10 Common Mortgage Blunders You Can Easily Avoid
The Smiths (seemingly friendly and genuine people) walk into your law office with what appears to be a straightforward real estate deal including mortgage financing, for which you are to represent the lender as well. But, is it really that straightforward? Consider this: a high percentage of claims are caused by communication errors, inadequate investigation, clerical errors and fraud when dealing with mortgages. Many of these claims are easily preventable.
Here are 10 common errors relating to mortgage transactions. If you handle these issues effectively you are more likely to close the deal with peace of mind.
- Not taking instructions from the “true” client
Always take instructions from the party who will have a beneficial interest – not from an agent or intermediary (such as a relative, mortgage brokers, agents or trust companies). Often, fraud may be prevented by asking the right questions. For example, asking if the person obtaining the mortgage will actually be living in the house can help prevent shelter fraud. For details on the different kinds of fraud, please see LAWPRO’s Fraud Fact sheet
- Not informing the lender of material information
There is no confidentiality between the purchaser/borrower and lender – you owe a full fiduciary duty to both parties, assuming you are acting for both in permitted circumstances. Make sure the lender is aware of any information material to the lender’s decision to advance funds under the mortgage (in writing before advancing funds). These include an inflated purchase price, unusual changes in property value or information that suggests the purchaser is misrepresenting the true circumstances of the purchase. In Ontario, the Rules of Professional Conduct speak directly to this issue (see Rule 3.14-15).
- Missing specific lender instructions
Does the lender have specific instructions? Instructions and security documents are updated on lender websites and can change without notice. Some lenders encourage lawyers to access their website each time they receive instructions for a residential mortgage transaction or personal loan secured by a collateral mortgage. Lawyers are further advised that the information from the website is to be read in conjunction with the instructions received. Checking lender websites frequently will help ensure you have the most up-to-date information.
- Not highlighting priority issues for the lender
Make lenders aware of priority issues, especially when dealing with second or third mortgages. Often, second or third mortgages are private mortgages granted by individuals whose experience may vary. It is important to explain their priority positions (for example, behind a first mortgage already registered against the title to the property) in the event of a default – before completing the transaction. Remember to always document your discussion.
- Not conducting a detailed title search
Pay attention to the pattern of inactive or deleted instruments on the parcel register and make inquiries if something seems suspicious, such as a mortgage being discharged within six months preceding the closing/advance date.
- Missing the red flags of fraud
Check ID, check ID, check ID. Sometimes lenders have specific instructions about client identification and verification which exceed the Law Society of Upper Canada’s requirements – be sure to follow them. Also, you can confirm the authenticity of an Ontario driver’s licence by checking it against the Ministry of Transportation website. Keep LAWPRO’s Fraud Fact Sheet handy and when in doubt refer to it.
- Not paying attention to special requirements when acting for private lenders
There are circumstances in which you cannot act for both a private lender and borrower, such as if the mortgage loan exceeds $50,000. Also, in Ontario for example, there are specific practice requirements set out in the Law Society of Upper Canada’s By-Law 9, Financial Transactions and Records. For example, Forms 9D and 9E must be prepared when applicable, and additional information must be provided in the Lawyer’s Annual Report to the Law Society (such as, if you acted for a lender lending money through a mortgage broker).
- Not explaining the loan documents to borrowers
Make sure the borrower client understands the terms of the loan and its implications. Borrowers often blame lawyers for not explaining the nature of the terms (how much are they borrowing, the interest rate, pre-payment options, and penalties). Clarify any discussions and ask for questions. It is good practice to document the terms of the loan in the reporting letter after closing.
- Not checking the fire insurance binder for the lender name
A fire insurance binder letter must be obtained by the client from his or her home insurer and provided to you before closing. Don’t forget to check that the name of the mortgage lender is accurately set out as loss payee in the fire insurance binder according to the lender’s instructions, and that it contains the standard IBC mortgage clause. Keep a copy of the binder in your file.
- Not obtaining a title insurance policy
Most lenders require binding title insurance. Double check that you have an issued policy for the lender with the right endorsements attached to the policy, such as construction or collateral loan endorsements. These endorsements provide important coverage for the lender.
These 10 steps can help prevent errors. But, needless to say – mistakes happen. For those unpreventable mistakes, Legal Service Coverage protection automatically included in TitlePLUS® policies* explicitly covers losses resulting from the lawyer’s negligence regardless of whether the loss falls under a covered title and compliance risk or not.
*Excluding OwnerEXPRESS® policies and Quebec policies.