FSRA’s webinar on mortgage product suitability assessment (January 24, 2024)

Event Facilitator
00:04    Hello, everyone, and welcome to today's webinar Mortgage Product Suitability Assessment Guidance Webinar. Before we get started, I would like to go over a few items so you know how to participate in today's event. We've taken a screenshot of an example of the attendee interface, and you should see something that looks like this on your own computer desktop. You will have the opportunity to submit text questions to today's presenters by typing your questions into the questions pane of your control panel. You may send your questions in at any time. We will collect these and address them during the Q&A session at the end of today's presentation. If we do not have time to address all the questions, we'll follow up after today's event. I would now like to introduce Gina Stephens with FSRA. Gina?

Gina Stephens
00:46    Thank you, Kat. Good afternoon, everyone. Thank you for attending FSRA's webinar on our proposed Mortgage Product Suitability Assessment Guidance. My name is Gina Stephens. I'm the Director of Mortgage Brokerage Conduct at FSRA, and I'll be joined by Antoinette Leung, the head of financial institutions and mortgage brokerage conduct. Before we begin, however, it's important to acknowledge the land that we are on is the traditional territory of many nations, including the Mississaugas of the Credit, the Anishinaabe, the Chippewa, and the Haudenosaunee, and the Wendat peoples, and is now home to many diverse First Nations, Inuit and Métis people. We acknowledge that Toronto is covered by Treaty 13 of the Mississaugas of the Credit, and the Williams Treaty signed with multiple Mississaugas and Chippewa bands. In terms of the agenda for this webinar, Antoinette will be walking us through the newly proposed guidance, which aims to help the industry better understand their obligations regarding assessing mortgage product suitability for the clients they serve. This presentation will focus on the key outcome FSRA expects licensees to achieve when they are assessing mortgage product suitability and what steps licensees can take to make sure they're meeting that objective. FSRA's consultation on this guidance will be open until February 28th, 2024. At the end of the presentation, Antoinette will share with you how you can provide your feedback during that consultation period. Now I will turn it over to Antoinette.

Antoinette Leung
02:11    Good afternoon, everyone. And thank you, Gina. Before I start, I thought I'll bring up some of the headlines. And in fact, I think some of these headlines are already dated. As everyone knows, that the conditions right now is very uncertain for consumers who are looking to buy a home or have to renew a mortgage. We heard today that the Bank of Canada is maintaining the interest rate at 5%, but we've also heard a few weeks ago that inflation for December has gone up a little bit to 3.4% from 3.1% in November. There's definitely a lot of questions now about when interest rate is going to come down; if it is going to come down, how much it will come down. So there's a lot of uncertainty. So about a year ago, we started watching the market. And just like you, we're very interested in understanding what this means for consumers, for home buyers. And we understand that there's definitely a lot of uncertainty. In fact, a few reports that came out from Bank of Canada recently definitely confirmed this. In the quarter four Bank of Canada survey of consumer expectations, they expected that there is still a lot of financial stress that households are facing. They are also noted that many Canadians, about 40%, have said that the mortgage payments are very close to or even above the maximum that they can afford. There are also statistics that talk about many Canadians who need to renew their mortgage are likely going to see their mortgage payments increase by about 20% in the period between '23 and '26.

Antoinette Leung
04:10    So these are not new to the sector. I'm sure you know more than we do, but this is definitely causing us to think about what consumers are expecting in this environment, especially when they are looking to get into a home. Mortgages are less affordable and they're looking for somebody to help them in finding that right mortgage. So we can move to the next slide. So, obviously, the key driver for us to put forward this piece of guidance is really about what consumers are looking for when they are dealing with a mortgage broker. As the economy and the market becomes more uncertain, we do expect more consumers to seek out the service of mortgage brokers. And mortgage suitability is the foundation of why consumers choose to work with a broker. They are going to be looking to look at what options they have. And we also think that in this environment, many consumers who used to be able to qualify for traditional mortgages from a financial institution may no longer be able to qualify or qualify for a small amount. So they will also need to consider alternative options.

