ARCHIVED — Vol. 146, No. 25 — June 23, 2012

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Protection of Residential Mortgage or Hypothecary Insurance Regulations

Statutory authority

Protection of Residential Mortgage or Hypothecary Insurance Act

Sponsoring department

Department of Finance

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the regulations.)

Issue and objectives

Laws governing federally regulated financial institutions require lenders to obtain mortgage insurance on loans with a down payment of less than 20%. Mortgage insurance is available from Canada Mortgage and Housing Corporation (CMHC) and from private mortgage insurers. Since CMHC is a Crown corporation, the Government is ultimately responsible for all of CMHC’s obligations, including its mortgage insurance claims. To make it possible for private insurers to compete effectively with CMHC, the Government also backs, through contractual guarantee agreements, the insurance provided to lenders by private mortgage insurers (i.e. Genworth Financial Mortgage Insurance Company Canada, Canada Guaranty Mortgage Insurance Company, and PMI Mortgage Insurance Company Canada).

In Budget 2011, the Government committed to introducing a legislative framework which would formalize existing mortgage insurance arrangements with private mortgage insurers and CMHC. This new legislative framework will strengthen the Government’s oversight of the mortgage insurance industry and support the efficient functioning of the housing finance market and the stability of the financial system. In addition, the framework will be more transparent and will improve accountability compared to the current contractual arrangement regime.

The new legislative framework for mortgage insurance received Royal Assent in June 2011 as Part 7 of the Supporting Vulnerable Seniors and Strengthening Canada’s Economy Act, and comprises the Protection of Residential Mortgage or Hypothecary Insurance Act (PRMHIA), as well as consequential amendments to the National Housing Act (NHA) and the Office of the Superintendent of Financial Institutions Act (OSFI Act). The proposed regulations are required in order to fully implement this legislative framework.

Description and rationale

There are three proposed regulations: the Protection of Residential Mortgage or Hypothecary Insurance Regulations, the Housing Loan (Insurance, Guarantee and Protection) Regulations, and the Regulations Amending the Assessment of Financial Institutions Regulations, 2001.

Protection of Residential Mortgage or Hypothecary Insurance Regulations

The proposed Protection of Residential Mortgage or Hypothecary Insurance Regulations would outline the criteria that a lender must meet before it can be designated as a qualified mortgage lender by an approved mortgage insurer under PRMHIA, including minimum capital requirements, and experience requirements related to underwriting and administering mortgage loans. (see footnote 1) Specifically, the Regulations would require that a lender be a corporation which is authorized to lend in the jurisdiction in which it operates and meet one of a number of other criteria (e.g. be a bank). The criteria are the same as exist in the guarantee agreements, except for an increase in capital requirements for unregulated lenders (from $1 million to $3 million), in order to account for inflation and increased property values.

The proposed regulations would also establish conditions under which an approved mortgage insurer may offer or seek reinsurance (i.e. an approved mortgage insurer may seek reinsurance from another approved mortgage insurer, and an approved mortgage insurer may also reinsure the government-backed mortgage insurance policies of another insurer). For the purposes of paragraph 13(1)(c) of PRMHIA, the proposed regulations would define prescribed relationships among insurers and lenders as relationships whereby a person beneficially owns more than 20% of the outstanding shares of any class of both an insurer and a lender’s voting shares, or whereby an insurer beneficially owns more than 20% of the outstanding shares of any class of a lender’s voting shares. The regulations would establish that lender-insurer pairs in prescribed relationships can enter into government-backed mortgage insurance agreements if the approved mortgage insurer notifies the Minister in advance.

The PRMHIA establishes that fees must be paid to the Government as compensation for the protection offered under the Act. The regulations would prescribe the formula for the fee (2.25% of premiums) and establish the due date for the fees (March 1st of the following year).

