Shadow Lenders and Shadow Brokers: Alternative Lending in Canada

This week, CBC News is reporting that a British Columbia woman has been acting as a “shadow” mortgage broker and altering tax and other documents in order to obtain mortgages for dozens of individuals who otherwise would not qualify for loans.

This case, which is not the first that BC’s Financial Institutions Commission (FICOM) has investigated, has revealed this problematic emerging practice, in which unregistered individuals act as a liaison between people seeking to obtain a mortgage and licensed mortgage brokers. It appears to be a new trend similar to the more well-known trend of shadow lenders.

What Are Shadow Lenders?

Shadow mortgage lenders, also known as alternative lenders, offer short-term, uninsured mortgages to prospective homeowners. Such lenders are often considered lenders of last resort as they are willing to provide loans to homebuyers who have been unable to secure loans through traditional lenders such as banks. Such loans are risky and come with much higher interest rates than those provided by traditional lenders, and can often be as high as 7 to 9% for first mortgages, and even higher for second mortgages.

Shadow lenders tend to operate outside of the scope of federal bank regulations. They can include anyone from organizations such as mortgage investment corporations and hedge funds to private lenders including high-net worth individuals, mortgage brokers, and realtors.

Who Are Shadow Brokers?

This recent case highlights a related practice of individuals who act as a liaison between a prospective homeowner and a licensed mortgage broker. This is related to, but not the same as, shadow lending, as these shadow brokers do not themselves lend money, but do alter documents in order to, for instance, inflate a prospective homeowner’s income.

In this case, more than 40 files handled by the shadow broker in question contained documents which were either completely fake or had been altered to significantly misrepresent a borrower’s income.

For instance, the shadow broker made the following alterations to the annual income of borrowers she was working with:

  • A self-employed fish filleter with an annual income of $30,000 was falsely identified as a fish trader with a $75,000 annual salary;
  • A self-employed hairdresser’s annual income was falsely inflated from $13,457 to $60,201;
  • A janitor’s annual income was falsely increased from $10,881 to $77,000.

Implications for the Shadow Broker

FICOM has posted a series of enforcement actions related to the shadow broker’s activities, which will culminate in a hearing in which she is accused of unregistered brokerage activity. She is alleged to have been “giving instructions and directions” to licensed mortgage brokers. The maximum penalty for unregistered mortgage brokering is $50,000.

The licensed brokers themselves also face consequences for their interactions with the shadow broker.

Implications for the Licensed Mortgage Brokers who Worked With the Shadow Broker

The licensed mortgage brokers all face professional misconduct hearings before their regulator.

At least one of the licensed brokers has agreed to give up his license for at least 10 years as a result of his interactions with the shadow broker. According to a set of facts that were agreed to at a hearing, the licensed broker had believed that the shadow broker was a realtor. Based on information that she provided him with (which included the inflated incomes of the borrowers) he then submitted 17 mortgage applications which included this misleading information to lenders.

B.C’s acting registrar of mortgage brokers told CBC News that this is one of the most significant cases that FICOM has investigated, and the size and scale of what has been identified is “unique in recent memory”. He added that “what we have been clear about with industry is that we don’t tolerate fronting of applications from unregistered parties.”

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