For mortgage brokers: when a client’s problem stops being a lending problem

Helpful Downloads for BrokersSix files to download: the closing-risk file sheet, the private-mortgage cost worksheet and three template letters, each as PDF and editable Word.

The call I get most from brokers

I am Paul Franchi, a Licensed Insolvency Trustee in Ontario, and a lawyer by training. The call I get most often from a mortgage broker goes like this. A client the broker placed a few years ago has come back. One income now instead of two, or a business that slowed, or a renewal that came back at a number they cannot carry. They have $40,000 or $70,000 on cards and a line of credit, serviced at minimums for a year or more. They want a second mortgage to consolidate it, and the broker has run the numbers and does not like what she sees.

That call is the reason this page exists. It is written for the broker who wants to know where useful lending advice ends, where a debt problem begins, and how to help without stepping outside the broker’s role.

For mortgage professionals: the Broker Closing-Risk Toolkit

If you are trying to decide whether a difficult file still has a responsible lending solution, start with the Broker Closing-Risk Toolkit from Insolvency Report. It brings together the questions to ask, the documents that reveal the real problem, and editable client letters your compliance department can review before anyone uses them. The toolkit does not tell a client to file anything. It helps the broker recognize when another mortgage may make the household worse and when the client should obtain independent advice.

Broker Closing-Risk Toolkit

These are guides I use in my own work as a Licensed Insolvency Trustee and have found helpful in my assessments. I am pleased to share them through Insolvency Report. If you intend to use them professionally, you must first obtain approval from your own internal compliance department and make any changes it requires.

Paul Franchi, JD, MBA, CIRP, LIT

These materials help mortgage professionals gather facts and prepare conversations.

Start here: six questions before anyone proposes a solution

A client who cannot close may have a financing problem, a contract and legal problem, a debt problem, or all three. The broker does not need to diagnose every issue. The useful first step is to establish the facts while the client still has choices.

1. What is the firm closing date, and what notices have been received?
2. What is the contract price, and what value will the lender use?
3. How much financing is firmly available, on what conditions, and how much cash is still required?
4. Does the agreement permit an assignment, and has the vendor offered written consent or a release?
5. What deposit was paid, where is it held, and what documents were delivered when the agreement was signed?
6. If the purchase fails, what other debts, assets, co-signers or guarantees are involved?

These questions help identify who should be involved next. The mortgage broker may still have a responsible financing route. A real estate lawyer may need to advise on the agreement, notices, assignment, deposit or exposure if the purchase does not close. A Licensed Insolvency Trustee may need to assess whether the household is insolvent and whether a formal proposal is available. The client should obtain advice from the appropriate professional before making a decision.

Client document checklist

Ask the client to gather the documents that exist. This is a preparation list, not a request for the broker to give legal or insolvency advice. The lawyer, lender or trustee may ask for additional records.

The purchase and the deadline

• Agreement of purchase and sale, including all schedules, amendments and addenda
• All notices from the vendor, developer or their lawyer
• Documents showing the firm closing date and any extension or occupancy dates
• Statement of adjustments or closing statement, if available
• Assignment clause and any written request, consent, refusal or proposed release

The value and the financing

• Current appraisal or the value the lender has said it will use
• Mortgage commitment, approval or term sheet, including all conditions
• Any refusal, shortfall calculation or revised lending decision
• Proof of funds available for closing
• Written estimate of the remaining cash required to close, including closing costs if available
• Details of any proposed private loan, second mortgage, fees and interest

The deposit and the parties

• Deposit receipts and records showing where the deposit is held
• Disclosure statement, condominium guide, amendments and records of delivery
• Names of every purchaser, borrower, co-signer and guarantor
• Any agreement about who supplied the deposit or who is responsible for closing funds
• Corporate or trust documents if a corporation or trust is a purchaser

The household’s wider position

• A current list of debts, minimum payments and secured loans
• A current list of assets and estimated values, including other real estate
• Recent proof of income and the amount the household can actually carry each month
• Details of any mortgage registered against more than one property
• Any demand letter, lawsuit or claim already received

Questions the client should take to the right professional

• For the mortgage broker: Is there a responsible financing route, what conditions remain, and what will it cost in dollars?
• For the real estate lawyer: What does the agreement permit, what deadlines apply, and what could happen if the purchase does not close?
• For a Licensed Insolvency Trustee: Is the household insolvent, how would a claim arising from a failed closing be treated, and what options fit the household’s full financial position?