Antoinette Leung
05:35    The second thing that is really causing us to propose this piece of guidance is really what we're seeing through our supervision. In the last few years, we have been doing examinations of the sector, looking at mortgage transactions that were completed by mortgage brokers. In the majority of the cases, over 60% of the transactions that we see, it is really not possible for us to understand why a broker is recommending a particular product for the client. We saw information that they collected about a client's situation. We saw a recommendation, but it is really not clear why they make that recommendation, and how the recommendation is directly tied to a client's needs and circumstances. So, in this type of situation when the market is uncertain, when there is very little paperwork supporting why a mortgage is suitable, it makes it really, really challenging when after effect, when a question asks a broker, "Why are you making this recommendation for me?" So make it harder for them to defend that recommendation. So this is really why we set out to prepare this piece of guidance. So how do we go about developing this? On this slide, you notice that our guidance are very much driven by FSRA's vision and our statutory objects.

Antoinette Leung:
07:12    As many of you know, our vision is financial safety, fairness, and choice for Ontarians. And one of our objects is promoting high standards of business conduct and protecting the rights and interests of consumers. So this very much guides our proposal. Other things that we've done in developing this guidance is that we talk to many of you through our advisory committee, so FSRA Mortgage Broker Advisory Committee. We talked to the trade associations. We've also talked to some of you directly to understand what are the best practices that the sector is already following. The other thing that we've also done is we've talked to FSRA Consumers Advisory Panel because, obviously, they looked at mortgage suitability from a consumer's lens. So we also want to make sure that consumers, being beneficiary of this, we have a view into that. The last thing we did when we were coming up with this guidance is really considering what are similar guidance that have put out by other regulators. We want to make sure that consumers have consistent experience, whether they are dealing with an independent mortgage broker or if they are dealing with a mortgage specialist at a bank. This also helped address one of the issues that we've heard over the years is, let's make sure that there is a level playing field for all professionals in the mortgage industry.

Antoinette Leung
08:51    So we did make sure that our guidance align with the principles for mortgage product suitability that was put out by the Mortgage Broker Regulators Council of Canada. We also look to FCAC's guideline on appropriate products and services for banks. Because as I mentioned earlier, mortgage specialists at the bank are also making mortgage recommendation. So if we can move on to the next slide. So on this slide, we really set out and highlight what are the key outcomes that we want to achieve through this piece of guidance. Two main things. One is that we want to make sure that the recommendations that are being put forward to consumers are suitable based on their specific needs and circumstances. So obviously, this is applicable to mortgage financing, but it equally applies if a broker is helping an investor find mortgage investments. The second key objective for us is to make sure that clients fully understand the risks, the features, and the implications of the recommendations that are being put forward. So our guidance do intend to help brokers and agents demonstrate how they are achieving these outcomes. So we go on to the next slide. So what we've done on this guidance is really set out the steps that a broker can take to demonstrate that the recommendation they're presenting is suitable. You will notice that a lot of these are not new. These align with many of the processes that are already in place at brokerage firms.

Antoinette Leung
10:49    So the first few steps are applicable to brokers and agents who are dealing directly with clients. So the first step, obviously, is knowing your client, knowing the product, understanding what product is accessible to you, and what are the regular underwriting guidelines for those products. And then the third step is really assessing what are the options based on your client-specific needs and their circumstances, and then making that suitable recommendation, and then explaining that rationale to your clients, explaining that recommendation, why it is suitable to them. And then what we are also emphasizing in this guidance is the role of a principal broker and the brokerage, is making sure that they properly supervise their brokers and agents to make sure that, generally, the recommendations that are put forward are suitable. And then lastly, it's about documentation. For brokers and agents who are making a recommendation, you should be documenting the assessment that you've done, the recommendation that you've made, and also the reason why you're making that recommendation. And then for principal broker and the brokerages have some documentation over the supervision that you have done in making sure that those outcomes are achieved. So I encourage everyone to read through our proposed guidance because it includes a lot of details and specific examples on how to do each step. We also highlight additional things that a broker can do in its supervision.

Antoinette Leung
12:42    So we can go to the next slide. What I'd like to do now is really highlight what is the status quo and what is being enhanced. You will notice that the requirement to assess product suitability and making sure that clients understand the product that you're recommending, these are not new. And it has been in place in the [inaudible] in our Act since 2008. So what we are really doing now is to enhance some of the elements to really help you demonstrate both to your clients, to your principal broker, as well as to us when we come for an examination why that recommendation is suitable. The enhancements really focus on articulating the reason of why you make that recommendation. There are three areas that we are enhancing. One is on the type of information that you can provide to your client. Really put forward the key reasons why that recommendation is suitable for them. The second enhancement is about your own internal documentation, right, on the assessment that you've made, the options that you've considered to the extent that there are options for your client. And lastly, it's about how brokerages and principal brokers are supervising their brokerage and the activities of the brokers and agents.

