Lenders say they fulfil a need; critics warn of dangers, high costs
Dan Fumano
The Vancouver Sun
Their ads trumpet the ease of using the equity in your home to get cash.
Alpine Credits helps customers get loans approved “regardless of your credit, age, or income,” the company’s commercials say. In a Capital Direct radio spot, veteran B.C. broadcaster Bill Good encourages listeners to call one of the company’s “friendly” advisers “if you could use any amount up to $300,000 or more,” telling them “it’s your money.”
While federally regulated banks dominate Canada’s residential mortgage lending market, accounting for more than 80 per cent, business appears to be growing for many “alternative” lenders, including two of the most visible B.C. companies, Capital Direct and Alpine Credits, who say they have provided more than $1 billion of loans each.
Representatives of home equity lending companies say they provide a valuable service, filling a need for Canadians unable to get loans from conventional, regulated financial institutions. Both defenders and critics of alternative mortgage lenders say more Canadians are turning to these less-regulated lenders as Ottawa has tightened lending requirements at federally regulated financial institutions. A Bank of Canada report from late last year said: “Tightening bank regulation … can lead to migration of activity from the traditional banking sector” to alternatives.
The breezy tone of their ads doesn’t sit well with a number of credit counsellors and foreclosure lawyers. They say that while these alternative lenders aren’t breaking any rules, the public needs to better understand what’s behind the catchy jingles: high costs and potential risk.
Typically, a home-equity loan is short-term (two years or less) and is secured against a borrower’s home as a second or third mortgage. Regulatory filings for Capital Direct and Ryan Mortgage Income Fund (a company affiliated with Alpine Credits, which purchases its mortgages) show a range of interest rates, often between 10 and 15 per cent. A small number of Capital Direct’s loans have interest rates as high as 25 per cent. Canada’s major banks have offered five-year fixed mortgage rates between 2.59 and 2.99 per cent in recent months.
The upfront fees charged by some alternative lenders can be significant, with five-figure sums charged before a loan is issued.
Most home equity borrowers use the money for renovations or to consolidate debt, according to a 2016 survey by Canadian Mortgage Professionals. But borrowed funds can be used for any purpose, which concerns credit counsellors at a time when Canadians are increasingly willing to use debt to fund their lifestyles.
Some ads for alternative mortgage lenders highlight that loans can be used to fund any frivolous purpose a homeowner chooses. In one Alpine Credits commercial, a cartoon “approval specialist” says an applicant “wants a loan to add a four-storey waterslide to his home.” After establishing the applicant is a homeowner, the narrator announces “He’s approved!” as the room erupts in cheers. Confetti rains down. Champagne sprays around.
Abdul Rahimi said he learned about Alpine Credits “through all these advertisements on TV 24/7.”
He wanted to start his own business, he said, and because he’d owned his Port Coquitlam home for more than a decade, he applied for a home-equity loan. But after his business hit a rough patch, he said, he had trouble making the payments. He defaulted on the loan last year and Ryan Mortgage (the Alpine Credits-affiliated company) started a foreclosure action against his home.
Rahimi said Alpine and Ryan Mortgage did not mislead him. Shaken by the experience, he blamed himself for not fully understanding what he signed up for.
“It’s not their fault. They’re in business, they’re trying to make money,” he said. “I never blamed any of these creditors. I blame myself.”
But when asked what he would tell a friend considering taking out a home-equity loan, Rahimi said: “I would tell them, ‘Never touch it.’ I don’t advise anyone to go with this kind of high interest rate.”
Some chartered banks also offer home equity loans, but at “very reasonable” interest rates and “little to no fees,” said Kin Lo, an accounting professor at UBC’s Sauder School of Business. Banks’ home equity loans are very different products, Lo said, than those offered by alternative lenders.
After reviewing details of home equity loans offered by alternative mortgage lenders, Lo said: “These products are being targeted toward unsophisticated and uninformed homeowners. No one who is even a little bit familiar with loans and mortgages would pay interest rates this high, and pay so much in upfront fees.”
