FSRA Update on 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 and invites your continuing input.
Before FSRA 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 and requires filing to FSRA of NQSMIs when retail sales commence. 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 and, when it identifies inadequate or misleading disclosures, contacts the mortgage brokers to confirm and mitigate those risks.
In November 2019, following public consultations and analysis of the 246 NQSMI transactions completed between 2011 and 2018, FSRA implemented its Supervision Approach for High-risk Syndicated Mortgage Investments. This 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 are working collaboratively to transfer regulatory oversight of certain retail NQSMI transactions from FSRA to the OSC. The transfer is expected to come into effect on March 1, 2021. FSRA recently completed a public consultation on its proposed approach for supervising mortgage brokerages and administrators that are engaged in SMIs, and for SMI transactions that remain under FSRA’s supervision after the transfer – see proposed approach.
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, last year it arranged over 300,000 mortgages, involving over $130 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 a 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 your 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.