Before another mortgage is presented as the answer

Put the proposed loan beside the client’s full monthly budget. Show the amount advanced after fees, the interest charged on the face amount, the payment, the term, the default provisions and the exit plan. If the loan closes today but leaves the household unable to carry its debts tomorrow, the file needs a wider assessment before the client commits.

What the toolkit includes

Resource	Use
Six-question triage and document checklist, above	Prepare the initial conversation and gather missing facts.
Broker Closing-Risk File Sheet (PDF, editable Word)	Record closing funds, future carrying costs and the next professional question.
Private Mortgage All-In Cost Worksheet (PDF, editable Word)	Compare net cash received, interest, fees, principal due and the proposed exit.
Template letters 1 to 3, one file in each format (PDF, editable Word)	Letter 1: a pre-construction purchase that may not close. Letter 2: a renewal that may not be available. Letter 3: wider financial distress. Each explains the questions to put to the right professional without recommending a filing.

The downloads are provided in PDF and editable Word formats. The broker’s name, brokerage, licence and contact fields are intentionally left for the brokerage to complete.

Resources are provided by Insolvency Report. They do not determine a person’s legal rights, eligibility for an insolvency proceeding, or suitability for a mortgage.

When a lending problem becomes a debt problem

If the credit score and the debt load will not support refinancing that improves the household’s position, the broker needs to look beyond another loan. Moving unsecured debt onto the home may change the payment, but the household still has to be able to carry it. A higher rate, fees and a short term can leave the client in a worse position.

Consider an illustrative one-year, interest-only private second mortgage of $350,000 at ten per cent. Assume $44,500 in lender, finder’s and legal fees is deducted from the advance. The client receives $305,500 and pays $35,000 in interest over the year. The $79,500 total of assumed fees and interest is about 26.0 per cent of the net proceeds. That is a simple first-year cost divided by net proceeds, not a regulatory annual percentage rate (APR). For a household that is already stretched, those costs may leave no workable way to repay the loan at the end of its term. This site’s guide to power of sale in Ontario discusses the lender’s costs.

Where another mortgage would not improve the position, dealing with the unsecured debt directly is another option to examine. Assessing that option is my work.

What a consumer proposal does to the mortgage

The mortgage is secured; a consumer proposal deals with unsecured debt; the mortgage normally sits outside the filing.

Who these remedies are for. Everything on this page about a consumer proposal or a bankruptcy applies to a person who is genuinely insolvent under the Bankruptcy and Insolvency Act: someone who cannot pay their debts as they come due, or who owns less than they owe. That is not a formality. It is the first thing I assess, and the law requires me to. If you are not insolvent, these are not your remedies, and arranging your affairs to look insolvent when you are not is the worst thing you can do: the Act lets a trustee reverse payments and transfers made before a filing, the Official Receiver examines a bankrupt under oath about the causes of the bankruptcy and what happened to the property, and a discharge can be opposed on exactly those facts. I am bound by my Code not to assist anyone down that road, and I will not.

If the payments stay current and the lender does not file a claim in the proposal, the client keeps the home and keeps paying the mortgage, and many of my clients do exactly that. While the proposal runs, the lender cannot end, change or call the mortgage because the client filed. At renewal the lender applies its own policy, as it always does, and every lender’s is different; a filing does not guarantee a renewal and I will never tell your client it does. Bankruptcy is a different question, because there the equity in the home matters and the provincial exemption sets the limit; in Ontario that exemption is small. This distinction matters when a broker compares financing with other debt options.

If the proposed payment is affordable, replacing existing unsecured-debt payments with the proposal payment may leave more room for the mortgage and other household costs. That improvement has to be demonstrated in the household budget.

