Guideline on Disclosure of Suitability and Material Risks

Purpose

Licensees providing mortgage services have obligations under the Mortgage Services Act (MSA), Mortgage Services Regulation (Regulation), and Mortgage Services Rules (Rules) regarding product suitability and disclosing material risks. This guideline provides guidance to licensees on

• understanding suitability and material risk disclosures
• when material risk disclosure is required and
• when material risks disclosure is not required

For more information on disclosure requirements, visit the BCFSA Mortgage Services Knowledge Base.

Guideline

Understanding suitability and material risk disclosures

Before presenting a mortgage or mortgage transaction as an option, licensees must take reasonable steps to determine whether it is suitable for a borrower or lender.

This assessment must consider

1. the needs and circumstances of the borrower or lender and
2. any material risks associated with the mortgage or transaction

A suitability assessment is required for all mortgages and mortgage transactions, including renewals, unless a specific exemption applies. Those exemptions are outlined below in the section “When Disclosure is Not Required” and include situations where the party is not a client of the licensee but a client of another licensee as well as where the borrower or lender is a permitted person who is not an individual.

Where a broker identifies material risks, those risks must be disclosed in writing to the borrower and/or lender. Brokers must also be able to explain why they believe the mortgage is suitable for the borrower’s or lender’s needs and circumstances, despite any identified risks. While material risks must be disclosed in writing, providing the suitability assessment itself in writing is optional.

To help brokers meet these disclosure requirements, BCFSA has developed two optional forms:

1. Form 6A — Disclosure of Suitability and Material Risks to Borrower  

2. Form 6B — Disclosure of Suitability and Material Risks to Lender  

Although brokers are not required to use these forms, BCFSA recommends it because they

• give consumers time to review, compare, reflect on, and ask questions about the mortgage option and its risks 
• promote consistency and completeness in disclosures and 
• create a clear record of disclosure that can help protect all parties in the event of a future dispute 

What does suitability mean? 

Mortgage brokers must ensure that any mortgage options they present to a client or unrepresented party (including mortgage renewals) are suitable for that person’s unique needs, financial circumstances, and objectives.

This requires brokers to gather and assess information about the person’s personal current situation, future plans, and financial capacity. Through discussions and questions, brokers should develop an understanding of factors that may affect the person’s ability to qualify for, manage, and benefit from different mortgage products over time.

Where brokers are working with a client whose needs do not align with any mortgage products that are readily available to the broker but may be available elsewhere, brokers must consider the best interests of their clients and refer their clients to more suitable mortgage options.

BCFSA is a member of the Mortgage Broker Regulators’ Council of Canada (MBRCC), which has developed Mortgage Product Suitability Principles to support consistent suitability assessments across Canada. These principles include:

1. Know your client: Understand the client’s unique needs and circumstances.
2. Know your product: Understand the mortgage products reasonably available and be able to explain their features and risks.
3. Assess options and make suitable recommendations: Present mortgage options that align with the client’s unique needs and circumstances.
4. Clearly communicate and explain rationale of the recommended option: Explain the options presented and document the reasons they were considered suitable. Brokers should obtain written acknowledgement that their client understands the options.
5. Ensure adequate oversight and accountability: Brokerages should have processes in place to ensure suitability assessments are conducted appropriately.
6. Document suitability assessment and oversight: Maintain records of recommendations and the rationale for supporting them, as well as brokerage oversight processes.

What does material risk mean? 

Whether a risk is material depends on the specific circumstances of the mortgage transaction and the parties involved. A risk is generally material if it could reasonably influence the borrower’s or lender’s decision to proceed with the transaction.

Material risks related to dealing in mortgages may include

• a borrower chooses a variable-rate mortgage without adequately planning for the possibility of significantly higher payments in the future 
• the lender approves loans primarily based on property value rather than the borrower’s ability to repay, resulting in higher interest rates, stricter default terms than other lenders, or both 
• the mortgage is a reverse mortgage or other type of specialized mortgage product with unique features and risks  
• the mortgage has a long amortization period and low payment structure that could cause the loan balance to increase rather than decrease over time, increasing overall debt  
• significant penalties or fees apply if the borrower wants to refinance, sell the property, or repay the mortgage before the term ends 

In relation to mortgage lending, material risks may include

• a history of missed mortgage payments by the borrower 
• the borrower is in arrears on existing mortgages, property taxes, income taxes, strata fees, or a combination of these obligations 
• the mortgage will be registered behind one or more other mortgages on the property 
• a high loan-to-value ratio or the possibility that changing property values could increase the loan-to-value ratio beyond expectations 
• a syndicated mortgage that includes a “subordination” clause, creating a risk that the mortgage’s priority may be reduced behind other debt without investors consent, potentially leaving investors with insufficient security (e.g., a loan-to-value ratio greater than 100 per cent) 

When material risks disclosure is required

Except where a specific exemption applies as set out below, brokers must provide material risks disclosure when presenting mortgage options to a borrower or lender. As noted above, this disclosure must be in writing and may be done using Form 6 – Disclosure of Suitability and Materials Risks or another written format that contains the required information.

The disclosure obligation applies not only to clients, but also to certain unrepresented parties. Where the broker is representing one party in the transaction and the other party is unrepresented, the broker must provide material risk disclosure to the unrepresented party unless an exemption applies. For example, a broker providing the service of mortgage dealing on behalf of a lender to an unrepresented borrower will be required to provide this disclosure to the unrepresented borrower when presenting a mortgage option for their consideration.

Disclosure packages  

As an alternative to Form 6, brokers can provide suitability and material risks disclosure in a package. There are four disclosure packages available for use depending on the party receiving the disclosure: 

1. Disclosure to represented borrowers: for borrowers who are clients of the broker.  

2. Disclosure to represented lenders: for lenders who are clients of the broker.   

3. Disclosure to unrepresented borrowers: for borrowers who are not clients of the broker and are unrepresented.   

4. Disclosure to unrepresented lenders: for lenders who are not clients of the broker and are unrepresented.  

When material risks disclosure is not required

The suitability assessment and material risks disclosure requirements do not apply in certain circumstances where the borrower or lender is already considered to have sufficient protection or expertise. The most common exemptions are where the borrower or lender is

1. a client of another licensee, who is responsible for providing the suitability assessment and material risk disclosure  
2. a licensed mortgage broker who has waived, in writing, their right to receive the suitability assessment or disclosure or   
3. a “permitted person” as defined under the Rules, who is not an individual  

A less common exemption applies where a borrower or lender is a permitted person who is an individual and the mortgage is a syndicated mortgage that is not a qualified syndicated mortgage.

When an exemption applies, brokers are not required to conduct a suitability assessment or provide material risk disclosure.

Applicable section of Mortgage Services Act, its Regulations, or the Mortgage Services Rules

MS regulation

s. 3 (1) of the Mortgage Services Regulation

Definition of “qualified syndicated mortgage” and “syndicated mortgage”

MSA Rules

s. 1 definition of “permitted person”

s. 70 [suitability and material risks]