FSRA’s supervision efforts are ongoing to ensure investors, consumers and their funds and investments are protected.
In the fall of 2022, we examined a sample of mortgage administrators’ practices and noted areas needing improvement. These included providing timely communications to investors, meeting required provisions in administration agreements and keeping written policies and procedures updated.
Licensed mortgage administrators handle billions of dollars of mortgage payments and investments annually. We encourage professionals in this sector to take steps to ensure their practices are aligned with FSRA’s expectations.
Examination
Last fall, we selected four mortgage administrators to assess whether their practices align with FSRA expectations and are compliant with MBLAA standards of practice, regulations and FSRA Guidance.
We assessed their administration practices for both individual private mortgages and syndicated mortgage investments (SMI). SMI included both qualified (QSMI) and non-qualified (NQSMI).
Using our risk-based approach, the four administrators were selected using the following key risk factors:
- total number of mortgages under administration
- total number of mortgages in arrears
- number of individual investors
- total number of development properties under administration
Process
The examination was conducted in three parts:
- Reviewing three transactions from each administrator. We focused on written administration agreements, use of discretion, monitoring changing market conditions, reporting arrears and subsequent encumbrances and timely notifications to investors.
- Reviewing the flow of mortgage payments through the administrators’ trust accounts.
- Reviewing design and implementation of policies and procedures.
Findings and response
Transactions review
Our findings suggested the following areas required improvement:
- not providing prompt and complete notifications to investors (50% of administrators reviewed)[1]
- not including MBLAA-required provisions in administration agreements (50% of mortgage administrators reviewed).[2]
- Not implementing updated policies and procedures (75% of mortgage administrators reviewed).[3]
Investors engage mortgage administrators to service mortgage investments including monitoring the mortgage performance. Therefore, as FSRA indicated in its Guidance on Mortgage Administrators – Response to Market Disruptions, mortgage administrators are required to monitor the financial performance of the mortgage and the condition of the underlying property and keep investors current on both.
Flow of funds
A critical part of the examination focused on the flow of funds, or “managing deemed trust funds” as required in sections 33-39 of O. Reg. 189/08: Mortgage Administrators: Standards of Practice.
Key elements in this regulation include:
- deemed trust funds must be kept separate from non-trust funds
- the mortgage administrator must keep a prescribed record of all deemed trust funds it receives and all transactions relating to the funds
- monthly and annual reconciliations for the trust account
- duty to report any shortfall in the trust account
These requirements ensure mortgage administrators adequately handle investor funds to reduce the risk of loss or misuse.
Most of the administrators reviewed demonstrated compliance with these core responsibilities.
Policies and procedures
We noted the four administrators have completed many of the updates to their policies and procedures as discussed with FSRA. But only about half have actually reflected these in writing.
Keeping written policies and procedures updated supports continued education and training. It also ensures the administrator’s operations remain consistent.
FSRA shared all findings with the administrators who responded during the Examination Exit Meetings. These were conducted with Principal Representatives and other compliance staff at the administrator. Corrective steps were discussed during the meetings and FSRA will follow-up on their implementation as appropriate.
Similar findings from previous FSRA examinations have been noted (e.g., lack of prompt notifications and use of discretion clearly documented) but FSRA is seeing improvements.
[1] FSRA Guidance No. MB0039INT and s. 18(3) of O. Reg. 189/08.
[2] Section 18 of O. Reg. 189/08.
[3] Section 25 of O. Reg. 189/08.