To (mortgage) broker or not: That is the question
Lawyer M receives a call from a client who is looking for someone who will advance monies on the security of a mortgage. The lawyer gives the client the name, address and phone of a person who, lawyer M believes, does on occasion lend money on the security of a mortgage.
Later, the potential lender gives lawyer M instructions to secure a mortgage from the borrower to whom lawyer M had initially provided the lender’s name, address and phone number. Lawyer M proceeds on the lender’s instruction; the borrower is represented by another lawyer. The lawyer subsequently commits an error or omission in a acquiring the security that the lender instructed him to receive. No commission is paid.
Is Lawyer M covered under the LAWPRO insurance program?
Lawyer S and her client meet a borrower and his legal representative to discuss the terms and conditions of a loan from the lender to the borrower. Both solicitors take an active part in the negotiations, and an agreement is subsequently concluded. Lawyer S proceeds to take the normal steps to acquire the security her lender client had agreed to, but makes an error in carrying out her assignment. Again, no commission is paid.
Is Lawyer S covered by LAWPRO?
LAWPRO’s answer in both situations is “yes.”
LAWPRO’s policy of excluding mortgage broker activities from insurance coverage does not mean that lawyers will no longer be covered for any mortgage-related activities. It does, however, mean that lawyers need to carefully assess their roles, how many parties they represent and the extent to which they helped arrange the subsequent mortgage.
The LAWPRO insurance policy clearly excludes coverage for claims where an insured lawyer acts as a mortgage broker (see definition below). The policy, however also excludes claims where an insured lawyer acts “as an intermediary arranging any financial transaction usual to mortgage lending”. Key here are the words “intermediary” and “arranging”.
Both words infer that the insured lawyer is instrumental in having the mortgage transaction take place; and both words infer that the lawyer has done more than simply pass along the name, address and phone number of a lender.
The word “intermediary” also means “middleman,” and the word “arrange” as a verb means “to make an agreement.” All of these activities are in the context of a “financial transaction usual to mortgage lending.”
Using these definitions, giving the name and phone number of the loans officer a local financial institution would not constitute acting as an intermediary or arranging the mortgage.
On the other hand, bringing an existing client together with another client in the office of a lawyer who is interested in doing mortgage lending, and negotiating or arranging the transaction for both parties as well as providing the legal services required would almost certainly take the lawyer outside the provisions of the LAWPRO insurance policy with respect to both the transaction in which the mortgage was arranged and the professional services provided by the lawyer.
How do these definitions and interpretations apply to Cases A and B?
In both situations, the lawyers did not act as intermediaries actively arranging the mortgage; neither did they hold themselves out as mortgage brokers. As long as these conditions apply, and as long as there is no commission owing to the lawyer from either the lender or borrower, these lawyers would be covered under LAWPRO’s insurance policy.
The fact that there were separate lawyers acting for the borrower and lender in both examples makes the decision to provide coverage even clearer.
If there had not been separate lawyers, the situations would require additional research on LAWPRO’s part, to determine if there had been any “arranging” or “negotiating” performed by the lawyer on behalf of the parties. If there had been any of these activities, the lawyer likely would not have been covered for any subsequent claims.
However, if the lawyer simply refers a client to an institutional lender, the mortgage arrangements are confirmed between the lender and client and the lawyer subsequently acts for both parties, the lawyer would not be considered to be acting as an intermediary arranging the mortgage, and would be covered under the LAWPRO policy.
The bottom line: lawyers involved in mortgage activities need to be more mindful than most of the actual role they play. Attention to this detail will go a long way to preventing the type of claims lawyers have found themselves involved in.
And if a subsequent claim arises, LAWPRO will examine the factual circumstances in detail before deciding if the claims arising out of the services provided will be covered under its insurance policy.
Definition of mortgage broker
LAWPRO’s insurance policy defines “mortgage broker” as follows:
“a person who lends money on the security of real estate, whether the money is the person’s money of that of another person, or holds himself, herself or itself out as or who by an advertisement, notice or sign indicated that the person is a mortgage broker, or a person who carried on the business of dealing in mortgages.”