Guidance
☑ Interpretation ☑ Approach ☐ Information ☐ Decision
No. MB0054INT
Purpose
This Interpretation Guidance (“Guidance”) outlines the Financial Service Regulatory Authority of Ontario’s (“FSRA”) interpretation of section 24 of Ontario Regulation 188/08: Mortgage Brokerages: Standards of Practice (“O. Reg. 188/08") under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (the “Act”).
Section 24 of O. Reg. 188/08 requires that a mortgage brokerage take reasonable steps to ensure that any mortgage or investment in a mortgage that they present for consideration to a client is suitable based on the unique needs and circumstances of the client (i.e., borrower and/or lender or investor), as the case may be.
This Guidance outlines FSRA's interpretation of whether a brokerage has taken the "reasonable steps," required by section 24 of O. Reg. 188/08, which is informed by the extent to which a brokerage has taken necessary efforts or actions to achieve the consumer protection outcomes identified in this Guidance.
This Guidance further outlines FSRA's approach in conducting supervisory reviews by transparently outlining the key indicators FSRA looks for when determining if a brokerage has achieved consumer-protection outcomes necessary to demonstrate compliance with section 24 of O. Reg. 188/08.
Scope
This Guidance relates to a regulatory obligation of:
- mortgage brokerages
This Guidance affects how the following licensees conduct their business:
- mortgage brokers
- mortgage agents
Rationale and background
The brokerage’s obligation to present only mortgages/mortgage investments that are suitable for their clients, based on the specific needs of the clients, is a fundamental element of the Act’s consumer protection regime. Further, licensees should be able to demonstrate how the mortgage product was deemed suitable for the client.[1]
Without an understanding of what mortgage brokerages can do to demonstrate they have taken “reasonable steps” to ensure their product is suitable for consumers on a case-by-case basis, there exists the real potential for consumer harm.
Ensuring mortgage suitability for consumers can be more challenging in some situations, for example, where:
- A client is financially vulnerable or has unique circumstances and must rely on non-traditional private mortgages to finance their homes during periods of economic uncertainty, such as a changing interest rate environment and/or correction in the real estate market
- A brokerage is a lender that deals with borrowers directly but only offers its own products
- A brokerage works with borrowers and lenders related to the brokerage
- A brokerage is limited in the range of mortgages that it can offer
Mortgage Broker Regulators’ Council of Canada’s principles for conducting mortgage product suitability assessments
FSRA’s outcomes-focused approach to determining whether a mortgage brokerage is compliant with section 24 of O. Reg. 188/08 is informed by the Mortgage Broker Regulators’ Council of Canada (“MBRCC’s”) Principles for Conducting Mortgage Product Suitability Assessments(“MBRCC Suitability Principles”).
In June 2023, the MBRCC developed and published for consultation six MBRCC Suitability Principles. The MBRCC Suitability Principles help brokerages, brokers and agents to meet their suitability assessment obligation and assist principal brokers and regulators with supervision of licensees.
FSRA considers whether certain consumer protection outcomes are met when assessing whether a mortgage brokerage has taken reasonable steps to ensure the mortgage products it has presented are suitable for consumers on a case-by-case basis. These outcomes include, for example, whether a mortgage brokerage can demonstrate an understanding of a client’s unique needs and circumstances.
Failure of a mortgage brokerage to be able to clearly demonstrate they have met the consumer-protection outcomes outlined in this Guidance may inform FSRA’s finding of non-compliance with s. 24 of O. Reg. 188/08. As such, having practices in place to identify that the brokerage consistently meets these outcomes is prudent to promote fair treatment of consumers and regulatory compliance.
Mortgage financing and mortgage investments
The Guidance distinguishes between mortgage financing and mortgage investments as two distinct types of mortgage products that have unique key indicators for each of FSRA’s required outcomes.
Mortgage financing is typically required by borrowers because they have already committed to purchasing a property or they must renegotiate as their current mortgage term approaches maturity. The borrower may have a sense of urgency to obtaining the mortgage.