Antoinette Leung
14:30    So what I'd like to do now, if we can go to the next slide, is really focus on private mortgage recommendations. As we all know, in this uncertain environment, more consumers likely have to consider alternative mortgage options. So our guidance sets out additional expectations when a broker and agent is recommending a private mortgage. So first of all, I thought it's helpful to just recap what is a private mortgage. Private mortgage is mortgages that are not offered by financial institutions or NHA-approved lenders. So these would be mortgages from alternative or private lenders like mortgage investment corporations, private companies, or private individuals. So why are we expecting more from our sector when it comes to private mortgages? Most important thing is that private mortgages do have a lot of unusual features and penalties or fees that many consumers, they don't understand or even expect. A few examples would be not being able to renew, very short-term. Or you may be able to renew but at a very, very high fee. And some other features that I know a lot of consumers are surprised, although, if you're a professional in this sector, you're aware, is that there's also a lot of private mortgages where you only make interest-only payments. So by the end of the term, a borrower have not paid down their principal.

Antoinette Leung
16:24    So obviously, with a lot of these features that consumers don't understand as well, it is extra important for us to explain to them what these features are. The second thing that we've noticed with private mortgages is that there are generally a lot more consumers who are considered financially vulnerable and less sophisticated who are required to use private mortgages. So when you have a more complex product and consumers who are less knowledgeable and less sophisticated, this is why our expectation on the sector is higher when a private mortgage is being recommended. Ultimately, what we want is that any recommendations that are being put forward are suitable, whether it is a private mortgage or not. And there are really three key things that any broker and agent must do when it comes to private mortgages. And you must be able to explain and document, number one, why there is no lower-cost option. Number two is why this particular recommended private mortgage is affordable and sustainable over the term of the mortgage for a client. We have seen cases where a broker has recommend a mortgage for a client and it is quite clear from know-your-client information that probably within a few months into the term of the mortgage, the client will no longer have cash flow that can actually make the payment.

Antoinette Leung
18:24    So it is really, really important that you be able to confirm that over the term of that private mortgage it is still affordable. And then the last thing is about exit strategy, right? As we all know, private mortgages are shorter-term. It's intended to be a short-term solution. Clients who are in these type of mortgages, it is important that, at some point, they get back into lower-cost, more traditional financing. So it is really important that there is a discussion about an exit strategy. Now, obviously, sometimes a client may come forward with an exit strategy that is not realistic, and they might insist on pursuing that strategy. In those situations, what we expect this sector to do is to really have a conversation with your clients that, hey, this strategy is not realistic, and here are the reasons why, and here's the risk that if you pursue this particular strategy. So at least you communicate with your client. Now, in many cases, the exit strategy is achievable, right? In those cases, it will be important for clients to understand why they must execute and stick to that strategy. So if you can't remember anything out of the guidance, I think the three things that we would like all of you to keep in mind when you recommend a private mortgage is that why a lower-cost option is not available, how this recommended mortgage is sustainable and affordable, and lastly, there is a discussion about an exit strategy.

Antoinette Leung
20:32    So we can move on to the next slide. I just want to give some information about the consultation because I do want to make sure we leave time out for questions and answer. Obviously, this consultation is important to us. We do see the industry as our partners. We want to make sure that the guidance is achieving the objective that we set out to do, which is making sure that consumers are getting a suitable mortgage and they understand what they are getting. And on this slide, we laid out where you can see the guidance. It is on our website, posted on our website, which is fsrao.ca. You can review the proposed guidance and submit your comments. Our comment period is open until February 28th. So there is still a month time to go through this and think about it. Now, one of the things that we noticed in the past is that we often hear negative comments about our proposal. If there are elements of this guidance that you find helpful and definitely should be staying in the final version, we are happy to hear about that as well because as we finalize the guidance, we want to make sure that we are keeping what is useful and we're amending only those that may not be as effective. So maybe with that, we can open up for questions. We're hoping that, by answering your questions, it can actually give you additional information so that you can provide more productive feedback for us.

