private lender for the benefit of your borrower, not simply so that you can then give them advice and represent their interests, but because they will be indebted to a more professional private lender.
    Our insurance industry also tells us that the biggest source of claims against brokers is from individual private lenders who believed the mortgage broker had their best interests at heart.
    Ensure you always choose a sophisticated and professional private lender for your own benefit, and for the benefit of your borrowers.

  • Ron Butler on 08/11/2012 9:24:18 AM

    I appreciate your insight Dale.

    Over 17 years we have placed well over 2500 private mortgages from individual investors, not MICS and we have retained most of the same investors for that 17 years who have referred us to others to invest and often to their children.

    We have never even had a official complaint from an investor in all that time let alone an insurance claim.

    I do respect that what you say is true, poorly handled private mortgages are a prime source of insurance claims and litigation in our industry. My belief has always been if you try to treat the investor's mortgage as if it was your own money going out, it is the best guiding principal.

    Also, I know several very sophisticated private lenders and some MICS where I would not be doing a borrower any favors if I arranged those mortgages.

    In the private mortgage business I think the best practise is the most honest disclosure and insistence that the borrower is always represented by a seperate lawyer representing the borrower's interest no matter what the size of the mortgage.

    Perhaps a recommendation that only professional private investors be used is also coming from a professional private investor.

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