In contrast, investing in a mortgage/lending funds for a mortgage is optional for investors because they can defer investing their capital or can invest in other financial products.
Acknowledging these differences, this Guidance sets out unique sets of indicators for each of FSRA’s required outcomes as they relate to mortgages and mortgage investments, respectively.
This Guidance will help mortgage brokerages, brokers, and agents understand what FSRA looks at when determining if a brokerage has taken reasonable steps designed to ensure any mortgage/mortgage investment recommended to a client is suitable based on the unique needs and circumstances (e.g., the level of financial sophistication of the client) and the mortgage product options available to the brokerage. This supports the fair treatment of consumers, encourages good conduct by licensees, and instills public confidence in the sector.
FSRA's statutory objects
In supervising and regulating the mortgage brokering sector, FSRA is guided by its statutory objects. With respect to the Guidance, FSRA’s relevant statutory objects include FSRA’s duties to:
- regulate and generally supervise the mortgage brokering sector
- contribute to public confidence in the mortgage brokering sector
- promote transparency and disclosure of information by the mortgage brokering sector
- promote high standards of business conduct
- protect the rights and interests of consumers
Interpretation
Section 24 of O. Reg. 188/08 requires that brokerages take reasonable steps to ensure that any mortgage or investment in a mortgage that they present for consideration to a client is suitable based on the unique needs and circumstances of the client (i.e., borrower and/or lender or investor), as the case may be.
Whether a brokerage has taken the "reasonable steps" required is informed by the extent to which necessary efforts or actions were taken to achieve the consumer protection outcomes identified in this Guidance. .
Required outcomes for suitability assessments
When determining if a brokerage has taken “reasonable steps” to ensure a mortgage product is “suitable” for a particular client, FSRA considers the extent to which a brokerage achieves the following six outcomes.
FSRA considers the extent to which mortgage brokerages organize their business to best achieve these expected outcomes.
FSRA’s looks for the following outcomes to be achieved:
Outcome #1 – Know Your Client (“KYC")
- The mortgage brokerage understands of the unique needs and circumstances of their client.
Outcome #2 – Know Your Product (“KYP”):
- The mortgage brokerage understands its products and can explain the mortgage products that are available (e.g., features and risks of a product).
Outcome #3 – Options are assessed and suitable recommendation(s) made:
- The mortgage brokerage is able to demonstrate how a mortgage product option(s) presented to a client meets their client’s unique needs and circumstances.
Outcome #4 – Recommended option(s) and rationale for it/them are clearly communicated and explained to the client both verbally and in writing:
- The mortgage brokerage is able to clearly explain to their client any mortgage product option(s) it selects to present for the client’s consideration.
- The explanations should include documented rationale for the option(s) presented to the client. The rationale should be based on client’s unique needs and circumstances, lender’s practices, availability of products and other material subjective/circumstantial factors (e.g., including turnaround time needed, service levels, complexity, relationship, likelihood of exception requirements, relationships.)
- Regulated persons and entities should obtain written acknowledgement from their client that the client understands the options(s) and that the mortgage application is being submitted through the mortgage brokerage by their licensed agent/broker.
Outcome #5 – Adequate oversight and accountability:
- The mortgage brokerage should have reasonable processes in place to ensure regulated persons authorized by the brokerage conduct adequate suitability assessments of mortgage product options and present only the option(s), if any, that are suitable for a client.
Outcome #6 – Documented suitability assessment and oversight:
- The mortgage brokerage should adequately document their suitability assessments. Documentation should, at a minimum, include the mortgage product recommendation provided to the client and the rationale for how the recommendation meets the client’s unique needs and circumstances.
- Further, regulated entities should document (a) their approach to reviewing the suitability assessments conducted by their authorized regulated persons, and (b) implementation of such approach.
Approach
Key indicators associated with outcomes
This Guidance outlines the indicators that FSRA considers when determining whether the brokerage has achieved the outcomes outlined above.
