Air-tight compliance touted as key to successful mortgage syndication

Air-tight compliance is the key ingredient to syndicating mortgages and a nascent Toronto firm is paving the way forward that sector of the real estate industry.

“We’re a community of investors and partners who only underwrite deals we feel are good for our investor base, and how we do that is to make sure we only get compensated when the investor can generate a principal return from their investments,” said Luan Ha, founder and CEO of Fundscraper.

Fundscraper arranges bridge financing for large developments on first, second, or combination, mortgages between one and three years, and it’s setting a new standard by using technology to both reduce costs and protect investors. Using a complex technological algorithm to assess potential investors’ suitability for syndicated mortgages, Fundscraper is also in the business of advising various mortgage investment entities.

The key, says Ha, is through harnessing technology.

“We use technology to enhance our ability to drive data out of our suitability assessments and, therefore, produce more holistic and accurate suitability assessments,” he said. “We use our data models to figure out whether a project fits within the time horizon or risk tolerance or investment concentration threshold of this one particular investor. We make it a point that our KYC [Know Your Customer] are done through what we call our suitability algorithm, and this produces a much more objective suitability assessment on whether or not an investor should be making investments through our platform.”

Gregory Colford, Fundscraper’s principal broker, vice president and chief compliance officer, noted that the Ontario Securities Commission is coming down hard on companies that treat compliance as an afterthought.

“Mortgage syndicators aren’t the only ones who have to worry about the OSC’s guns because mortgage investment entities that don’t have proper compliance in place will be subject to regulatory scrutiny,” he said, adding it will be in the form of fines, investigations and audits.

Fortunately, Fundscraper’s senior management team has decades of combined real estate and securities experience, which they leverage to deconstruct potential investment projects—many of which Colfrd says the company rejects—by looking at everything from models, market studies, appraisals, the developer and much more.

The firm also uses that expertise to help other private lenders and syndicators improve their compliance methods.

“The way to make syndication safer for investors is through objective technology,” said Ha. “The documents are very sophisticated and you need a transaction background and development expertise, a legal background and existing relationships. There are over 520 registered private lenders in Toronto and not all of them have registered as exempt market dealers. As new rules progress forward, we hope that our technology can help facilitate those lenders.”

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