Price Waterhouse Limited - Eron Mortgage Corporation

ERON MORTGAGE INFORMATION WEBSITE
THE ERON LENDER COMMITTEE

FICOM

QUESTIONS AND ANSWERS

ERON MORTGAGE CORPORATION

The registration of ERON Mortgage Corporation (ERON) was suspended by the Registrar of Mortgage Brokers (Registrar) on October 3, 1997. At that time, a large number of ERON investors wrote to this office requesting information. Each of those requests for information was answered to the best of the ability of this office.

Recently, Price Waterhouse, in their role as judicial trustee, has announced that ERON investors will lose a very substantial portion of their investment. This, as well as a letter writing campaign being promoted by the ERON Lender Committee (Committee) has resulted in a large volume of new requests for information from the Registrar's office and others. Although each individual request for information has been reviewed by the Registrar, it was felt better to respond in the form of a comprehensive note which addresses all information requests. And that is the purpose of this note, to respond in a concise question and answer format to the requests for information which have been received by the Registrar's office.

At the outset, it is important to emphasize that it is clearly recognized by the Registrar's office that a number of investors in ERON have been significantly harmed as a result of the investment losses which were experienced. Although we sympathize, the Registrar's office is of the firm view that there is no evidence to suggest regulatory failure on behalf of this office.

Some investors clearly disagree and civil suits have been filed against the Registrar in this regard. While we agree that the appropriate forum to resolve these disputes is the courts, the Registrar's office intends to vigorously defend itself against the civil suits because it is of the view that its actions were appropriate within both the context of the Mortgage Brokers Act and the information which was available at the time regulatory decisions were being made. Nevertheless, we do welcome this opportunity to answer questions which investors may have. Of course, it is not appropriate for the Registrar's office to answer questions about the activities and questions related to other entities such as the R.C.M.P.

Question 1: What is the purpose of the Mortgage Brokers Act?

Answer: Attached to this note is a copy of the Mortgage Brokers Act. It is recommended that you read the Act, not only to understand its purpose, but also to obtain a full understanding of the roles, responsibilities and duties of both mortgage broker registrants and the Registrar.

Question 2: Where does a person go to complain about the performance of the Registrar of Mortgage Brokers?

Answer: The Office of the Ombudsman, which is independent of government, receives inquiries and complaints about the practices and services provided by public bodies. That office can investigate to determine if the public body is being fair to the people it serves. The mailing address of the office is:

931 Fort Street
PO Box 9039 Stn Prov Govt
VICTORIA BC V8W 9A5

or

111 Melville Street, Suite 200
VANCOUVER BC V6E 3V6

Question 3: Why did the Registrar of Mortgage Brokers waive the registration requirements for Mr. Brian Slobogian and/or Mr. Frank Biller?

Answer: The short answer to this question was that the registration requirements were NOT waived in the case of Mr. Slobogian, Mr. Biller or any other sub-broker registered with ERON.

Section (4) of the Mortgage Brokers Act states in part,

The registrar must grant registration or renewal of registration to an applicant if in the opinion of the registrar the applicant is suitable for registration and the proposed registration is not objectionable.

In determining suitability, the Registrar considers a number of matters such as whether the applicant:

- has passed the qualifying examination;

- has previous relevant experience in the mortgage, real estate or financial services industries;

- has been refused a licence or registration in any jurisdiction;

- has had a licence or registration suspended or cancelled;

- is subject to a charge or indictment or has been convicted without pardon under any law of any province, state or country;

- has either personally or corporately been subject to bankruptcy proceedings;

- is the subject of pending legal proceedings either personally or corporately; and

- is the subject of an unsatisfied judgement either personally or corporately.

In cases where an individual has declared bankruptcy, the Registrar determines whether the bankruptcy is discharged. In cases where individuals are undischarged, the reason that a discharge has not been obtained is considered. In the event a person has failed to comply with the orders of the court, or has misconducted themselves, the person would not be considered suitable.

Discharges from bankruptcy are made by the court. Before making such an order, the court considers the person's conduct in relation to the event of bankruptcy, whether they have complied with all orders for payment made by the court, whether the Superintendent of Bankruptcy or other creditors oppose the discharge, and whether the person has been guilty of any misconduct in relation to their property or affairs. Once the court orders that a person is discharged from bankruptcy, it is the policy of the Registrar to accept the court's discharge as an indication that the person has satisfied all legal requirements in relation to the bankruptcy. Thus, once a person has been discharged from bankruptcy, they would not be prevented by that fact alone from registration under the Act.

Question 4: Why does the Registrar not release the financial statements of Mortgage Broker Act registrants?

Answer: The financial statements of privately held companies are not required to be filed publicly. Similarly, registrants under the Mortgage Brokers Act have a right to expect confidentiality in their filings with the Registrar.

Moreover, the financial statements of registrants are not particularly relevant to investors. Investors do not make investments in mortgage broker companies. Rather, they make investments in mortgages that are being brokered by the company. Because of this, due diligence by investors would naturally focus on the characteristics of the borrower of the funds, the terms of the mortgage agreement, the merits of the project as well as the appraised value of the property being mortgaged. There is nothing in the financial statements of mortgage brokers that would help in assisting investors in this due diligence.

Question 5: Why weren't the numerous complaints regarding ERON during 1995 and 1996 investigated by the Registrar?

Answer: Prior to March 31, 1997, there were only four complaints received by the Registrar about ERON. In two cases, the complainants refused to provide material so the complaints could not be pursued; in one case the complaint was that the mortgages being brokered by ERON had high interest rates, which is not a statutory violation and the final complaint was a complaint of unlicensed activity which was pursued and resolved.

Question 6: Why was the Investigative Order not published?

Answer: The Mortgage Brokers Act does not require Investigative Orders to be made public for a good reason. This office conducts numerous investigations in any given year. These investigations attempt to gather evidence to determine whether there has been infractions to statutory requirements. Many investigations find that infractions have occurred and in these instances there are a variety of measures undertaken to ensure statutory compliance. In other cases, the investigation reveals that there have been no infractions or that statutory compliance has been achieved. The investigation is then closed.

Investigations in progress are not disclosed to the public because premature disclosure of allegations of statutory violations could do considerable harm to the reputation of innocent persons.

For this reason, the Investigative Order which was signed by the Registrar on May 13, 1997 was not released to the public.

Question 7: Why did the Registrar not suspend the registration of ERON when it commenced the investigation?

Answer: Sections 8 and 9 are the provisions of the Mortgage Brokers Act which deal with suspensions and the cancellation of registrations. The Act indicates that the registrant is either entitled to a hearing and/or an appeal to an independent agency, the Commercial Appeals Commission, should a suspension take place.

During this process, it is incumbent on the Registrar's office to provide evidence that the suspension is warranted. However, on May 13, 1997 when the investigation commenced, that evidence was not available. Indeed, the purpose of the investigation was to gather information and evidence.

It is of the view of the Registrar's office that sufficient evidence to warrant a suspension was not obtained until late in the afternoon of September 30, 1997 when a report prepared by Price Waterhouse on the Schushwap Falls project was received.

October 7, 1998

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