Why is FSRA interested?

A market disruption such the COVID-19 pandemic creates uncertainty and can increase the general and specific risks of non-qualified syndicated mortgage investments (NQSMIs), especially for various legacy NQSMIs1 that are reaching the end of their investment terms.

Borrowers, potentially facing liquidity concerns, may choose to extend or renew their investments to avoid a default. In these situations, FSRA is concerned that investors are not provided with complete, accurate and objective information about the circumstances under which their mortgage investments are being extended or renewed.

In 2020, we began phase one of our Legacy NQSMI review. The objective of this review was to determine whether mortgage brokerages and mortgage administrators provided adequate disclosure for high-risk NQSMIs at the time of renewals or extensions. We shared our findings in FSRA’s first Mortgage Brokering newsletter

We are now providing an update on phase two of this review. The objective of this phase remained focused on assessing mortgage administrators’ compliance with the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA) and FSRA Guidance for high-risk NQSMI transactions, at the time of renewal or extension, between May and December 2020.

What we did and how we did it

During phase two, FSRA reviewed how mortgage administrators:

  • service Legacy NQSMIs, including the corresponding policies and procedures regarding the administration of Legacy NQSMIs
  • keep investors informed about the performance of their mortgage investments
  • handle trust funds

Between April and September 2021, FSRA sent out a questionnaire to 58 mortgage administrators who reported administering NQSMIs in 2019 and 2020. The questionnaire requested data that was not collected in the Annual Information Return (AIR).

We used the questionnaire data, along with data from the 2019 and 2020 AIRs and compliance background checks, to obtain a comprehensive risk assessment of the mortgage administrators based on the scope of the review. The risk assessment was completed based on over 20 criteria, such as the number and dollar value of NQSMIs being administered, the proportion of the NQSMIs portfolio relative to the total mortgage portfolio, the number and dollar value of contractually extended and renewed NQSMIs, and the compliance history of the administrators.

Based on the risk assessment, FSRA selected and conducted a desk review examination on 18 NQSMI projects across 6 mortgage administrators.

What we found and how it was addressed

In December 2021, FSRA completed the 6 desk reviews and found the following key issues:

  • 100% of the 6 reviewed mortgage administrators' policies and procedures were not properly established in accordance with Ontario Regulation (O. Reg.) 189/08: Mortgage Administrators: Standards of Practice and did not reflect their business activities.
  • 33% of the mortgage administrators reviewed did not provide sufficient disclosure of any conflicts of interest that the mortgage administrator or an employee engaged in administering the NQSMI may have in connection with the NQSMI, and the potential impacts of such conflicts on other investors in the mortgage.
  • 67% of the mortgage administrators included information in the mortgage administration agreements that conflicted with requirements stated in O. Reg. 189/08.
  • 50% of the mortgage administrators did not comply with the notification requirements specified in FSRA’s May 12, 2020 Guidance for Mortgage Administrators.

FSRA took regulatory action based on the findings. For one mortgage administrator, we issued a Letter of Caution due to the nature of the findings.

What this means for you

Mortgage administrators remain under FSRA’s oversight in the administration of new and existing NQSMI transactions. It is recommended that mortgage administrators customize their Policies and Procedures Manual to their specific business operations and processes. Mortgage administrators should also periodically update their manual to comply with the law and protect consumers from financial harm.

1 Legacy NQSMIs are NQSMIs with Permitted and non-Permitted Clients transacted by mortgage brokerages prior to the July 1, 2021 transfer of oversight of certain NQSMIs to the Ontario Securities Commission.