The real estate market in Ontario, particularly in the Greater Toronto Area, seems to be ever-expanding, and with it, the demand for financing from purchasers. The private lending market, once a source for a small subset of Ontario mortgages, has also been growing. In 2017, it made up 8%, or approximately $10.6 billion, of Ontario’s mortgage transactions. This was up from $6 billion just three years prior. Due to the increase in private lending, the Ontario government is now considering a provincial registry for these lenders, in order to better regulate the industry, and better understand the level of risk in the private lending sector.
Lack of Information and Oversight
The recommendation for the registry comes from a report released at the end of September by the Ministry of Finance, which discussed concerns with respect to the lack of oversight and insight into the growing market.
The private lending market has gained traction in the last couple of years due to the implementation of stress tests for uninsured mortgages in 2018. Private lenders have become more popular with those facing financial difficulty, who may not qualify for a traditional bank-funded loan. The report indicates the need for better oversight into this industry, in a way that will enable the province to gain a much-needed glimpse into the role private lenders play in the provincial economy and housing market.
Money Laundering Concerns
There is also a growing concern that private lending could be a potential hotspot for money laundering, given similar issues found through recent investigations in British Columbia. The report encourages collaboration between the Financial Services Regulatory Authority of Ontario (FSRA) and the Ministry in order to create a registration system that would be mandatory for lenders who meet a certain threshold, and voluntary for those who don’t.
The report also suggests that the FSRA work with the Law Society of Ontario to create an exchange of information with respect to private lending facilitated by Ontario lawyers. The creators of the report would also like to see a requirement for lenders to periodically report their activities to a regulatory body.
Potential for Implementation
The provincial government is currently weighing the suggestions contained in the report, and considering implementing some of the recommendations as soon as next year. It will be interesting to see what if anything comes from this report. Currently, private lenders are often the only option for people who are already strained financially but are also often charging much higher interest rates than traditional regulated lenders. As a result, the private mortgage industry sees the highest rate of default across all mortgage lenders. Perhaps regulation could help to narrow this gap somewhat and help lessen the consumer’s risk when it comes to unregulated mortgage lenders. This remains to be seen.
Seek Experienced Legal Advice
Any person seeking to obtain a mortgage, whether through a regulated entity or a private lender, should seek the advice of a qualified real estate lawyer. Your lawyer can review all associated documentation with you and ensure that you are aware of your obligations before entering into a commitment. Defaulting on a mortgage is a demoralizing process that can affect your financial standing for years afterward. It’s best to have a full understanding of what you are committing to before signing.
At Baker & Company in Toronto, our real estate lawyers take the time to meet with you and understand your unique needs in order to guide you through your real estate matter, whether commercial or residential. We rely on our broad base of experience and expertise to provide exceptional legal advice and risk management in a variety of transactions, or through litigation. Call us at 416-777-0100or contact us online for a consultation.