Housing Loan (Insurance, Guarantee and Protection) Regulations

The proposed Housing Loan (Insurance, Guarantee and Protection) Regulations would be made pursuant to the consequential amendments to the NHA mentioned above and would apply to CMHC. The regulations would outline the criteria that a lender must meet before it can be designated as an approved lender by CMHC for the purposes of Part Ⅰ of the NHA. These lender criteria would be the same as those outlined in the Protection of Residential Mortgage or Hypothecary Insurance Regulations, and would be equivalent to the criteria that exist under the current informal arrangements with CMHC and in the guarantee agreements with the private insurers (except for the increase in minimum capital requirements for unregulated lenders, as discussed above).

Regulations Amending the Assessment of Financial Institutions Regulations, 2001

The proposed Regulations Amending the Assessment of Financial Institutions Regulations, 2001 would be made pursuant to the consequential amendments to the OSFI Act mentioned above. In accordance with the OSFI Act, OSFI is funded mainly through assessments on the financial institutions it regulates and supervises. Under the proposed regulations, the Assessment of Financial Institutions Regulations, 2001 would be amended to add PRMHIA-related expenses to the existing base assessments. The proposed methodology for allocating OSFI’S PRMHIA-related expenses to each institution would be based on each institution’s share of the aggregate minimum required capital of all institutions subject to PRMHIA.

These criteria and requirements represent key elements of the overall guarantee framework for the Government’s backing of mortgage insurance through the private insurers and CMHC.

The regulations contain no reporting requirements and therefore no administrative burden would be imposed on the insurers. For the private insurers, demonstration of compliance under either the contractual agreements or the new legislative framework would remain the same in accordance with OSFI’s risk-based supervisory framework.

The benefits of the proposed regulations, as outlined above, include improving oversight of the mortgage insurance industry, supporting the efficiency of the housing market and financial system stability, as well as improving transparency and accountability. The costs of the proposed regulations would be minor and would include general implementation costs as well as the PRMHIA-related expenses recovered by OSFI from the private insurers. Given the above, the benefits of the proposed regulations are expected to outweigh the costs.

Consultation

The private mortgage insurers, CMHC, and OSFI were consulted during the development of the Protection of Residential Mortgage or Hypothecary Insurance Regulations and the Housing Loan (Insurance, Guarantee and Protection) Regulations. OSFI was consulted during the development of the Regulations Amending the Assessment of Financial Institutions Regulations, 2001. Comments were received and have been taken into consideration.

Implementation, enforcement and service standards

The three sets of proposed regulations do not require any new mechanisms to ensure compliance and enforcement. As the prudential regulator of federally regulated financial institutions, OSFI would oversee private mortgage insurers’ compliance with the proposed Protection of Residential Mortgage or Hypothecary Insurance Regulations. OSFI would use its existing compliance tools that may include compliance agreements and administrative monetary penalties with regard to private mortgage insurers.

The proposed Regulations Amending the Assessment of Financial Institutions Regulations, 2001 would be overseen by OSFI, which already collects assessments from private mortgage insurers under the Assessment of Financial Institutions Regulations, 2001 to recover from the private insurers the costs associated with the Insurance Companies Act.

The proposed Housing Loan (Insurance, Guarantee and Protection) Regulations would be implemented by CMHC. CMHC reports to Parliament through the Minister of Human Resources and Skills Development and is subject to the accountability framework for Crown corporations.

As mentioned above, the regulations would increase the capital requirements for unregulated lenders from $1 million to $3 million. The regulations provide for a one-year transition period, during which time the capital requirement will continue to be $1 million.

