He’s not discouraging them, but an E&O insurance broker is warning mortgage professionals about the costs associated with their expansion into private lending – a move that could raise their insurance premiums by as much as 90 per cent.
“I’m not saying that your E&O will go up the moment you use a private lender,” said Derrick Leue, president of LMS PROLINK, the insurance broker partner for Liberty International Underwriters Liberty, “but you have to be careful.
“As the frequency of your private lender deals goes up, so will your insurance rates – you could see a bump of 10 per cent and even 90 per cent if you have any claims.”
In recent months, many brokers have refocused on individual private lenders and MICs as a way of diversifying their revenue stream outside of a dwindling number of Triple A deal. It’s also a way of servicing clients shut out by tighter underwriting, even among institutional alternative lenders.
Brokers are already aware of the consequences private deals could have on their brokerage E&O.
“Please also insure that your E and O insurance covers you to act for a Private Investor,” wrote one MBN reader this week.
Those concerns about higher E&O premiums are valid, said Leue who pointed out that the majority of the claims his company handles involve private lenders.
“Almost 90 per cent of the claims we receive are claims on mortgages arranged with private lenders,” he said. “A majority of that or about 60 per cent involve individual private lenders who believe the mortgage brokers failed to accurately disclose to them the risks involved in the deal.”
Law suits from individual private lenders are more prevalent because losing money on a deal often has a greater impact on them that on MICs, which spread risk across several investors.
Among the top complaints from private lenders are:
The mortgage broker misrepresented the borrower’s ability to meet the terms of the deal
The mortgage broker mishandled the transaction because he or she did not get a proper appraisal of the property; or failed to secure income verification; or did not furnish lender with all documents
The financial advice given by the broker was wrong
A broker’s best defence against a lawsuit would be to meticulously and accurately document the transaction, said Leue.
For instance, in Ontario FSCO has the Investor/Lender Disclosure Statement for Brokerage Transactions. This is a free form provided by FSCO, which serves as a guide and checklist of documents to obtain and steps to take when working with a private lender.
Saskatchewan and British Columbia require brokers to fill out a similar form and LMS Link is working with Alberta Mortgage Brokers Association to develop a similar tool, said Leue.