Strengthening Consumer Protection Around Syndicated Mortgages

Since FSRA launched in June 2019, a key focus has been to assess risks and to build frameworks and resources so we can deter deceptive and fraudulent financial services practices and protect consumers. This update highlights how this focus has manifested itself in the area of syndicated mortgage investments. FSRA invites your continuing input.

Before FSRA officially launched, it used its new rule-making authority to begin to enhance the information it would receive in this area post-launch. Leveraging off the 2018 MBLAA regulation requiring enhanced disclosure to investors in non-qualified syndicated mortgage investments (NQSMIs), FSRA’s Fee Rule became effective in June 2019. The Fee Rule requires filing to FSRA of prescribed Form 3.2 disclosures made to the first investor presented with the investment opportunity in NQSMIs when a retail sale commences. Using these filings, FSRA’s dedicated SMI supervision team is able to identify and deter unacceptable disclosures, ideally before investments are completed. This FSRA team actively reviews NQSMI materials. When it identifies inadequate or misleading disclosures, FSRA contacts the mortgage brokers to confirm and mitigate those risks.

In November 2019, FSRA implemented its Supervision Approach for High-risk Syndicated Mortgage Investments. This followed public consultations and analysis of the 246 NQSMI transactions completed between 2011 and 2018. The Approach focuses on the three hallmarks of high-risk NQSMIs (high loan-to-value ratio; subordination or postponement rights; conflicts of interest). Where any of these hallmarks exist, it requires a pre-contract, plain-language warning to retail investors.

In May 2020, FSRA published Interpretation Guidance which aims, in part, to address mortgage administration issues observed with Fortress. It details the obligations of mortgage administrators to make disclosures and otherwise protect the interests of NQSMI investors.

FSRA and the Ontario Securities Commission worked collaboratively to transfer regulatory oversight of NQSMI transactions with non-sophisticated investors from FSRA to the OSC. The transfer came into effect on July 1, 2021.

In March 2021, FSRA issued a final guidance on its Approach for supervising SMI transactions remaining under FSRA’s supervision after the transfer. This Approach focuses on monitoring and evaluating developments in NQSMIs transactions through data collection and ensuring brokerages dealing and trading in NQSMIs with Permitted Clients comply with the law, its regulations and applicable FSRA Guidance. The oversight framework for mortgage administrators administering legacy and new NQSMIs remain under FSRA’s supervision and is unchanged.

In 2020-2021, FSRA continued to review NQSMIs with Permitted and non-Permitted Clients transacted by mortgage brokerages before the transfer ( legacy NQSMIs). FSRA reviewed 18 NQSMI projects across six mortgage administrators. We found that 100% of mortgage administrators reviewed did not have properly established policies and procedures manuals, and 33% of administrators did not provide sufficient disclosure of any conflicts of interest and its potential impacts. We took regulatory action based on our findings. For one mortgage administrator, we issued a Letter of Caution due to the nature of the findings. FSRA has done this work based on the input of the mortgage brokerage sector and other stakeholders - and we thank those who have taken the time to participate. The proper functioning of this sector is important to Ontario – for example, in 2020 it arranged over 370,000 mortgages, for a total dollar value of $172 billion. It helps to create a dynamic market where credit-worthy borrowers, be they a single family or a commercial property developer, have options to access funds.

Effective financial services regulation requires careful balancing. If too restrictive, financial markets, intermediaries and consumers all suffer. If too loose, the public will pay the price. And FSRA finds this ever-changing balance point through public input.

If you have comments or concerns to share with FSRA about its regulation of this sector, we invite you to contact us at via the FSRA website.

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FSRA continues to work on behalf of stakeholders, including consumers, to ensure financial safety, fairness, and choice for everyone.

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