On May 12, the Financial Services Regulatory Authority of Ontario (FSRA) issued guidance (Guidance) for mortgage administrators (Administrators) and mortgage brokers (Brokers) regarding their disclosure and other obligations in respect of mortgage-based investments during significant market disruptions, such as the COVID-19 pandemic.

The first notice, Mortgage Administrators – Responses to Market Disruptions (Administrator Notice), sets out FSRA’s interpretation of Administrators’ obligations under Mortgage Brokerages, Lenders and Administrators Act 2006 (MBLAA) to protect investors/lenders in mortgages/mortgage investments during significant market disruptions. For example:

  • Notify investors/lenders:The Administrator must promptly notify investors/lenders of a borrower defaulting under the mortgage or any significant change to circumstances affecting a mortgage. If an investor/lender is a mortgage investment corporation (MIC) or other mortgage investment entity (MIE), the Administrator must notify that entity. The Administrator Notice includes examples of events that trigger this disclosure requirement, such as potential forbearance, a material delay in the development of a project being funded by the mortgage, or a change in the ability of investors or lenders to redeem prior to the mortgage investment’s maturity. The Administrator Notice also describes good practices that an Administrator should follow to keep current on the financial status of the mortgages and underlying properties in the portfolio and to communicate effectively with investors/lenders.
  • Adhere to administration agreements:During the COVID-19 pandemic, more borrowers are requesting modifications to their mortgage terms. Administrators should review their administration agreements to confirm the scope of any discretion that they have to modify mortgage terms and they must adhere to those terms. They also should carefully document any exercise of such discretion. If the agreement does not authorize them to modify mortgage terms, an administrator faced with a request from the borrower to modify terms must review the requirements under the MBLAA and related regulations regarding the notice to be provided to the investors / lenders and obtain approval for the modifications.

The second notice, Mortgage Brokerage Disclosure and Suitability Assessments for Non-Qualified Syndicated Mortgage Investments (SMIs) – Responses to Market Disruptions (Broker Notice), discusses Brokers’ obligations to:

  • Disclose material risks arising from the current market disruption to investors in non-qualified syndicated mortgage investments (NQSMIs); and
  • Consider the current market disruption when assessing the suitability of an NQSMI to an investor.

The Broker Notice includes a non-exhaustive list of risks associated with a market disruption that FSRA considers material. These are similar to the “significant changes in circumstances” outlined in the Administrator Notice. The Broker Notice also emphasizes that Brokers must consider whether any property appraisals prepared for syndicated mortgage investments (SMIs) before the market disruption reflect the property’s market or current value and make investors/lenders aware of the risks of relying on any appraisal that either predates the market disruption or does not consider the market disruption’s impact on the property valuation. Also, if the appraisal contains any limitation statements, the Broker must bring those statements to the attention of the investor/lender. The Broker Guidance also states that Brokers must take into account the potential impacts of a market disruption on an SMI, its probable future performance, and the investor/lender’s unique circumstances when they assess the suitability of an SMI for an investor-lender.

Although not directly applicable to exempt market dealers (EMDs), the Guidance also may be useful to firms conducting suitability assessments with respect to MIE securities. Likewise, firms that operate MIEs might want to consider the Guidance when assessing whether to update the descriptions in their offering documents regardig risk factors, descriptions of the MIE’s mortgage portfolio, and/or changes to redemption rights.

AUM Law can help you assess the impact of the Guidance on your business, advise you on your disclosure obligations and help you prepare the required disclosures, as well as update your policies and procedures to incorporate these publications. Please do not hesitate to contact us for assistance.

May 29, 2020