Gina Stephens
22:25    Thank you, Antoinette. That was very helpful. We've got a number of questions in the chat. The first one that I have for you is does FSRA have a standard KYC form for a mortgage client?

Antoinette Leung
22:40    So what we have included in the guidance are some illustration forms. We decided to provide example of what are some of the key information that should be documented. Within the guidance, we also list out the key Know Your Client information that should be collected. We hope that the illustration is going to give you a good kind of baseline for you to work out your form. We have chosen at this time not to provide a standard form because we recognize that every client is different and maybe your business is different so we want to give you the flexibility to create your own form. But we do include some illustration to help you look at what are the type of information that should be collected. And you'll also notice that the illustrations are intended to give you example of what it looks like if you're recommending a traditional mortgage and what it looks like if you're recommending a more complex private mortgage.

Gina Stephens
23:57    Great. The next question is quite interesting. My business arranges mortgages for financially distressed borrowers, which provide some temporary relief to clients, but may be perceived as being unaffordable and therefore unsuitable. Is FSRA suggesting that I shouldn't arrange such mortgages?

Antoinette Leung
24:17   That is absolutely not what we're suggesting. We understand that even in very distressed situation, a client would want to stay in the home or find a home for their family. What we are looking for is that in your process of recommending a mortgage for this client, you are actually finding something that is going to help them be in a better situation. When somebody is vulnerable, it is likely that you may not be able to substantially improve the situation. However, we do think that one of the value-add of this sector is to help them find something that set them on the right path to a better situation. Or in other situation, it may be helping them to achieve an intended objective. We know in some cases a client may be getting temporary financing so that they can fix up the home and sell it. So that is a means to help them get to a better financial position.

Antoinette Leung
25:32    So if that is the case, then as long as the mortgage that you're recommending is achieving that intended purpose and helping client to get to where they need to get to, then that's all we're asking of you. Obviously, you should be documenting what your reason and why, what's the intended objective. And in these very vulnerable situations, we are also expecting a discussion about exit strategy. What are the risks? What happened if they don't stick with that exit strategy? If they suggest something that is not realistic, then have a conversation with them and document what are the risks of that unrealistic exit strategy.

Gina Stephens
26:31    Great. I have another question here. "Suitable", in quotation marks, is a pretty loose term, and suitability can be different in different situations. Can you please provide examples of suitability in different scenarios as guidance?

Antoinette Leung
26:48    So as you said, suitable can be very different for very different situation. I think the key things that we are looking for is that you understand your client's situations and their needs, and you're able to link those particular needs and situations back to your recommendation. And within our guidance, we actually have listed out what are some of the Know Your Client information that will be important for you to collect and to understand. And we've also included two examples, in fact, of what a client's situation would cause a mortgage to be suitable. I think the most important thing is demonstrating how it is matching the required needs and the intended objective.

Gina Stephens
27:56    Great. The next question is, how do I document a borrower not qualifying for a lower-cost mortgage option?

Antoinette Leung
28:06    That's a great question. I think a lot of these situations is that you, as a professional, you've seen enough cases. You probably have seen other clients who have similar profiles, similar situations, and you've seen how lenders have reacted to those situations. So you know your past experience based on interaction with other clients as well as your general understanding of lenders' underwriting guidelines will give you the context for how to document why other options are not available. So for example, a client comes in asking for a mortgage from a big bank. They have very low credit score. They don't have a steady income. So those are likely going to be some of the key information that you want to explain why they don't qualify for a bank mortgage or a traditional mortgage. So it's going to be very much informed by your past experience. Other things that can also support why there is no lower-cost options would be notes from lenders, right, or decline notices. I do recognize that this may not-- if you are in the sector, you understand the business, you're likely not going to get a lot of decline notices because you understand these lenders. So a lot of it will come from your previous experience with other borrowers that would help inform and explain why there are no lower-cost options.

Gina Stephens
30:01    Great. So as a follow-on to that query, will FSRA provide templates or models of what a properly documented suitability assessment looks like?

Antoinette Leung
30:12    As I said earlier, I know that was a question about Know Your Client form. Similar to that, for suitability assessment, we have not created a template. What we have done is we've created illustrations. We've also list out what are the key things that you should be documenting about why a product is suitable. So you can go to our proposed guidance that it does include a few illustrations for that. What we want to make sure is that the sector have the flexibility to really modify forms based on their own business processes. So we have not put forward template, but we have put forward suggestion and illustration.

