FSRA is providing additional information to support mortgage brokerages in completing Form 3.2 - Disclosure Statement for Investor / Lender in a Non-Qualified Syndicated Mortgage.
The FAQs below address the main common deficiencies found in the Form 3.2s that mortgage brokerages filed with FSRA.
What are Qualified and Non-Qualified Syndicated Mortgages?
The definitions section of Ontario Regulation 188/08: Mortgage Brokerages Standards of Practice (O. Reg. 188/08) defines a syndicated mortgage as one that involves two or more lenders / investors. It also defines a qualified syndicated mortgage (QSM) as a syndicated mortgage that meets all of the following criteria:
- It is negotiated or arranged through a mortgage brokerage.
- It secures a debt obligation on property that,
- is used primarily for residential purposes,
- includes no more than a total of four units, and
- if used for both commercial and residential purposes, includes no more than one unit that is used for commercial purposes.
- At the time the syndicated mortgage is arranged, the amount of the debt it secures, together with all other debt secured by mortgages on the property that have priority over, or the same priority as, the syndicated mortgage, does not exceed 90 per cent of the fair market value of the property relating to the mortgage, excluding any value that may be attributed to proposed or pending development of the property.
- It is limited to one debt obligation whose term is the same as the term of the syndicated mortgage.
- The rate of interest payable under it is equal to the rate of interest payable under the debt obligation.
A syndicated mortgage that secures a debt obligation incurred for the construction or development of property is not a qualified syndicated mortgage.
Consequently, a syndicated mortgage that is not a QSM, is a non-qualified syndicated mortgage (NQSM).
FSRA will follow-up with the brokerage(s) that transact in mortgage investment structures that pose similar risks as NQSMIs to investors / lenders. Such investment structures include arranging multiple mortgages with similar terms but different amounts with different lenders to provide funding for a single purpose, e.g. the construction or soft costs of a real estate development project. FSRA will ask for further information, at a minimum, about:
- how the transaction was underwritten
- how the investment was marketed and sold
FSRA reminds brokerages and administrators that they must meet their respective obligations regarding disclosures to and suitability assessment (as applicable) for investors / lenders under MBLAA and its Regulations.
When does Form 3.2 need to be submitted to FSRA?
Mortgage brokerages must submit Form 3.2 within five calendar days after they provide the form to the first investor / lender in the non-qualified syndicated mortgage investment (NQSMI). If applicable, mortgage brokerages must also submit Form 3.2.1 - Supplemental Disclosure for Retail Investor in a High-risk Syndicated Mortgage (Form 3.2.1) within the same time frame. The FSRA Fee Rule sets out this requirement, which became effective June 8, 2019.
What deficiencies has FSRA identified in the Form 3.2s it has received?
Between June 8, 2019 and August 31, 2020, FSRA reviewed 710 Form 3.2s. It noted the following common deficiencies:
- Late filing of Form;
- Inadequate disclosure of material risks;
- Inaccurate calculation of loan-to-value (LTV) ratio (i.e., did not use the correct appraised value or loan);
- Incomplete Form (e.g., missing information about the developer and/or borrower)
- Mortgage brokerages used an old version of the Form
Where can I find information about the FSRA Fee Rule relating to NQSMIs?
These forms provide important information to assist the investor / lender to decide whether to invest in / lend under the syndicated mortgage that the mortgage brokerage proposes. FSRA expects mortgage brokerages involved in brokering NQSMs to use care, diligence and professionalism in completing these forms. This ensures investors / lenders obtain adequate information to make an informed decision about their investment.
How is the five-calendar days timeline to file Form 3.2 determined?
The five-day timeline starts when the Form 3.2 is first provided by or on behalf of the brokerage to the first potential or actual investor / lender in a NQSMI. The investor / lender does not need to sign the Form before the brokerage files it with FSRA.
Can sections of the Form be left blank if the questions do not apply to a transaction?