FSRA looks for key indicators to determine if the consumer-focused outcomes have been achieved. However, the presence of these indicators alone is not sufficient if the outcomes are not met.
The following is a list of non-exhaustive indicators to transparently outline what FSRA considers during its supervisory reviews. This list is intended to assist mortgage brokerages with understanding and achieving the outcomes listed above. Achieving these indicators is not determinative of meeting FSRA’s required outcomes.
The determination of whether a brokerage has taken reasonable steps to identify suitability of a mortgage product can differ based on the mortgage specificities such as the type of mortgage products (financial institution versus private lender mortgage) and level of financial sophistication of the consumer.
FSRA’s required outcomes and key indicators that FSRA considers when conducting supervisory reviews
Outcome # 1 – Know Your Client (“KYC”)
Mortgage financing for a borrower client
Key indicators of whether a brokerage knows its borrower’s needs and circumstances include but are not limited to the broker’s and agent’s understanding of their client’s:
a) employment status and stability (e.g., full-time, part-time, contract, probation, unemployed)
b) income type and stability (e.g., salary, commission, base plus commission, bonus, dividend, retirement, social assistance)
c) property details (e.g., single-family house, multi-unit house, condo, co-operative) and any current mortgages or encumbrances (e.g., HELOC, municipal by-law requirements, easements, positive or restrictive covenants)
d) financial knowledge (e.g., experience with mortgages and financing)
e) short- and long- term financing objectives, risk tolerance (e.g., tolerance to increasing payments on variable and/or adjustable-rate mortgage products) and housing plan[2]
f) additional factors of financial vulnerability, such as language/communication barriers
g) prior experience with consumer proposal, bankruptcy, power of sale, foreclosure, or other mortgage enforcement or debt recovery activities.
Mortgage investment for a private lender/investor client
Key indicators of whether a brokerage knows its private lender’s/investor’s needs and circumstances include but are not limited to the broker’s and agent’s understanding of the client’s:[3]
a) personal circumstances
b) financial circumstances
c) investment needs and objectives
d) risk tolerance
e) experience in mortgage investments and related real estate transactions
f) source of funds being invested (e.g., registered funds that may be impacted by adverse tax rules, cash, equity from home refinancing)
g) beneficial owner(s) if lender/investor is a corporation
h) mortgage administrator (i.e., who will administer the mortgage) and whether the mortgage administrator has a business or other relationship with the borrower.
Outcome # 2: Know Your Product (“KYP”)
Mortgage financing for a borrower client
Key indicators of whether a brokerage knows the mortgage product option(s) being considered for a borrower include but are not limited to the broker’s and agent’s understanding of:
a) the limitations, if any, in the range of products it is able to offer
b) the recommended product’s features, risks and limitations including:
- cost of borrowing, including how the rate is compounded, and any trigger points (for variable rate mortgages (VRM) and adjustable-rate mortgages (ARM))
- repayment plan and whether regular mortgage payments include principal repayment or interest only
- prepayment options and costs (i.e., renewal, renegotiation or discharge of mortgage prior to maturity date, and basis for calculation of prepayment costs)
- extension or renewal options and costs (e.g., lender may not extend or renew and not at the same interest rate)
- any additional costs paid to lenders, brokers or other parties (e.g., administration costs)
- how costs are paid (e.g., deducted off the committed amount)
- other restrictive or unique options/clauses (e.g., portability, assumability, lump-sum payment privileges, payment increase/decrease allowances, convertible to another product)
- rules regarding subsequent financing using the same property as collateral or maximum combined LTV restrictions
c) lender’s/investor’s mortgage underwriting/approval requirements including pre-approval conditions, documentation, common conditions to be fulfilled, and processing timelines
d) impact of the product recommendation on the client’s situation (e.g., impact to the borrower if the mortgage cannot be renewed)
In cases where the brokerage is not the lender, brokers and agents should consider various mortgage options and not automatically funnel all borrowers to a single lender. Brokers and agents should ensure the recommendation is suitable for the needs and circumstances of the borrower.