Gina Stephens
31:09    One question that's been asked in a variety of ways on the chat, and I'm just going to summarize it all into one, is how does the suitability guidance apply to commercial mortgages?

Antoinette Leung
31:23    That's a great question. And you will notice that, from our perspective, the high-level steps that we have set out in the guidance should apply to any mortgage, any client. And we deliberately stay high level, is to be able to accommodate the different situations like commercial mortgage. I think it will be hard to argue that even with commercial mortgages, a broker got to understand the client, right? Got to be able to know what are the products out there, and then be able to take the step to assess the options and make their recommendation. So from our perspective, the high-level steps are equally applicable regardless of what the mortgage is. Now, because we are a consumer protection agency, we do focus a lot of the details and the guidance on a residential mortgage for a less sophisticated client, like retail client. But you'll notice that we have structured the guidance in such a way that these are not specific minimum requirements. These are really more principal-based that you can adapt for a commercial mortgage situation.

Gina Stephens
32:57    Great. Here's another question that's interesting. Many prime borrowers who go to any FI will come to mortgage brokers with a firm concept of what mortgage product they want. They reject broker suggestions, that they insist they know the best. How should we document that scenario?

Antoinette Leung
33:17    So I think in this particular case, the best thing is to document what you would recommend based on your understanding of the client's situation, and then document and explain why the product that the client insisted may not be fully meeting their needs and circumstances and have the client acknowledge it. We are not expecting our sector to make sure a client execute on the recommendation because, as the question has indicated, many clients do have very strong views about what they want to get into. So in this case, it's really about putting down what you would recommend based on your understanding of the situation and why the product that your client insisted may not fully meet that needs and have them acknowledge that discussion.

Gina Stephens
34:33    Great. Will these suitability requirements apply to renewals of existing loans? For example, if the exit strategy was to refinance after improving credit but they need additional time and the lender agrees to renew, do we need to do another suitability assessment?

Antoinette Leung
34:51    Yes. So if it is a renewal, I think we would expect another assessment. Now, it was likely not going to be as extensive because of the uncertain environment. Client situation can change. So I think for protection of everybody, it is always good to at least confirm has the situation changed, have the needs changed. If it hasn't changed, it is just as simple as we're confirming nothing has changed and the product that was recommended last time continue to be suitable. So it will be much less extensive of a documentation. But we do expect that when there is that renewal, there is at least that confirmation and discussion.

Gina Stephens
35:48    Great. So the next question is, does suitability impose an obligation on the broker to broadly canvass the market to obtain the best terms available to the client?

Antoinette Leung
36:01    No. This is not about knowing all the product in the market. This is about you doing sufficient steps to at least understand what's available through your brokerage and be able to consider at least a few options, right? We do know that there are circumstances where there is very little options for a client. So in those cases, it is really about explaining why there's not many options. But we're not expecting everyone to be canvassing all the products in this market. Based on conversations with the sector, our understanding is that if your client is a prime borrower, most likely many of the products from a lot of the large financial institutions, they're quite standardized. So if you look at a few of them, that will likely be sufficient for you to be able to find that suitable option. In cases where a client situation is a bit more unique, you may need to do a little bit more work to really confirm if there are other options or if there are no options. But we're definitely not expecting everyone to be looking at everything in the market.

Gina Stephens
37:39    So this is a similar question, but a little bit of a different take on it. Can you elaborate on the need to explain why there is no lower-cost option? Are you referring only to options available on the firm's product shelf?

Antoinette Leung
37:55    Yes. We do expect that if you have a product shelf, yes, you should be looking at your product shelf and explaining why a lower-cost option is not available. Now, if your product shelf is very limited and a client comes in and expecting many options, and they may come to you and say, "Hey, I want a mortgage from financial institution A," or, "I want a mortgage from this MIC," if you don't have access to that product, we do expect that you explain to your client that that is not a product that's accessible, but here are the different options that is available through our brokerage and this is what I would recommend off my shelf.

Gina Stephens
39:02    So the next question is sometimes it is hard to find a suitable product if a customer comes to you with a situation that should not have occurred prior to coming to you. You just have to find the best option which may not be suitable. At what point do we decline clients? We always want to help.

