FSRA issues new guidance for mortgage-based investments disrupted by COVID-19
On May 12, 2020, the Financial Services Regulatory Authority of Ontario (“FSRA”) issued guidance with respect to the Mortgage Brokerages, Lenders and Administrators Act, 2006 for mortgage brokerages (“Mortgage Brokerage Guidance”) and mortgage administrators (“Mortgage Administrator Guidance”) related to the disruptions caused by COVID-19 (“Market Disruptions”). FSRA’s stated purpose for doing so is to increase protections for consumers involved in mortgage-based investments during periods of market volatility and disruption.
The Mortgage Brokerage Guidance sets out FSRA’s expectations of mortgage brokerages during times of market disruptions. In particular, mortgage brokerages must consider the potential impacts of any market disruption on their disclosure of material risks and suitability assessments of syndicated mortgage investors / lenders.
To comply with the obligation to disclose material risks related to market disruptions such as COVID-19, mortgage brokerages must:
- consider whether property appraisals provided properly reflect their market value
- alert investors / lenders to the risk of relying on appraisals that predate market disruptions (e.g. COVID-19), as they would likely not consider the potential impact of such market disruptions on property valuations; and
- bring to the attention of investors / lenders any limitation statements contained in appraisals.
FSRA expects mortgage administrators to promptly notify each investor / lender of the potential impacts of market disruptions, such as COVID-19, on the performance of mortgage / mortgage investments being administered; and comply with the terms of mortgage administration agreements in exercising any discretion permitted. The Mortgage Administrator Guidance explains that, to promptly notify investors / lenders of significant changes in circumstances affecting mortgages, mortgage administrators are required to:
- Keep current on the financial performance of each mortgage in their portfolio and on the condition of the underlying properties, including maintaining awareness of significant circumstances that could impact property valuations and loan-to-value ratios, regularly assessing delinquency risk and tracking the impact of mortgage arrears on investors / lenders.
- Provide prompt and complete notification to investors / lenders by having and using communication plans for regular reporting on the performance of investments, borrower performance against loan covenants, potential need for amendments to mortgage terms requiring investor / lender approval; and changes in redemption policies caused by market disruptions.
The Mortgage Administrator Guidance also clarifies how mortgage administrators should use their discretion during periods of market disruptions such as the COVID-19. Where mortgage administrators are granted discretion under mortgages to modify mortgage terms, they will be required to determine the nature and extent of such discretion, including:
- analyses of each option considered, outlining the benefits and risks to investors / lenders, and rationale for options selected;
- strategies for implementing selected options; and
- communication plans for notifications to investors / lenders.
FSRA’s new policy guidance for mortgage brokers and mortgage administrators shed important light on how the regulator views their obligations during events of market disruptions such as COVID-19. Brokers and administrators may be interested in engaging counsel to assist with reviewing documentation for compliance with legislation and regulation, FSRA guidance, and rights in commercial agreements.