Risk Management Tips for Mortgage Brokerages

RECA has made Errors & Omissions (“E&O”) Liability compulsory effective September 1, 2011. Does this mean that risk management becomes less important now that you have an insurance company ready to defend you if you are sued? Absolutely not. It is in everyone’s best interest to avoid professional negligence lawsuits. Our experience from insuring hundreds of mortgage brokerages in Ontario when E&O became compulsory tells us that plaintiff lawyers will become more aggressive. Lawyers know that every mortgage brokerage now maintains E&O Liability. This represents a big target for lawyers.

You cannot eliminate the risk of being sued; however, risk management practices will:
1. Minimize the possibility of experiencing a claim; and
2. Maximize your ability to defend an E&O claim against your firm.

Risk Management Tips

1. Documentation. Documentation. Documentation. In real estate, it is all about location. Risk management is all about good documentation. Document and save all communications and instructions.
2. “Know Your Client”. You need to understand your client in order to reduce your exposure to future customer complaints and lawsuits.
3. Develop a Policies and Procedures Manual. This should lead to a greater level of consistency in services provided by all employees and associates. AMBA’s Policies and Procedures Manual for Brokerages is a great place to start.
4. Use third party, licensed appraisers. Even if you know the market value of the property, a licensed appraiser will be responsible for defending the valuation in a lawsuit.
5. Enter into Service Agreements with private lenders. The Alberta Real Estate Act Rules requires Mortgage Brokerages representing private lenders enter into Service Agreements with the private lenders. Section 73 of the Real Estate Act Rules outlines the terms and conditions to be included in the Agreement.