Antoinette Leung
39:23    So like I said before, and I think there was a similar question, the most important thing is that client's situation should not be worse than when the current situation is. So if a client comes to you, they're in a very bad situation, what we expect is that there is a discussion and understanding of what ultimately the client is trying to do to achieve what's the objective. If the mortgage that you're able to find for this client is able to achieve that objective and you are able to write down the key reason for it, then from our perspective, you don't need to turn away the client. There could be situation where there's truly no option and you are not able to help the client, then it is probably wise to have to say to the client, "Unfortunately, in this situation, we cannot help." We recognize that many of you are in this business because you want to help the client. So having those really honest and important conversations about what they want to achieve and how you can help them and in a situation where you really could not help them, then that is the last resort, is to have to turn them away.

Gina Stephens
41:12    The next question is more process. Does FSRA accept emails sent to clients as evidence of suitability confirmation or assessment?

Antoinette Leung
41:23    Yes. We actually don't define how you communicate with client and how you communicate the rationale as long as the key reasons are written down, it can be by email, as long as, obviously, you maintain that records so that if a client's later on ask, you can retrieve it. Or if your principal broker is reviewing your file and they can take a look at it, then that's the most important thing.

Gina Stephens
41:56    So in a similar vein, is the expectation that KYC and suitability documentation be signed by the borrower, or is it for internal documentation?

Antoinette Leung
42:07    So I think it really depends on your processes. I know what I've heard some cases that it came across, especially when markets change fast and client situation change, sometimes clients do come back after the fact and question a recommendation. So for your protection, it will probably be good that clients have some acknowledge the key information they've provided you and the recommendation that you've offered. So if you're thinking from that perspective, then it would be prudent to have the client sign those forms. So it really depends on your client's situation and your business. We do think that at least for the reason for the recommendation and the reason for it, it is prudent to have the client sign off on those.

Gina Stephens
43:14    The next question is, is a suitability assessment documentation required for all mortgages or only for high-rate mortgages?

Antoinette Leung
43:26    So we do expect it for all mortgages. Obviously, for an A-client, very good credit rating and really can have many, many options available to them, the documentation will be not as extensive. So we do expect some form of documentation, but it's not going to be the same extent as for private mortgages.

Gina Stephens
43:56    Good stuff. And in a similar vein, will a Know Your Lender form become mandatory for a compliant file for a private mortgage?

Antoinette Leung
44:07    Yes, it is equally applicable. And in fact, if you look at our-- there is a Form 1 that is for mortgage investment. You'll notice that included on that form, there's some Know Your Client information, there's information about risk disclosure as well. So that obviously is a form that you must complete. But if there are additional client or lender investor information that is relevant that you think is important to track, then it would be important for you to note those down as well.

Gina Stephens
44:48    At renewal, who reviews or confirms the suitability? Is it the broker who originated the deal or the private lender?

Antoinette Leung
44:59    So the question becomes who is representing that client in that renewal? If a client go back to the original broker and have that broker help with the renewal, then the obligation is on the broker. Now, if the client does not go through the original broker in the renewal, they go directly to the private lender, then that private lender would have that obligation. Now, many private lenders are also licensed as brokers. So they would then take on that responsibility because the client goes directly to them.

Gina Stephens
45:52    With respect to prime mortgages that are placed with one of our banks and/or other OSFI-regulated financial institution, will a suitability assessment form or documentation still be required?

Antoinette Leung
46:06    Yeah. This is similar to the previous question. Like we said earlier, you always have to be able to demonstrate why you make that particular mortgage recommendation. Even it could be why an RBC mortgage instead of a CIBC mortgage, right? So there has to be some explanation. As I said, it doesn't have to be as extensive because it is a really, really strong client have a lot of options, then obviously the documentation is not going to be as extensive.

Gina Stephens
46:47    So here's a question about the role of principal brokers. Is FSRA expecting principal brokers to review each transaction for suitability assessments and to keep the record of such suitability assessments?

Antoinette Leung
47:01    No. Our expectation is that as a principal broker, you should have some comfort that your brokers, your individual brokers and agents, are generally making suitable recommendation. Whether you would review every transaction before the fact or spot check, it really based on your understanding about the experience level and the competency of your brokers and agents. For somebody who's new in the business, you may want to check every recommendation before they are even submitted, right? And as they gain more experience and as they demonstrate that the recommendation that they are providing to clients are high quality, then you can likely reduce the amount of check you have. And for very seasoned brokers and agents who've been in the business many, many years, have a good reputation with their clients, you may only choose to spot-check after the fact. So it all boils down to the experience and the competency of that individual broker and agent. That will drive how frequent you want to check the deals and how timely you want to check the deals.

