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Increasing role of private lenders presents risks for lawyers

Recent rule changes have made it more challenging to obtain a mortgage in Canada, with private lenders now often playing a role in helping to finance short-term loans, Toronto real estate lawyer Sarita Samaroo-Tsaktsiris tells Canadian Lawyer magazine.

As the article notes, regulators recently tightened restrictions to ensure buyers can sustain interest rate fluctuations and the debt load they take on to buy a property, with much of the attention focused on the management and limitations on money borrowed to finance the purchase of homes.

While the Bank of Canada has expressed concerns over highly indebted households, the bank regulator, the Office of the Superintendent of Financial Institutions, noted that it would increase its scrutiny in the areas of income verification, non-conforming loans, debt service ratios, appraisals and loan-to-value ratio calculations and institutional risk appetite. A stress test previously required for insured mortgages is now to be extended to uninsured mortgages. 

As a result, reports Canadian Lawyer, it has become increasingly difficult for the average buyer to secure a mortgage from traditional institutions and more people are seeking out alternative means, such as private lenders, which are not subject to the federal banking regulations.

Samaroo-Tsaktsiris, principal with SST Law Professional Corporation, explains that while banks typically give a loan-to-value ratio of 80 per cent, non-bank and private lenders are not subject to federal regulation and could extend loans that reflect up to 95 per cent of the value of the property.

“Given now that the stress test has increased, people have to seek out other means of financing. There are not the stringent requirements that the institutions have or even the B-lenders have. Private lenders just simply require that there is equity in the property and they don’t look as much at your income and your ability to pay as they do the equity that’s available in the property,” says Samaroo-Tsaktsiris, who often acts for those lenders.

There are also risks for lawyers, she says, because the legal insurer providing coverage for lawyers in Ontario doesn’t provide protection for claims or losses incurred by private lenders.

Samaroo-Tsaktsiris says she has instituted a series of procedures and policies she expects her lender clients to follow. These include an information statement confirming the first mortgage is in good standing and there are no arrears. She also requests a tax certificate, a status certificate to ensure that common element expenses are paid to date, a proper appraised value of the property and a request for an assignment of the rent registered on title to ensure it can be collectable by the lenders in the event of default on rental property.

Deals have also been declined in instances where outstanding judgments have been uncovered during execution searches, Samaroo-Tsaktsiris says.

“There are requirements; it’s just that they’re not as stringent as an institutional lender’s requirement,” she says.

“As long as you have done your due diligence searches to ensure that in fact everything is in good standing and there will not be an interest ahead of your private lender's interest, then, typically, it’s safe to act for private lenders.”

Ontario’s law society also requires additional paperwork to confirm that the lawyer doesn’t provide any advice on any losses they may incur, but seeking permission from the primary lender isn’t a requirement, says Samaroo-Tsaktsiris.

If future controls of non-banking lenders are considered, she adds, stipulation might serve the purpose.

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