In cases where a mortgage option being considered for a borrower is a private mortgage, brokers and agents should understand and be able to explain the following non-exhaustive factors:
a) private lender’s identity, experience, source of funds
b) in addition to standard conflict of interest (COI) disclosures[4] required, description of the relevance of the COI and any management strategies in place to manage the COI. Examples of COI situations include: the transaction involves related parties, brokerage staff as lender, etc.
c) triggers and timelines for power of sale, foreclosure, or other mortgage enforcement remedies
d) fees/costs for services such as payment date changes, statements, discharge documents, renewal fees, etc.
e) method of payment (direct debit, e-transfer, post-dated cheques, etc.)
Mortgage investment for a private lender/investor client
Key indicators of whether a brokerage knows the mortgage product option(s) being considered for a private lender/investor include but are not limited to the broker’s and agent’s understanding of:
a) the characteristics of the property being mortgaged, such as type, location, valuation and any material factors that may impact the property value (such as market disruption, environmental issues, unique zoning, building restrictions, and if there are any property tax arrears)
b) the borrower’s track record or borrowing history (as available), such as whether it has defaulted in the recent past
c) the track record of the developer (for mortgages that fund construction / development).
d) the characteristics and material risks of the mortgage, including but not limited to:
- whether there are other mortgages or encumbrances with higher priority on the property
- whether the mortgage includes a subordination clause
- the relationships between parties in the transactions (MB, MA, lender/investors, borrower/developer, appraiser, real estate agent, etc.) that may lead to actual or potential conflicts of interest
- how missed mortgage payments can be handled, the associated procedures (e.g., under the Mortgages Act) and the investor’s rights in such situations
- which party is responsible for paying any fees or interest on prior ranking mortgages if the mortgage goes into default
e) whether the investment in the mortgage can be redeemed before the end of the term and under which conditions.
Outcome # 3: Options are assessed and suitable recommendation(s) made
Mortgage financing for a borrower client
Key indicators of whether a brokerage has assessed its options for a suitable recommendation for a borrower client include but are not limited to:
a) Brokers and agents can demonstrate completion of a comparison/analysis of the borrower’s key needs and circumstances and the product’s features which correspond to them, or comparison/analysis of other available offerings they have access to and for which the client qualifies.
b) Brokers and agents can demonstrate proactive and early disclosure about any benefits or incentives (monetary or non-monetary[5]) they received or will receive in connection with the mortgage, and that the incentives were not a motivating factor for the recommendation.[6]
Brokers and agents should obtain written acknowledgement by the client of the disclosure.
Mortgage investment for a private lender/investor client
Key indicators of whether a brokerage has assessed its options for a suitable recommendation for a lender/investor client include but are not limited to:
a) Brokers and agents can demonstrate a comparison analysis with other available offerings they have access to and for which the client qualifies was conducted and documented.
Brokers and agents may accept client directed investment solutions in cases where the client is a sophisticated entity (i.e., not a natural person, meets the definition of a “permitted client”) and acknowledges, in writing, that they are declining any recommendations by the broker or agent.
Outcome # 4: Recommended option(s) and the rationale for it/them are clearly communicated and explained to the client both verbally and in writing.
Mortgage financing for borrower client
Key indicators of whether a brokerage has clearly communicated and explained the rationale for its recommendation include but are not limited to:
a) Brokers and agents should be able to explain to the client why the recommended mortgage is suitable, given the client’s personal and financial needs and circumstances.
The explanation may include use of visual representations such as graphs and scenario analysis/cases, in addition to the required amortization schedule.[7]
Brokers and agents should also be able to explain what other mortgage options were considered and not recommended.
b) Brokers and agents should be able to demonstrate that they have provided the above communication and reasonably ensured their client’s understanding (e.g., in writing with client’s acknowledgement)
c) In cases where the recommended mortgage is a private mortgage, brokers and agents should be able to:
- Articulate why a private mortgage was required or why the client does not qualify for a mortgage from a financial institution, NHA-approved lender, or other lower-cost financing options.