Gina Stephens
48:32    So now we have another process question. Would non-written forms of documentation be considered acceptable for demonstrating a suitability assessment, such as Zoom recordings or video explanations?

Antoinette Leung
48:47    If it is an electronic recording of Zoom or even phone conversation, then those can be as effective as written communication. So we don't really define or dictate the form of the recording. Any of these will work as long as somebody who is not involved in that transaction can understand easily what is the recommendation and what are the key drivers or key reasons that you rely on to make that recommendation.

Gina Stephens
49:31    So another question about whether or not this is a new requirement. Has it always been applicable since the [inaudible] was established, or are we doing something new here?

Antoinette Leung
49:42    This is not a new requirement. The requirement to ensure that a mortgage that is presented to client is suitable based on the needs and circumstances have been in the Act since 2008 or even in the previous Act. That requirement is not new. What we're noticing is that the sector is not very good at demonstrating how they're meeting that requirement because oftentimes there are very little notes or paperworks that support that they are in fact making a suitable recommendation. And so the guidance is really intended to enhance the documentation and the explanation to clients about why a mortgage is suitable.

Gina Stephens
50:35    Great. So I think we have time for only one more question, Antoinette. So the last question is, if a deal is referred from another broker for a private mortgage, can I use their KYC and suitability form for my compliance documentation?

Antoinette Leung
50:51    So if the KYC coming to you from another broker based on your experience is sufficient, then yes, you can rely on those. Obviously, if you are more experienced, you may need to ask additional questions. If that's how you assess the situation, then you can just supplement it with your own notes.

Gina Stephens
51:21    That's great. Well, thank you, Antoinette, for taking all of those questions. I'm sure this was very helpful to all those that were watching. Thank you, everyone, online for your engagement, for your great questions. We'll be posting a summary of some of the questions that we didn't have time to go through as well as a video of the seminar. And we'll also be posting the guidance in that-- links to the guidance in that section so you can refer to the guidance we've been speaking about today. Thank you again for your time and for attending and have a great day.

Antoinette Leung
51:56    Thank you.

Slide 1
[LOGOS: FSRA. Financial Services Regulatory Authority of Ontario and the Coat of Arms of Ontario.]

[White text appears over a blue background.]

[TEXT ON SCREEN: FSRA’s Proposed Mortgage Product Suitability Assessment Guidance. Proactively supporting consumers in a more challenging mortgage environment.]

[TEXT ON SCREEN: Date: January 24, 2024. Speaker: Antoinette Leung. Head – Financial Institutions and Mortgage Brokerage Conduct, Market Conduct.]

[Gina Stephens is seen in a small video window next to the presentation slides.]

Slide 2
[The attendee interface has a series of icons including a text box for user to type a question.]

Slide 3
[Slide 1 reappears on screen.]

Slide 4
[The Land Acknowledgment appears on screen.]

Slide 5
[The agenda appears on screen. 1. Introductions. 2. Land Acknowledgement. 3. Current market conditions are challenging for consumers. 4. Why is FSRA releasing mortgage suitability Guidance? 5. What is the key outcome FSRA wants to achieve through this Guidance? 6. What steps assist in achieving suitable product recommendations? 7. What remains status quo and what is being enhanced in this Guidance? 8. Why do private mortgages require additional due diligence? 9. How can I share my views? 10. Questions?]

[Antoinette appears in a small video window next to the slides. Gina’s video window disappears.]

Slide 6
[A slide is titled: Current market conditions are challenging for consumers. On the left side of the slide is an image that shows houses on an arrow arching upwards. Below reads: Chart 5: Many homeowners’ mortgage payments are close to or beyond the maximum they can afford. How much is your regular mortgage payments? Based on your current financial situation, what is the maximum regular mortgage payment you feel you can afford? A chart is titled: All mortgage holders. A legend appears below. Red indicates above the maximum affordable mortgage payment (less than 0.95). Orange indicates close to the maximum affordable payment (0.95 to 1.05). Yellow indicates slightly below the maximum affordable mortgage payment (1.06 to 1.25) and green indicates far below the maximum affordable payment (more than 1.25).]

