CSA Staff Notice 33-315 expands upon the core
regulatory requirements which require registrants to
determine suitability of a proposed purchase or sale of a
security. There are two key requirements for determining
suitability for an investor that you must satisfy:
• the needs and objectives of your client – Know Your
• the attributes and associated risks of the products
recommended to clients – Know Your Product
Investments in the private capital market space
are generally complex, and require an extensive
review of the details in order to gain an understanding
of the transaction. Suitability cannot be delegated to
someone else - you must perform and document your
own suitability and due diligence procedures.
Mortgage Broker Perspective
A mortgage broker is involved in arranging
mortgages with the ultimate goal of resolving
a financing need (residential or commercial).
A mortgage transaction is a private contract between
a borrower and a lender (investor). In exchange for the
mortgage, the lender takes security in the underlying
real estate asset. A mortgage broker often represents
both the lender and borrower. Mortgage brokers are
governed by provincial legislation (in Ontario it is the
Financial Services Commission of Ontario (FSCO),
and mortgage brokers have similar obligations with
respect to KYC, KYP and product suitability, as do
registrants in the private capital sector.
In this article, we discuss some of the issues that arise
in discharging our KYC, KYP and suitability responsibilities
as a mortgage broker in the private capital sector.
Knowledge of the Borrower
A mortgage involves a funding need. In most
cases, the borrower does not willingly disclose the
true need for the money, but the need for funding
could be symptomatic of a problem. The role of a
mortgage broker is to get the facts and present to
lenders who may be interested in funding the project.
Every project requires that we undertake a
detailed analysis of the borrower. If you have ever
applied for a mortgage, you recall that you provided
all of your particulars when completing your mortgage
application; legal name, address, dependent, current
and past employment, net worth particulars, etc. The
mortgage application is the starting point for analyzing
the file and presenting to potential lenders.
The borrower must submit to a credit check, to
allow an understanding of their current financial position,
payment history and credit worthiness. Significant useful
information can show up in those reports.
If the borrower is a corporation, the analysis
should include understanding the corporate entity, its
structure, the directors and shareholders. Knowledge
of key management and whether they are committed
to the business is an important consideration in
lending; the lenders need to know that the key decision
makers are focused on the business. Verification of
the borrower’s identity is required on all transactions.
Knowledge of the Underlying Asset (Property)
Mortgage lending is facilitated by the borrower
pledging the property as security for the loan. We
need to gain as much Information on the underlying
asset in order to provide full disclosure to the lender.
The type of information that we obtain about a
Lenders base the amount funded on an appraisal
of the property. Lenders fund to a certain loan to
value target based on their risk profile. The higher the
appraisal, the larger the loan amount.
There are different type of appraisers and
reports. The significance on the appraisal to the
lending decision speaks to the need to engage only
an accredited appraiser (AACI or CRA ). There are
issues with relying on valuation opinions issued by
unlicensed/unaccredited professionals because the
reports and opinions are not standardized, and the
writers may not carry E&O insurance.
We read the report in detail to understand
the basis for the appraisal and any extra ordinary
Real Wealth Mortgage Corp.
KYC, KYP and Product Suitability –
A Mortgage Brokers Perspective
By Nick Tsimidis