If a section of the Form is not applicable to a transaction, you should explain why the section is not applicable on the form. Some sections are always applicable and should be completed. For example, questions about the rank of the mortgage and whether the rank can change apply in all instances and must be completed.
What financial amounts must be included in the LTV ratio?
The calculation for the LTV, expressed as a percentage, is:
(Total Prior Encumbrances + Amount of this Mortgage) ÷ (Property’s Appraised Estimated (“As is”) Value) x 100
- Total prior encumbrances: Based on the ranking of the mortgage, this is the total of all financial claims against the property by a party or parties that occurred prior to this specific transaction.
- Amount of this mortgage: This is the face value of the mortgage as noted in Section 7. “Terms of the Mortgage”. Several brokerages have included the initial drawdown as the amount of the mortgage, however, the face value (i.e. committed and / or registered amount) of the entire mortgage must be used.
- Appraised estimated (“as is”) value: This is the estimated market value (i.e., “as is” value) of the property as specified in the appraisal report. This value:
- must not rely on future assumptions in valuing the property
- is the value at the effective date of the appraisal report noted in Form 3.2 without including the proposed development / construction or changes that may occur in the future.
Section 31.1 of O. Reg. 188/08 also requires the appraisal to be less than 12 months old and completed by an Accredited Appraiser Canadian Institute (AACI).
Not using the “as-is” estimated market value of the property to calculate the LTV ratio contravenes section 31.1(1)2 iv & v of O. Reg. 188/08.
Mortgage brokerages can find additional information about expected disclosures in times of market disruption in FSRA Guidance No. MB0040INT published on May 12, 2020.
Can the appraisal be based on the future value of the property (i.e., after it has been developed or based on assumptions)?
No. Section 31.1 (1) 2 v of Ontario Regulation 188/08 states:
“The estimated value of the property referred to in subparagraph iv must not depend or rely on,
- assumptions about proposed or future development of the property,
- assumptions about proposed or future improvements to the property, or
- any other condition that is not in existence as of the date selected for the estimated market value of the property”
What information should be disclosed in the material risks of the investment section in Part E of the Form 3.2?
A brokerage must describe the general and specific risks of a NQSMI. Examples of general NQSMI risks may include:
- Real estate risks
- Economic risks
- Borrower risks
- Construction risks
- Liquidity risks
- Syndication risks
- Covid-19 related risks
General risks of NQMSIs are detailed in Form 3.1 – Suitability Assessment for Investor / Lender in a Non-Qualified Syndicated Mortgage.
See FSRA Guidance No. MB0040INT for additional information about disclosures in times of market disruption.
What information must be disclosed about the borrower / developer?
Section 9 “Transaction Parties: Part A –The Borrower” must be completed from point 1 to 11.
If the NQSMI funds development or construction of the property, Section 9 “Transaction Parties: Part B –The Developer”, mortgage brokerages must also complete point 1 to 7.
Have there been any changes or updates to the forms?
On December 1, 2019, FSRA updated Forms 3.0, 3.1 and 3.2 to reduce burden on NQSMI transactions with sophisticated investors / lenders. The update reduced the number of sections that mortgage brokerages need to complete for transactions with sophisticated investors / lenders.
The streamlined forms for sophisticated investors / lenders do not reduce the disclosure or suitability requirements under the MBLAA. FSRA expects that brokerages will supplement the updated forms with their own forms to complete all relevant disclosures and suitability assessments. See FSRA Interpretation Guidance No. MB0038INT for additional information.
The latest version of Form 3.2 is available on FSRA’s website in the Forms section.
- Brokerages working with sophisticated investors / lenders must complete Form 3.2, sections 1 to 5
- Brokerages working with non-sophisticated investors / lenders must complete Form 3.2, sections 1 to 3 and 6 to 11
For additional questions / comments, please contact FSRA Contact Centre at 416-250-7250, Toll free: 1-800-668-0128 or by email at [email protected].