Examples of the fees can be seen in documents filed with B.C. courts in connection with foreclosure actions. One case includes a loan agreement obtained by a 79-year-old pensioner from a Ryan Mortgage-affiliated company. The fixed credit disclosure statement for the loan details the fees, which include: a brokerage fee, lender fee, application fee, appraisal/other fee, and estimated legal fee and disbursements totalling $15,088 — about nine per cent of the principal amount of the mortgage ($168,100).
B.C. lawyers who work in foreclosures said the fees in that example are on the higher side, but not uncommon for mortgages from alternative lenders.
When you see alternative mortgage lenders charging high interest rates, Lo said, it suggests they “are not vetting the borrowers like the banks are. … The high interest rates anticipate high rates of default.
“If the homeowners are able to borrow from a bank (or credit union), they would be much better off doing so,” Lo said. “If they aren’t able to borrow from a bank, then they shouldn’t resort to borrowing from these ‘alternative mortgage lenders’ because doing so will just get them into debt that will be very difficult to pay off.”
Firm numbers are hard to come by in this sector. A Bank of Canada report last year said “significant gaps remain in data and knowledge” in the country’s alternative financial sector, and “are likely to remain.”
Samantha Gale, CEO of the Mortgage Brokers Association of B.C., said it’s hard to say how much alternative mortgage lending has grown in the past decade. “There are no records to draw upon — we know that it has grown and continues to grow,” she said, adding it’s estimated that as much as $7 billion is under administration by alternative mortgage lenders, including home equity lenders, in B.C.
When a borrower defaults on a mortgage, whether a first mortgage from a big bank or a second or third mortgage from an alternative lender, it can lead to foreclosure, which sometimes result in a court-supervised, forced sale of the property so lenders can recover the outstanding value of the loan.
Foreclosures are rare in B.C. because, in a hot housing market, borrowers who get into trouble can usually sell their home quickly to “bail themselves out,” said Scott Hannah, president of the Credit Counselling Society. But, Hannah said, if there’s a correction in property prices, the number of foreclosures could rise.
Hannah has seen the impact foreclosures can have on families, forcing them to uproot and move, he said. “It takes a real toll on people. It goes beyond finances.”
Canadians’ willingness to take on debt has grown dramatically in the past decade. Last year, Statistics Canada reported, the level of debt held by Canadians exceeded the country’s gross domestic product for the first time.
“People are using debt to finance their expenses,” Hannah said. “We’ve really kind of changed as a culture: Canadians used to be known as a nation of savers. And now we’re a nation of debtors.”
As for Bill Good, Capital Direct’s main pitchman, Hannah had this to say: “Just because somebody is a spokesperson with a very good reputation and past, it doesn’t mean the product is right for you. … When you see someone like Bill Good, who is a spokesperson and, let’s face it, Bill Good has a very good reputation, has been trusted by consumers for decades, I think that builds a lot of credibility. I worry that people think, ‘Well, OK, he wouldn’t be doing that if he didn’t think the service was upfront and was really there to help people.’”
Good is one of the province’s best-known journalists with a 50-year career in radio and TV, lifetime achievement awards, and an honorary doctorate from BCIT. Good’s radio editorials run eight times every weekday on News 1130 and this year he began writing a column for the Glacier chain of newspapers.
In an interview, Good said: “I checked out Capital Direct pretty carefully before I went to work with them. They have an outstanding rating with the Better Business Bureau. I’ve interviewed a number of people who’ve borrowed from them, all of whom expressed considerable satisfaction.”
Capital Direct and Alpine Credits both have A+ ratings from the Better Business Bureau of B.C., evaluations the bureau says are based on a wide range of factors.
“From my point of view, I’m quite comfortable with it, because I’ve had no backlash,” said Good.
“Capital Direct has been around for quite a while, but there’s a bit of a proliferation of companies coming into the market to fill the void that’s being left behind by the banks and the Finance (Department) making it tougher to get loans. And I don’t pretend to be an expert, but my understanding is that a large percentage of the people borrowing money from companies like Capital Direct would have been borrowing from the banks three or four years ago, and it’s just become more and more difficult to get money from the banks,” Good said. “I think it’s filling a need.”
