The Ministry of Finance recently released Protecting and Modernizing Ontario’s Mortgage Broker Industry, a report on the legislated five-year review of the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA) led by Attorney General of Ontario Doug Downey and Parliamentary Assistant to the Minister of Finance Stan Cho. The review first launched in November 2018 with a view to improve efficiencies and reduce regulatory burden, objectives that are closely aligned with the Ontario government’s commitment to reducing regulatory requirements by 25 per cent by 2020. For more information on the consultation, please see our December 2018 Blakes Bulletin: Ontario Seeks Input on Regulation of Provincial Mortgage Businesses.
The report, which follows an extensive open consultation process, provides an overview of the issues raised and input received from 35 different stakeholders representing a variety of financial services sectors, including feedback received from these industry participants through detailed written submissions, roundtable discussions as well as many one-on-one meetings. According to the report, the seven key recommendations are “aimed at modernizing and streamlining the MBLAA to increase accessibility to the mortgage market, reduce regulatory burden, and improve consumer and investor protection.” Interestingly, the report comes shortly after the establishment of the Financial Services Regulatory Authority of Ontario (FSRA).
On June 8, 2019, FSRA replaced the Financial Services Commission of Ontario as the regulator for mortgage brokers, insurance, credit unions, loan and trust companies and pensions. If adopted, the recommendations will usher in significant changes to the MBLAA.
RECOMMENDATIONS
Of the seven key recommendations, the first four recommendations (Recommendations 1, 2, 3 and 4) are aimed at reducing regulatory burden for lenders and brokers and increasing access to the housing market for homeowners and investors and the last three recommendations (Recommendations, 5, 6 and 7) are intended to strengthen consumer protection and anti-money laundering oversight.
Recommendation 1: Reducing Red Tape for Commercial Mortgage Transactions
The report recommends that the Ministry of Finance and FSRA work together to “reduce the regulatory burden on commercial mortgage transactions between sophisticated entities, such as large companies and financial institutions.” This recommendation flows from the fact that, currently, the MBLAA applies the same regulatory framework to both residential and commercial mortgages. The report recognizes that commercial mortgages are unnecessarily subject to consumer and investor protection regulation and recommends removing the red tape by exempting sophisticated entities from these requirements when they are dealing in commercial transactions.
Recommendation 2: Reducing Regulatory Burden by Establishing New Classes of Licensing
The report recommends that the Ministry of Finance work with FSRA and the industry to develop different licensing schemes to better reflect the specifics of different segments of the mortgage market. This recommendation stems from the understanding that various types of mortgages are accompanied by different sets of risks and the current “one size fits all” approach to licensing does not ensure that mortgage brokers and agents have the appropriate competencies and skills required to best serve their clients.
Recommendation 3: Reducing Regulatory Burden in Guidance, Bulletins and Forms
The report recommends that FSRA consult with industry participants in its efforts to simplify and streamline guidance, rules, bulletins as well as forms and accompanying disclosures provided to consumers. This recommendation emphasizes the need for these documents to be written in plain language in order to enhance industry and consumer readability and understanding while simultaneously striving to reduce regulatory burden and duplication.
Recommendation 4: Maintaining Current Licensing Exemptions
The report acknowledges the importance of maintaining the current licensing exemptions for simple referrals, lawyers and employees of financial institutions but recommends that FSRA and the Law Society of Ontario cooperate to ensure protocols are put in place to allow for the timely sharing of information in circumstances where either regulator takes enforcement action involving a licensee that is subject to regulation by the other. The report also recommends that the Ministry of Finance work with the Financial Consumer Agency of Canada to ensure consumers are treated consistently regardless of “whether they receive their mortgage from a provincially-regulated mortgage broker/agent or from a federally-regulated bank employee.”
Recommendation 5: Raising and Streamlining Educational and Professional Standards for Agents and Brokers
The report recommends that FSRA work with industry and mortgage licensing education providers to improve the mandatory education requirements, including licensing education courses by, among other things, expanding both the content of such courses and the types of courses offered in coordination with the new licensing regime described in Recommendation 2. This recommendation recognizes that “right-sized” education for mortgage brokers and agents should be focused on teaching the skills necessary to properly prepare agents and brokers for their careers in the mortgage industry.
Recommendation 6: Incentivising Registration for Private Lenders
The report makes several important observations as it relates to private lending in Canada’s real estate market. It notes that significant changes in Canada’s housing market (including, rising housing prices, stricter underwriting rules and federally mandated stress tests for uninsured loans) have contributed to an increase in the use of private lenders in recent years.
According to the report, “although private lenders represent a relatively small portion of mortgages currently outstanding in the overall $132 billion mortgage brokerage market in Ontario, the market share of this segment has grown in recent years”. Nonetheless, despite this growth, because private lenders who work through a licensed mortgage brokerage qualify for an exemption from the licensing requirement under the MBLAA, the report highlights the difficultly in determining the extent of their market participation under the existing mortgage broker regime. It also notes the recent reports in British Columbia that have identified private lending in Canada’s real estate market as being “particularly vulnerable to the risk of money laundering.”
In an effort to better understand and quantify the continued growth of the private mortgage lending sector and to combat fraud, the report recommends that the Ministry of Finance and FSRA create “a registration regime for private/unregulated lenders that meet certain monetary or activity thresholds” and which could also invite entities that do not meet the prescribed thresholds to voluntarily register. Under the proposed registration regime, registered private lenders that lend to sophisticated entities “would be able to carry out mortgage lending activities without the need for licensing under the MBLAA, and without the requirement to work through a licensed brokerage” which according to the report would operate to “significantly reduce regulatory burden” for private lenders.
The report also recommends that registered private lenders “should be required to report periodically to FSRA on their lending activities”, thereby providing FSRA with valuable data to bridge the existing information gap related to private lender activities and market share in the Canadian real estate market.
Recommendation 7: Strengthening the Administrative Monetary Penalty Framework
The report recommends that the Ministry of Finance and FSRA review the administrative monetary penalty (AMP) maximums currently imposed under the MBLAA to ensure they appropriately deter non-compliance with the legislation. This recommendation is in response to stakeholder feedback indicating that current AMP levels are not high enough and often result in non-compliance with the MBLAA being a more cost-effective option than compliance.
NEXT STEPS
With respect to the implementation of these recommendations, neither the report nor the Ministry of Finance announcement specify next steps. However, in light of the extensive public consultation process and industry participation, it is expected that the seven recommendations we discussed will likely be presented in the form of draft regulations, but nothing has been published at this point. Given the government’s self-stated goal of reducing the number of regulatory requirements affecting business by 25 per cent overall by 2020, and the fact that modernizing and streamlining the MBLAA in accordance with the recommendations in the report represent, in large part, changes proposed by industry participants that would be a welcome change, it’s possible that draft regulations could be released in short order.
