Better consumer protection needed in administration of non-qualified syndicated mortgage investments (NQSMIs)

Investors should have the information they need to make informed decisions about their mortgage investments. In continuing to review Legacy NQSMIs, FSRA found that mortgage administrators may not be providing adequate and timely information about these mortgage investments to investors. FSRA will therefore continue to examine mortgage administrators to better protect consumers.

What we did and how we did it

FSRA has now completed Phase three of the Legacy NQSMI^[1] review. Phases one and two were discussed in the first and second issues of FSRA’s Mortgage Brokering newsletter. Similar to the previous two phases, the objective of this third phase was to look at appropriate disclosure and due diligence related to mortgage performance. FSRA assessed mortgage administrators’ business operations compliance with MBLAA and FSRA Guidance for selected high-risk NQSMI transactions that were renewed or contractually extended between January 1, 2021 and December 31, 2021.

In alignment with the review purpose of the previous phase, Phase three focused on how mortgage administrators:

• administer Legacy NQSMIs and the corresponding policies and procedures regarding the management of Legacy NQSMIs
• keep informed of the performance of the NQSMIs and provide related information to investors
• handle trust funds

FSRA examined 12 NQSMI mortgages across four mortgage administrators. FSRA selected mortgage administrators for examination based on risk factors in the following two key areas:

1. characteristics of the mortgage portfolio under administration – 13 risk criteria^[2]
2. mortgage administrator’s business and compliance history

To identify mortgage administrators, FSRA risk-assessed (1) the 2020 Annual Information Return (AIR) data, (2) the data collected from the Phase two questionnaire^[3], and (3) the results of compliance background check of each of the 55 mortgage administrators that reported administering NQSMIs in their 2020 AIR.

What we found and how it was addressed

FSRA completed the examinations in May 2022. Key findings were:

• 100% of the four mortgage administrators’ Policies and Procedures were not adequately established or did not reflect their business activities in accordance with MBLAA, Ontario Regulation 189/08 and NQSMI Supervision Approach Guidance.
• 100% of the four mortgage administrators’ Mortgage Administration Agreements did not include all information required under Ontario Regulation 189/08 section 18.
• 50% of the four mortgage administrators’ prompt notifications processes and exercise of discretion were not clearly documented or reflected in the Policies and Procedures manuals or the Mortgage Administration Agreements.
• In one instance, it was noted that a NQSMI transaction was completed with non-Permitted Client investors outside of the oversight of the Ontario Securities Commission (OSC). The mortgage administrator was asked to reach out to the OSC for proper reporting purposes as applicable

The mortgage administrators were required to take appropriate steps to address these findings. This included updating their policies and procedures manual and mortgage administration agreements as well as providing appropriate related training to their staff.

What this means for you

Mortgage administrators should have processes in place to provide timely information to investors about their mortgage performance. In addition, they should accurately reflect their specific business operations and processes in their policies and procedures.

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