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Changes to the Mortgage Syndication Rules

As of July 1, 2018, the Financial Services Commission of Ontario (FSCO) will begin enforcing the changes to the O. Regulation 188/08 Mortgage Brokerages Standards of Practice under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA) that affect non-qualified syndicated mortgages.

To recap a qualified syndicated mortgage is a syndicated mortgage (a mortgage where there is more than one lender) that meets ALL of the following requirements:

  1. A licensed mortgage brokerage was involved in negotiating or arranging it.
  2. The mortgaged property secured was:
    • Primarily used for residential purposes;
    • Did not contain more than four (4) dwelling units (remember sometimes lenders will classify multiplexes as commercial or entirely residential depending on the number of dwelling units disregarding actual zoning and use);
    • Did not contain more than one non-residential (commercial) unit, if within a mixed use building with other residential units (again up to four (4) in total).
  1. The syndicated mortgage together with all other mortgages in priority or at the same priority did not exceed a loan to value (fair market value) of ninety (90%) percent. The fair market value cannot include any proposed additions, developments or renovations to the mortgaged property.
  2. It cannot secure more than one debt obligation with different terms.
  3. The interest rate on the actual debt obligation must equal the interest rate on the syndicated mortgage.
  4. The debt obligation secured cannot be for construction or development purposes.

Therefore, simply put, a non-qualified syndicated mortgage is a syndicated mortgage that does not meet the six (6) requirements mentioned above; in other-words, is not a qualified syndicated mortgage.

What does this mean for mortgage brokers, agents and brokerages?  Going forward they will have to collect and provide for the following when dealing with non-qualified syndicated mortgages:

  • Make sure to document in a financial information form provided by FSCO, the investor’s financial capacity, appetite, circumstances, needs and risk tolerances.  A more sophisticated form of KYC (know your client).  One typically used by investment advisers and managers.
  • Make sure to document and assess suitability using the information provided and specific criteria for each investor through another form provided by FSCO.
  • Make sure to document an expanded disclosure information form provided FSCO. This new form will now include information regarding the appraisal of the mortgaged property; as well as financial statements for non-individual investors (i.e. corporations).
  • To the best of your knowledge make sure investors do not invest more than $60,000 over a 12-month period in any syndicated mortgages.  This requirement only applies to individuals that are not of a “designated class” of investors, and it does NOT apply to qualified syndicated mortgages or to any syndicated mortgages invested in prior to July 1, 2018.
    • A Designated Class of investor is one that is a member of any one of the following classes (similar to the “Accredited Investor” definition in typical securities regulations):
      • The Crown in right of Ontario, Canada or any province or territory of Canada.

      • A brokerage acting on its own behalf.

      • A financial institution.

      • A corporation that is a subsidiary of a person or entity described in immediately preceding 3 paragraphs.

      • A corporation that is an approved lender under the National Housing Act (Canada).

      • An administrator or trustee of a registered pension plan within the meaning of subsection 248 (1) of the Income Tax Act (Canada).

      • A person or entity who is registered as an adviser or dealer under the Securities Act when the person or entity is acting as a principal or as an agent or trustee for accounts that are fully managed by the person or entity.

      • A person or entity who is registered under securities legislation in another province or territory of Canada with a status comparable to that described in the immediately preceding paragraph, when the person or entity is acting as a principal or as an agent or trustee for accounts that are fully managed by the person or entity.

      • A person or entity, other than an individual, who has net assets of at least $5 million as reflected in its most recently-prepared financial statements and who provides written confirmation of this to the brokerage.

      • An individual who, alone or together with his or her spouse, has net assets of at least $5 million and who provides written confirmation of this to the brokerage.

      • An individual who, alone or together with his or her spouse, beneficially owns financial assets (being cash, securities within the meaning of the Securities Act, the cash surrender value of a life insurance contract, a deposit or evidence of a deposit) that have an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1 million and who provides written confirmation of this to the brokerage. “Spouse” means spouse as defined in section 29 of the Family Law Act.

      • An individual whose net income before taxes in each of the two most recent years exceeded $200,000 or whose net income before taxes in each of those years combined with that of his or her spouse in each of those years exceeded $300,000, who has a reasonable expectation of exceeding the same net income or combined net income, as the case may be, in the current year and who provides written confirmation of this to the brokerage. “Spouse” means spouse as defined in section 29 of the Family Law Act.

      • A person or entity in respect of which all of the owners of interests, other than the owners of voting securities required by law to be owned by directors, are persons or entities described in the immediately preceding 12 paragraphs.

        (2) In this section,

        “spouse” means spouse as defined in section 29 of the Family Law Act.  O. Reg. 188/08, s. 2 (2).

  • Make sure to report written complaints received by the brokerage related to non-qualified syndicated mortgages to FSCO’s Superintendent of Financial Services within 10 business days.

Don’t forget, as of last year FSCO announced that mortgage brokers, agents and brokerages are not allowed to use the services/accounts held in out-of-province trust companies to invest in mortgage loans directly, such as syndicated mortgages, unless they are also registered in the province of Ontario.  This is typically met with concern when accessing registered accounts like self-directed RRSP accounts.

Finally, this is just the beginning; recently the Canadian Securities Administrators released proposed changes to National Instrument Policy 45-106 removing most, if not all, exemptions in relation to dealing with mortgages.  The proposed changes as of March 8, 2018 are open for comments.  Obviously this will have to be diligently assessed against FSCO’s recent changes to make sure there is no conflict among other matters of concern.  Stay tuned for a similar summary to follow.  The landscape of Private Lending in Canada, is changing.  The lawyers at Levy Zavet are adequately equipped to advise, handle all your concerns and provide solutions, as always.

 

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