“It’s not a situation where we’re trying to rope people in who aren’t suited,” David Rally, Capital Direct’s vice-president of legal affairs, said in an interview. “That’s bad for business. We want people who can manage the loan. … But given the rules the federal government has passed, it has become increasingly difficult for people to access bank loans, which sends them looking for other alternatives, and that’s sort of what we do.
“I can’t speak for the rest of the industry. … But we spend a lot of money on advertising and we try and put our presence out there. It’s a good time for this type of business, but our goal, obviously, is to make sure we have borrowers who are properly positioned so we’re providing a service that’s going to help them, and we’re not going to obviously impair our own business,” Rally said.
Second and third mortgages from alternative lenders tend to default at higher rates than first mortgages, said Sid Rajeev, head of research for Fundamental Research Corp. The rate of mortgages in arrears 90 days or more for home equity loans from mortgage investment corporations is still low, Rajeev said, estimating around two per cent, but that could be eight times higher than the rate of residential mortgages in arrears from federally regulated banks, which the Canadian Bankers Association reports is 0.25 per cent.
Rajeev specializes in researching alternative mortgage lenders and mortgage investment corporations (or MICs), including secondary lenders like Capital Direct and Alpine (and Ryan Mortgage). The CMHC commissioned Rajeev to provide an overview of this sector in 2015 with a report called “Growth and Risk Profile of the Unregulated Mortgage Lending Sector.”
There’s a fundamental difference, Rajeev said, in how banks and alternative lenders assess whether to lend to a borrower: “The banks, when they lend, they focus more on the borrower’s credit and income to see if they can repay on a regular basis. While these kinds of (alternative) lenders, they do more asset-based lending, so they’re more worried about the fundamentals of the collateral, the underlying asset, and not much on the borrower.”
Rajeev said alternative lenders can be the best option for recent immigrants or self-employed people who want to borrow funds but don’t have the credit rating to obtain a loan from a bank.
Representatives of Alpine Credits and Ryan Mortgage declined to be interviewed or answer questions by email.
A director of Alpine’s parent company, Amur Financial Group, declined to talk about the business but said customers must obtain independent legal advice before entering into a loan agreement.
Capital Direct requires borrowers to obtain independent legal advice before taking out a loan, Rally said, but not independent financial advice.
The value of borrowers obtaining not only legal advice but also independent financial advice was stressed in interviews with foreclosure lawyers and credit counsellors.
Chris Carter, B.C.’s acting registrar of mortgage brokers, did not discuss specific companies, but in an emailed statement, said, generally speaking: “There is a risk of predatory lending practices in equity lending and the registrar is vigilant in monitoring for that activity. That is why we advise not only independent legal advice, but also independent financial advice. … Independent financial advice provides an enhanced level of scrutiny and protection.”
Capital Direct and Alpine Credits declined to provide their default rates.
Priyan Samarakoone, a lawyer with Access Pro Bono who has tried to help dozens of borrowers facing foreclosures in the past four years, said many cases involve a borrower who’s saddled with a high-interest home equity loan and stretched thin so that when an unexpected challenge comes up — like job loss, illness, an accident or divorce — it leads quickly to financial trouble.
“Your world can go down very quickly if one bad thing happens to you. You need to be aware of that,” he said.
There’s another reason for caution, Samarakoone said. In a time, when good pensions are increasingly rare and the rising cost of living makes it harder to save, there’s a concern that drawing down the built-up equity in your home can shortchange your future.
“A good way of looking at what your home really is, is as an investment for you and your kids and the future,” he said. “And if you think your home is an ATM or a bank machine and you can just use money against it, you end up with nothing for the future.”
Still, Samarakoone said, alternative lenders sometimes fill a need. He’s helped clients in the past who have found themselves needing cash and unable to borrow from banks. Depending on the details of their situation and the terms offered by the lender, he’s helped people through situations where a home-equity loan was their best available option. However, he said, borrowers always need to get careful legal and financial advice and enter the agreement with a clear understanding.
“It’s not to demonize these things,” he said. “It’s just that you have to get the proper advice before you do it and you have to consider everything.”
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