[On the right side of the slide reads: Consumers are now faced with: Reduced mortgage affordability. Higher interest rates. Housing market volatility. Buying and staying in one’s home is becoming more challenging for average Ontarians. A CNBC Personal Finance headline reads: As mortgage rates hit 8%, home ‘affordability is incredibly difficult,’ economist says. The headline was published Friday, October 20th, 2023. 2:05PM EDT. Updated Friday, October 20th 2023 at 2:33 PM EDT.]

Slide 7
[The next slide is titled: Why is FSRA releasing mortgage product suitability guidance? The slide contains three categories. The first is Vision. Financial safety, fairness and choice for Ontarians. The second is Statutory Object. FSRA promotes high standards of business conduct; and protects the rights and interests of consumers. The third is Guidance. Protecting consumers by enhancing the requirement for mortgage products to be suitable. Supporting consumers as they seek financing for their home (or mortgage investments).]

Slide 8
[The next slide is titled: What is the key outcome FSRA wants to achieve through this Guidance? An image appears next to text. It depicts a per pointing up with an umbrella over them. Coins fall and a check mark adorns a shield. The text reads: Purchasing a home is often the single largest financial commitment individuals and families can make. Consumers rely on a mortgage professional to help them finance or re-finance their home. It is critical that they get a financial product that best meets their needs. The following text is boxed in below: The primary outcome that brokerages, brokers and agents should achieve regarding mortgage product suitability is that consumers and investors are provided mortgage product recommendations that are suitable based on the specific needs of the clients. Further, clients should fully understand the risks and features of their mortgage and licensees should be able to demonstrate how the mortgage product was deemed suitable for the client.]

Slide 9
[The slide is titled: What steps assist in achieving suitable product recommendations? The six steps are outlined next to an image of a clipboard and two people giving a thumbs-up. Step 1. Know your client. 2. Know your product. 3. Assess options and make suitable recommendations. 4. Clearly communicate and explain rationale of the recommended option. 5. Ensure adequate oversight and accountability. 6. Document suitable assessment and oversight.]

Slide 10
[The slide is titled: What remains status quo and what is being enhanced by the Guidance? An image shows a person working on a laptop and another on smartphone. Around them are books, folders, an envelope, a pen and an hourglass. Above them is a shining lightbulb. The slide reads: Status Quo: The requirement to assess product suitability and ensure suitability of recommendations is not new – it has been in place since the MBLAA first came into force in 2008. The following text is boxed in below: Enhancements: Agents and brokers must maintain appropriate and complete documentation of their suitability assessment, not simply to demonstrate compliance to FSRA but also to assist clients in understanding the rationale for the product recommendation. This helps avoid misunderstandings after the fact. Brokerages must also maintain documentation of its supervision of its brokers’/agents’ suitability assessments. This guidance provides tips and tools to help brokers and agents to understand what may be appropriate to assess for various consumers and various products, and how these determinations should be documented.]

Slide 11
[The next slide is titled: Why do private mortgages require additional due diligence? It reads: Sub-prime and private mortgage products will generally require a more detailed assessment, documentation, and rationale to understand why the product was recommended. A piggy bank is next to the text: Mortgages from less experienced individual private lenders pose the highest risk of potential consumer harm. A house with a percentage symbol is next to the text: Private mortgage can contain unusual features, penalties, and risk that most consumers don’t expect or understand. At the bottom of the slide is written: Questions licensees need to be able to answer and document for private mortgage transactions: 1. Is it clear that the borrower or borrowers would not have

qualified for a lower cost option (e.g. from a lender with lower rates and/or fees)? 2. Is the mortgage affordable and sustainable for the borrower for the term of the mortgage? 3. Had the broker/agent discussed a realistic exit strategy with the borrower and the risks involved in not executing that strategy?]

Slide 12
[The slide is titled: How can I share my views? An image shows two people in discussion. The slide reads: If you are a mortgage broker, agent, mortgage lender, or consumer, FSRA wants to hear your views on this Guidance. The comment period is open until February 28, 2024. Comments may be submitted via FSRA’s website where the guidance is posted.]

Slide 13
[Gina’s video window reappears below Antoinette’s video window. A slide reads: Questions?]

[Antoinette and Gina smile.]