Which client, and which not

The candidate has unsecured debt they cannot service, an income that can carry a fixed monthly payment for up to five years, and a mortgage they can keep paying once the unsecured debt is dealt with. And the first thing I do with any referral is assess whether they are insolvent under the Bankruptcy and Insolvency Act. If they are not, I send them back to you, because these are not their remedies. If dealing with unsecured debt would still leave the mortgage unaffordable, we have not solved the household’s problem. The financing and sale options need to be considered too.

Two things to check before the conversation. First, whether the client owns a second property. A consumer proposal is available where the client’s debts, leaving out debts secured by the home the client lives in, are within a set limit. Debt secured by the client’s principal residence is left out of that count. A second property’s mortgage counts in full; a client with a heavily mortgaged rental may be over the line and into a Division 1 proposal, which is the same idea through a different door. Second, and this is the one that changes everything: whether any lender’s mortgage is registered on more than one of the client’s properties. A private lender secured on both the home and the rental can refuse to release either unless paid in full, unless the mortgage says otherwise, and can hold up either sale. A consumer proposal cannot make that lender accept less or release his security. Where a lender holds security over more than one property, the client should obtain an assessment from a Licensed Insolvency Trustee and their own lawyer before listing. They need to examine the available options and the lender’s security, including whether a Division 1 proposal is an option on the client’s facts. The self-placement ladder on this site’s house-poor page, six rungs from “fully levered, no equity” to “one lender holds both properties”, is built for exactly this triage, and your clients can use it themselves.

What the law lets a broker say, and what it does not

You may tell a client the truth about where they stand and what a trustee does. You may not urge a client to file, and no money may pass between a broker and a trustee for a referral, in either direction.

This is worth knowing because it protects you. The Bankruptcy and Insolvency Act makes it an offence for any person, not only a trustee, to directly or indirectly solicit or canvass someone to make a proposal or an assignment in bankruptcy. The provision reaches a broker exactly as it reaches a debt consultant. The line the profession itself draws is between advice and canvassing: explaining what a proposal is, and that a consumer proposal is administered by a Licensed Insolvency Trustee, is advice; pressing a client to file is canvassing. And the trustee’s own rules bar me from paying anything to obtain an engagement or accepting anything for a referral. There is no money in this relationship and there cannot be. That is a strength, because it means whatever your client hears from either of us is not bought.

When a second mortgage would leave the client worse off, explain the concern without telling the client to file. The person who can assess the insolvency options is a Licensed Insolvency Trustee. Then let the household decide.

What happens to the credit file afterward

The effect on the household budget can be explained. I cannot promise a credit recovery timeline.

When the unsecured debt is dealt with, the household’s debt service obligations change, and so does what a lender is looking at. That is a mechanism, and I will explain it to any broker who asks. What I cannot give your client is a promised recovery period, in months or in points. A filing is debt relief. What happens to the credit file afterward is a consequence of it, never the reason for it, and I will not present it any other way to your client or to you.

What you can take back to your office

You should not need to improvise this conversation. The Broker Closing-Risk Toolkit gives your office a repeatable first response: questions that distinguish a lending problem from a debt problem, a document list for the client, and editable letters that your own compliance department can review before use.

I can explain the options plainly to you or to a client who asks. I can help a household understand which options fit its facts and what those options cost. I will not treat your client list as a pipeline. No fee or benefit passes between us for a referral, and the toolkit does not ask a broker to recommend a filing.

If a client is at the point this page describes, the form on my contact page reaches me directly. If your office would like a clearer explanation of the options, send a question through my contact page.

Can’t find your answer here?

This site is built to answer these questions properly, and most of the time it will. If yours is not here, send it to me. I read them myself, and I answer them personally.

Paul Franchi, Licensed Insolvency Trustee

The analysis behind this page

The rules on what a proposal does to a mortgage, on the consumer proposal’s ceiling and the Division 1 door, and on what a broker may and may not say are set out on Mortgages and a Consumer Proposal: Renewing, Refinancing, and Buying a Home, Division 1 Proposals in Plain Terms, and this site’s professionals’ guide to debt-consultant pitfalls; the Power of Sale in Ontario guide provides the wider enforcement context. This page is general information for professionals and not advice about any client.