Strict compliance touted as best practice for mortgage syndication

Strict compliance touted as best practice for mortgage syndication

Strict compliance touted as best practice for mortgage syndication

A combination of technology, experience and assiduous compliance has the potential to rehabilitate the syndicated mortgage sector while keeping brokers and lenders out of the line of fire.

Toronto-based Fundscraper arranges bridge financing for large developments on first, second, or combination, mortgages between one and three years—and it leverages technology to reduce costs and protect investors. The firm uses a complex technological algorithm to assess potential investors’ suitability for syndicated mortgages, and its compliance is so air-tight that it’s become an advisor to various mortgage entities.

According to Gregory Colford, Fundscraper’s principal broker, vice president and chief compliance officer, the Ontario Securities Commission’s hackles are raised, and where the Financial Services Commission of Ontario at times seemed indolent, the OSC is on the warpath to ensure consistent compliance.

“Mortgage syndicators aren’t the only ones who have to worry about the OSC’s guns because mortgage investment entities that don’t have proper compliance in place will be subject to regulatory scrutiny,” in the form of hefty fines, intrusive investigations and lengthy audits, he said.

Using the experience of a senior management team with decades of collective real estate and securities experience, Fundscraper deconstructs potential investment projects—and rejects many, says Colford—by looking at everything from models, market studies and appraisals to the developer and much more.

Luan Ha, Fundscraper’s founder and CEO, added that, using technology, the same attention to detail goes into investor suitability assessments.

“We use technology to enhance our ability to drive data out of our suitability assessments and, therefore, produce more holistic and accurate suitability assessments,” said Ha. “We use our data models to figure out whether a project fits within the time horizon or risk tolerance or investment concentration threshold of this one particular investor. We make it a point that our KYCs are done through what we call our suitability algorithm, and this produces a much more objective suitability assessment on whether or not an investor should be making investments through our platform.

“Using technology, we drive down the cost and reduce manual time to make assessments, but we still have an experienced person to sign off on all of our transactions. It’s easier to scale up the platform across multiple jurisdictions when you have technology helping you with your processes and procedures.”

Fundscraper is trying to bring that same expertise to other private lenders and syndicators, having already advised plenty of mortgage investment entities since its inception a few short years ago.

“The way to make syndication safer for investors is through objective technology,” continued Ha. “The documents are very sophisticated and you need a transaction background and development expertise, a legal background and existing relationships. There are over 520 registered private lenders in Toronto and not all of them have registered as exempt market dealers. As new rules progress forward, we hope that our technology can help facilitate those lenders.”

Given the recent fallout over syndicated mortgages, it is evident that mortgage brokers shouldn’t sell syndication products—especially with an emboldened OSC. However, Colford says there will still be a place at the table for brokers.

“Fundscraper is not here to cut out the broker; we’re here to protect the broker,” he said. “Regardless of what changes come down in the late spring or early summer, brokers are still the only party licensed to deal with mortgages, aside from obvious parties like chartered banks. We want to bring brokers into the world of regulatory compliance that’s coming down from the Ontario Securities Commission. We believe there’s an opportunity for brokers and mortgage syndicators to continue their business, doing what they do best and that’s dealing in mortgages. We’re here to help, not to take business away.”