Why is FSRA interested?
During a Market Disruption, such as the declared emergency due to the COVID-19 pandemic, the general risk of NQSMIs was heightened, especially for various Legacy NQSMIs1 that are coming to terms. The uncertainty in the current market, fueled by factors such as low materials supply, higher construction costs and stricter underwriting for construction financing, creates a liquidity risk to the borrowers, which might negatively affect repayments to investors. As a result, mortgages might be extended and/or renewed to avoid a default.
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. Consequently, investors might not be able to make an informed decision about the extension/renewal where it has not been, initially, contractually agreed upon. Investors who are not sophisticated are especially vulnerable.
What we did and how we did it
The objective of this review was to determine whether mortgage brokerages and mortgage administrators provide adequate disclosure for high-risk NQSMIs at the time of renewals or extensions. The determination for a high-risk NQSMI is based on a risk assessment using over 20 criteria such as use of funds (e.g.: purchase, refinance, construction, etc.), loan-to-value ratio, compliance history, conflict of interests. FSRA reviewed the disclosure documents against the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA) provisions and FSRA Interpretation Guidance on disclosure requirements for mortgage brokerages and mortgage administrators during a Market Disruption.
FSRA took a risk-based approach throughout the two phases of this project. We selected mortgage brokerages and administrators to review based on their nature, size, complexity and risk profile
FSRA reviewed disclosures that mortgage brokerages provided to investors/lenders in identified high-risk NQSMIs at the time of renewal or extension. We focused on NQSMI transactions that:
- posed the highest risk to investors due to the nature of the property they fund (e.g.: construction and development, etc.)
- were renewed and/or extended
Based on the 2018 and 2019 AIR data and compliance background check, we identified 19 mortgage brokerages that had sold NQSMIs that are considered high-risk.
FSRA sent a survey to the 19 mortgage brokerages in the summer of 2020. We collected and reviewed data and the status of a total of 226 transactions.
Among the 226 transactions:
- 101 of them were paid out in full
- 119 of them were outstanding NQSMIs and 6 of them were in default, foreclosure, had realized or anticipated losses.
FSRA also conducted further desk reviews of some of the 119 NQSMIs that were outstanding, by examining three mortgage brokerages and one mortgage administrator that was related to one of the selected brokerages.
What we found and how it was addressed
In March 2021, we completed a desk review of 20 investor files across the selected three mortgage brokerages and one mortgage administrator.
FSRA found the following key issues:
- Mortgage brokerages – inaccurate or insufficient disclosures of conflict of interests, material risks and non-compliance with appraisal guidelines in accordance with MBLAA both at the time of extension/renewal and at the initial point of sale.
- Mortgage administrator - incomplete and inadequate information included in the Mortgage Administration Agreement governing the administration of the mortgage and insufficient disclosure was provided to investors on the project status during the term of the mortgage.
FSRA took regulatory actions based on the findings. For one mortgage brokerage, we escalated for conditions to be placed on their licence. The conditions would prohibit the brokerage from dealing in NQSMIs going forward. FSRA escalated the case due to the nature of the findings, which revealed incorrect information disclosed to investors about the use of funds, mortgage ranking, appraised value and LTV calculation, which would have impeded the investor(s) from making an informed decision.
We also issued Letters of Caution to one mortgage administrator and two mortgage brokerages.
FSRA is reviewing how mortgage administrators:
- service Legacy NQSMIs
- keep investors informed about the performance of their mortgage investments
- handle trust funds
FSRA sent out a questionnaire to collect data from mortgage administrators who reported administering NQSMIs in 2019 and 2020. Our goal is to identify more complex mortgages that are under administration or pose a higher risk of loss to investors.
The questionnaire requested key data points that are not currently being asked in the AIR. This includes questions about whether the specific NQSMIs were renewed or extended, the type of significant notifications provided to investors and whether mortgage investment entities were lenders in the NQSMIs.
Licensees have an obligation to respond to regulatory requests for information by the specified due dates unless an exception has been provided. We have taken regulatory actions against late filers who have failed to respond despite several follow-ups before and after the information due date.
This phase is ongoing and FSRA expects to complete it later this fiscal year.
What this mean for you
Mortgage brokerages remaining under FSRAs oversight in their NQSMI activities and mortgage administrators administering NQSMIs will continue to be required to comply with the MBLAA and its regulations, along with Interpretation Guidance and Rules.
It is recommended that you review the FSRA Final Approach guidance to better understand the scope of the transfer and oversight between FSRA and the OSC. This information will help you understand what you need to do 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 July 1, 2021.