Mortgage firms reach deal with chief regulator
Eight participants in Canada’s syndicated mortgage market have been sanctioned by the sector’s chief regulator as part of a $1.1-million settlement that saw several lose their broker licences.
The eight parties, which included four individual brokers and four brokerages, were involved in the distribution of syndicated mortgage investments for projects linked to Fortress Real Developments Inc., an Ontario-based real estate development company and consultant that partners with builders and developers in five provinces.
Fortress itself, which is not a mortgage brokerage or administrator, was not a party to the settlement or the subject of any orders.
Friday ’s settlement was reached after what the Financial Services Commission of Ontario described as a “complex and detailed investigation,” and included the revoking (on consent) of the mortgage broker licence of Vince Petrozza, who is listed on the Fortress Real Developments website as the firm’s chief operating officer.
Natasha Alibhai, communications manager for the firm, said Fortress “does not believe that the settlement and orders will harm its business.”
In an emailed response, she said Petrozza made “a business decision to consent to an order” and would be focusing on real estate development, which does not require a mortgage broker licence.
“As stated in the order, there has been no finding or determination by the Financial Services Tribunal as to any contravention or failures to comply with the Mortgage Brokerages, Lenders and Administrators Act,” Alibhai said.
In all, the broker licences of four individuals and one firm — Building & Development Mortgages Canada Inc. — were revoked on consent by FSCO.
In addition, Ildina Galati-Ferrante, principal broker of BDMC Inc., surrendered her broker licence, “requiring her to cease all mortgage brokering activities,” FSCO said.
BDMC, formerly known as Centro Mortgage Inc., will also pay part of the administrative penalty, along with FFM Capital Inc., FMP Mortgage Investments Inc. and FDS Broker Services Inc.
In addition, BDMC voluntarily agreed to relinquish its mortgage administration functions for existing syndicated mortgage investments in real estate development projects for which Fortress is a developer or development consultant to a new arms-length administrator, FAAN Mortgage Administrators Inc.
There is nothing inherently wrong with syndicated mortgages, in which groups of investors back real estate developments, and many such mortgages are funded and discharged without issue. Some of these investments fund commercial and large-scale residential real estate developments in their early stages, and projects include condominium, office and retail complexes.
According to FSCO figures, the syndicated mortgage market grew rapidly between 2014 and 2016, from just $3.7 billion to $6 billion.
But the growing sector has attracted several lawsuits, which contained claims that investors were put into developments that were far riskier than they were led to believe.
The claims, none of which have been proven in court, alleged investors were misled about where their money was going, who had priority on returns, and what recourse they had if the development ran into trouble.
Fortress Real Developments was named in a number of lawsuits, but denied any wrongdoing and moved to have the cases thrown out of court. In August, the company issued a news release that said four proposed class actions were struck out by the Ontario Superior Court, and claims against Petrozza and Fortress co-founder Jawad Rathore were dismissed on the basis that the statements of claim “did not disclose any legal causes of action against them.”
FSCO, too, has drawn criticism from investors in syndicated mortgages and their advocates over its handling of the burgeoning sector within Canada’s booming real estate market.
Neil Gross, a securities lawyer and former head of the Foundation for the Advance of Investors Rights (FAIR Canada), told the Financial Post last April that “FSCO hasn’t shown a sense of urgency in protecting consumers.”
He noted that a recommendation by an expert panel to overhaul FSCO, which has been embraced by the Ontario government, followed two reports in 2014 that questioned the regulator’s willingness or ability to take “effective” enforcement action.
In April, the Ontario government announced plans to transfer responsibility for syndicated mortgage investments from FSCO to the Ontario Securities Commission.
At the time, Gross called the move “appropriate and long overdue.”
Industry sources said the transfer of oversight was expected to take as long as two years, and the government pledged to move forward in the meantime with new regulations to provide investors with more protection. These include establishing investment limits on syndicated mortgages and requiring mortgage brokerages to document their assessments of the suitability of such products for their clients.
“FSCO would also expand requirements relating to information provided by mortgage brokerages to ensure that investors are aware of the potential risks associated with these types of investments,” the Ontario government said in its spring budget last year.