The growing use of collateral charge mortgages means brokers should consider asking clients to sign waivers acknowledging they were appraised of the up and, indeed, the downs attached to those controversial loans, a leading E&O insurance provider told MortgageBrokerNews.ca.
“Certainly, it is a good risk management practice to have them sign a waiver acknowledging that the broker informed them about all aspects of a collateral charges mortgage and releasing the broker of any responsible,” said Derrick Leue, president of LMS PROLINK – broker-partner for Liberty International Underwriters Liberty.
The advice effectively answers a growing number of brokers worried about possible ramifications tied to arranging collateral-charge mortgages as an increasing number of their lenders restrict abandon the convention model.
While readvanceable mortgages have the potential to help clients more quickly tap the equity in their homes and avoid upfront legal costs, they also make it harder for brokers to move that client at renewal or for a refinance given the primary lender has registered the mortgage for 100 per cent of the value of the property.
That has the potential to tie the hands of clients if their lender is unwilling to readvance the loan and they’re forced to go elsewhere for a second mortgage or refinance. There’s also concern about the arbitrary resetting of interest rates by lenders if the loan falls into arrears.
They’re complex challenges brokers fear could lead to a spike in litigation as trapped clients look to ascribe blame.
Leue hasn’t yet seen any growth in those types of cases, although “if the past is an indication, I would say that it is a possibility,” he said.
At the very least a waiver would provide a broker with the opportunity to engage the client in a comprehensive discussion on the potential pitfalls attached to collateral charges, although it’s by no means a guarantee against the kind of uptick in claims the industry attracted as private lending deals went belly up in the recession.
“At the end of the day, if they want to come forward with a claim, a waiver isn’t likely to stop a (litigation) lawyer,” Leue told MortgageBrokerNews.ca.