- Discuss with the client how sustainable and affordable the recommended mortgage is based on the client’s ability to pay, consequences of not meeting payment obligations.
- Discuss with the client a feasible and realistic plan to get back to more traditional financing, or otherwise out of private lending (also known as an “exit strategy” or “exit plan”) (e.g., improving credit score, completing renovations, preparing the property for sale, etc.). If the product recommendation is contingent on such actions, the presentation of the product must include reference to such enabling factors.
- Discuss with the client how sustainable the recommended mortgage is (e.g., when the equity in the home would be fully depleted due to interest and other costs accruing over time).
Mortgage investment for a private investor/lender client
Key indicators of whether a brokerage has clearly communicated and explained the rationale for its recommendation include but are not limited to:
a) Brokers and agents can demonstrate they explained to the client the mortgage options that were considered, and why the recommended mortgage is suitable given the client’s investment objectives and risk tolerance.
b) Brokers and agents can demonstrate that they have provided the above communication and reasonably ensured the client’s understanding (e.g., obtained client’s acknowledgement of the communication and explanation in writing).
Outcome # 5: Adequate oversight and accountability
Key indicators of whether a brokerage has ensured adequate oversight and accountability include but are not limited to:
a) Brokerage has and can demonstrate adherence to documented internal policies and procedures that help ensure its licensed individuals recommend only suitable mortgage products to clients based on their needs and circumstances.
These policies may address:
- criteria for conducting suitability assessments
- training requirements for brokers and agents (e.g., more detailed training for less experienced agents, when new products are being introduced, periodic refreshers for more complicated/restrictive products or client situations, etc.)
b) Principal brokers demonstrate an established and effectively implemented supervision, monitoring and feedback process, which may be risk-based, that addresses:
- how the brokerage reviews the suitability assessments conducted by its authorized regulated persons
- how to address/correct for unsuitable mortgage recommendations provided to a client
- how licensed individuals who are not meeting expectations for conducting proper suitability assessments would be identified, further trained and supervised
- ensuring that only staff holding a Mortgage Agent Level 2 or Broker licence are responsible for clients requiring financing from lenders that are not financial institutions or approved lenders under the National Housing Act (NHA-approved lenders)
Outcome # 6: Documented suitability assessments and oversight
Key indicators of whether a brokerage ensures that suitability assessments and its oversight of how the assessments are conducted are documented include but are not limited to:
a) Principal brokers, brokers and agents maintain sufficient documentation to demonstrate how they are meeting the expectations with respect to mortgage product suitability, including relevant requirements set out in legislation and FSRA Guidance.
b) Adequate documentation processes are evident when a third party who has not been involved in a particular mortgage transaction or the principal broker’s supervision activities can re-perform the suitability assessment or supervisory activities respectively and be able to describe the rationale.
Compliance requirements
Mortgage brokerages, brokers and agents are required to comply with the law in accordance with FSRA’s interpretations set out in this Guidance.
Failure to comply may result in enforcement or supervisory action including, as appropriate, letters of warning, license conditions, license revocation or suspension, and administrative monetary penalties of up to $100,000 for individuals and $500,000 for entities, per contravention. Further, FSRA has the authority to lay quasi-criminal charges under the Act which are prosecuted in the Ontario Court of Justice under the Ontario Provincial Offences Act.
Effective date and future review
This Interpretation Guidance becomes effective on [TBC]. The latest possible date for FSRA to initiate a review of this Interpretation Guidance will be [TBC].
About this Guidance
This document is consistent with FSRA’s Guidance Framework. As Interpretation Guidance, it describes FSRA’s view of requirements under its legislative mandate (i.e., legislation, regulations and rules) so that non-compliance can lead to enforcement or supervisory action. As Approach Guidance, it describes FSRA’s internal principles, processes and practices for supervisory work, action and application of Chief Executive Officer discretion.
Scenarios and sample documentation included in the appendix are for illustrative purposes only. These are not prescribed forms and may not include all information required for a particular borrower’s or lender’s individual circumstances.