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Saturday, February 5, 2011

Mortgage referral ruled a real estate brokerage activity

Court of appeal rules in favour of the ACAIQ

Mortgage referral ruled a real estate brokerage activity

OACIQ Reference Number: 4205
December 3, 2003 - 00:00

Notice to reader

Please note that the following article has not yet been updated since the coming into force of the new Real Estate Brokerage Act on May 1, 2010. Readers are advised to refer to this content with caution and to make any necessary adjustments when applying the content to their own situation.
If you have any questions, please contact the Info OACIQ Information Centre at 450 462-9800 or 1 800 440-7170, or by sending us a message.
Source: ACAIQ

In a decision handed down on May 21, 2003, the Court of Appeal of Quebec has confirmed that the referral of clients to a lending institution for a loan secured by immovable hypothec, in exchange for compensation if the loan is granted, constitutes a brokerage activity under the Real Estate Brokerage Act. According to the Court, laws governing real estate brokerage activities are there to ensure the protection of the public and this protection would be diminished if securities brokers and their representatives who do not hold the authorizations or certificates required under these laws were allowed to encourage their clients to borrow against an immovable hypothec collateral.
Following are the facts that led to this decision. In 1999, Compagnie de Fiducie M.R.S., a trust company active in the field of mortgage lending across Canada and a subsidiary of a major investment management company, Mackenzie Financial Corporation, wanted to launch a client referral program in Québec as it had already done in other Canadian provinces. Under this program, investment representatives who were part of the Mackenzie financial distribution network could direct clients seeking a loan secured by immovable hypothec to M.R.S. If M.R.S. granted a mortgage of more than $50,000 to a client, M.R.S. would pay the securities broker whose representative referred the client an amount of up to $400.
Under the M.R.S. program, the role of the securities broker and his representative was to be limited to:
  • provide clients with documentation concerning M.R.S. mortgage products ;
  • provide clients with a toll-free telephone number to reach an M.R.S. representative; or;
  • have clients fill out a reply card with their name, address and telephone number so a representative could contact them directly.
Once the client was thus put in contact with M.R.S., the role of the securities broker or his representative would stop there. The rest would concern only the client and M.R.S. Therefore, the broker or his representative would provide no advice, would not represent themselves as mortgage brokers, would not take part in the loan application or approval process, would not contact M.R.S. and, more generally, would not undertake any action with M.R.S. on behalf of the client.
This being said, the Association des courtiers et agents immobiliers du Québec (ACAIQ) still considered the referral process in this program to be a brokerage activity under the Real Estate Brokerage Act. The ACAIQ felt that only a real estate broker or agent or a representative registered with the Bureau des services financiers (BSF) and authorized to carry out brokerage activities in connection to loans secured by immovable hypothec, in accordance with the Act respecting the Distribution of Financial Products and Services, should be able to use the referral process as described in the M.R.S. program.
Not satisfied with the Association's interpretation, M.R.S. filed a motion for a declaratory judgment before the Superior Court to establish that the proposed program would not involve real estate brokerage activities. The Superior Court agreed, stating that "the act of referring a client to M.R.S. in order to help secure a mortgage loan does not make a securities broker or his representatives, subject to the CVMQ (Quebec Securities Commission) ethics, into intermediaries. They are merely referring, [which] cannot be considered a real estate transaction that could come under the jurisdiction of the respondent, (the ACAIQ), in its role of protecting the public".
This Superior Court decision meant that securities brokers and their representatives registered with the CVMQ and those registered with the BSF could engage in mortgage referral activities under the program proposed by M.R.S. without holding a real estate broker or agent certificate or the required authorization by the BSF. The ACAIQ appealed this decision, and the Court of Appeal ruled in its favour. According to the court, "the role of broker is essentially that of an intermediary: by his intervention, he plays an essential role in establishing contact between a lender and a borrower".
This decision from Québec's highest court clearly states that anyone engaging in a referral activity, even to a very slight degree, in connection with loans secured by immovable hypothec, is also carrying out a real estate brokerage activity, whether this person does is frequently or not. The person must therefore hold a certificate issued under the Real Estate Brokerage Act or apply for an authorization under the Act respecting the Distribution of Financial Products.