Syndicated mortgage fraud, and the consequences its unscrupulous players are beginning to reckon with, has put the Financial Services Commission of Ontario on the hot seat, with many questioning the government agency’s effectiveness.
“Various parties in our industry have been talking about what’s wrong with Fortress to FSCO for seven years,” said Ron Butler of Butler Mortgage. “FSCO really took no definitive action until the Reuters report hit, and at that point the Finance Minister instructed FSCO to do something about it.”
Reuters reported that FSCO was in possession of enough evidence to act against Fortress-affiliated mortgage brokers, but that Anatol Monid—FSCO’S Executive Director for Licensing and Market Conduct—decided the evidence was insufficient.
Monid also ignored the pleas of various parties within the industry to look into the alleged untoward behaviour.
“We were on a conference call with various FSCO people and we talked about all the red flags,” continued Butler. “We talked about the insane amount of commission being paid—in our business it typically ranged from 50 basis points to 100 basis points, half a percent to 1%; these guys were being paid 8%, being spread out between mortgage brokers and brokerages. That’s 800 basis points.
“If you read their mortgage document, what the consumer was buying, the consumer was allowing their position on the mortgage to go from second to fifth, so in other words it automatically allowed other lenders being involved and consumers’ interests being constantly postponed. I’ve never even seen that in a mortgage document in my life, and I’ve been doing this for 25 years. It said you may not stay in second position. Never saw that before.”
Also suspicious was the provenance of Fortress Real’s funds. Butler notes the company held a few black tie galas to recruit investors, which are pricey affairs, and still managed to pay out exorbitant 800-basis-point commissions. He wonders where the money came from.
Butler suspects up to half of investor monies were used to recruit even more investors.
“Why are these guys so incredibly different than everybody else in the business?” asked Butler. “It turned out in the end that the front companies like FDS (Broker Services Inc.) would offer syndicated mortgages to investors, and what was unknown was between 35 and 50 cents of every dollar invested was going to Fortress. I think Fortress just existed to raise money and that was their sole contribution to the development. I believe that, but I may be wrong.”
Fortress’s co-founders Vince Petrozza and Jawad Rathore previously paid the Ontario Securities Commission a $3mln settlement, and the latter received a lifetime ban from the Mutual Fund Dealers Association and fined $25,000 in penalties and $7,500 in costs.
“If I was giving money to a development company, I would not want the people to whom I was giving money to have accepted a voluntary ban from the mutual fund industry,” said Butler. “Personally, I would not feel comfortable with it. Others might, but I wouldn’t.
“I’ve never met anyone who invested in Fortress who paid their own ILA [independent legal advice]. They used a lawyer who provided ILA but the investor did not pay for it. I can’t tell you Fortress paid that ILA lawyer, but five of the investors I spoke to said they never paid. For independent legal advice to have validity, you need to pay them. I can’t say who paid.”
The Financial Services Commission of Ontario isn’t held in high regard in the broker channel. Corinna Smith-Gatcke was involved in a transaction in which a borrower could have fallen prey to a predatory lender thanks to a few deceitful brokers.
“None of the brokers who touched the file ever worked on behalf of the client, and I contacted all brokers of record, but what I do know is if you poke the bear and lodge a complaint with FSCO, if you open Pandora’s box, they’ll come after you as much as the person you’re lodging the complaint against,” Smith-Gatcke said of vindictive brokerages.
She was dissuaded by other mortgage brokers who told her not to pursue the matter with FSCO.
“Nobody feels FSCO has any clout at all, and when you do find people doing inappropriate things, very little happens,” said Smith-Gatcke, adding FSCO cannot execute its mandate “in a concise and swift manner.”
“There’s nothing in our industry to protect you as a broker or an agent. There’s no incentive for a broker or agent to willingly declare that they had seen something fraudulent. Most brokerages make those claims regardless, and those are the brokerages you want to be aligned with, but, unfortunately, there are a lot of other bad brokerages out there.”