Contact

Jane Pearse
Director
Financial Institutions Division
Department of Finance
L’Esplanade Laurier, East Tower, 15th Floor
140 O’Connor Street
Ottawa, Ontario
K1A 0G5
Telephone: 613-992-1631
Fax: 613-943-1334
Email: finlegis@fin.gc.ca

PROPOSED REGULATORY TEXT

Notice is given that the Governor in Council, pursuant to paragraphs 41(b) to (e) and (h) of the Protection of Residential Mortgage or Hypothecary Insurance Act (see footnote a), proposes to make the annexed Protection of Residential Mortgage or Hypothecary Insurance Regulations.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part Ⅰ, and the date of publication of this notice, and be addressed to Jane Pearse, Director, Financial Institutions Division, Department of Finance, L’Esplanade Laurier, East Tower, 15th Floor, 140 O’Connor Street, Ottawa, Ontario K1A 0G5 (tel.: 613-992-1631; fax: 613-943-1334; email: finlegis@fin.gc.ca).

Ottawa, June 19, 2012

JURICA ČAPKUN
Assistant Clerk of the Privy Council

PROTECTION OF RESIDENTIAL MORTGAGE OR
HYPOTHECARY INSURANCE REGULATIONS

INTERPRETATION

Definitions

1. The following definitions apply in these Regulations.

“Act”
« Loi »

“Act” means the Protection of Residential Mortgage or Hypothecary Insurance Act.

“beneficial ownership”
« propriété effective »

“beneficial ownership” includes ownership through one or more trustees, legal representatives, agents or other intermediaries.

“voting share”
« action avec droit de vote »

“voting share” means a share of any class of shares of a corporation carrying voting rights under all circumstances or because of an event that has occurred and is continuing or because of a condition that has been fulfilled.

DESIGNATION OF QUALIFIED MORTGAGE LENDERS

Designation

2. To be designated as a qualified mortgage lender, a mortgage or hypothecary lender must meet the criteria set out in subsection 3(1) and, as applicable, subsections (2) and (3).

General criteria

3. (1) The mortgage or hypothecary lender must be

  • (a) a corporation whose articles do not restrict its powers to lend in the jurisdictions in which it operates; and
  • (b) one of the following:

    • (i) a financially sound institution with at least $3,000,000 of unencumbered paid-up capital that is incorporated by or under an Act of Parliament or of the legislature of a province,

    • (ii) a bank or an authorized foreign bank within the meaning of section 2 of the Bank Act,

    • (iii) a corporation to which the Trust and Loan Companies Act applies,

    • (iv) an association to which the Cooperative Credit Associations Act applies or a central cooperative credit society for which an order has been made under subsection 473(1) of that Act,

    • (v) an insurance company or fraternal benefit society that is incorporated or formed under the Insurance Companies Act,

    • (vi) a trust, loan or insurance corporation that is incorporated and regulated by or under an Act of the legislature of a province, or

    • (vii) a cooperative credit society that is incorporated and regulated by or under an Act of the legislature of a province.

Criteria for underwriting

(2) To underwrite mortgage or hypothecary loans, the mortgage or hypothecary lender must, in addition to meeting the criteria set out in subsection (1),

  • (a) have at least three years’ experience underwriting residential mortgage or hypothecary loans in Canada and the capability and resources to underwrite such loans and make loan commitments;

  • (b) be a subsidiary of a parent corporation that is a qualified mortgage lender and that satisfies the criteria set out in paragraph (a), if the parent corporation undertakes to fulfil the task of underwriting residential mortgage and hypothecary loans in Canada for the subsidiary and to be accountable to the approved mortgage insurer for the subsidiary’s performance in relation to those loans; or

  • (c) have paid-up capital of at least $5,000,000 and employ at least two mortgage officers who each have a minimum of ten years’ residential mortgage or hypothecary underwriting experience and who are responsible for underwriting the lender’s residential mortgage and hypothecary loans in Canada.

Criteria for administering

(3) To administer mortgage or hypothecary loans, the mortgage or hypothecary lender must, in addition to meeting the criteria set out in subsection (1),

  • (a) have at least three years’ experience administering residential mortgage or hypothecary loans in Canada and the capability and resources to administer such loans and meet all insurance conditions;

  • (b) be a subsidiary of a parent corporation that is a qualified mortgage lender and that satisfies the criteria set out in paragraph (a), if the parent corporation undertakes to fulfil the task of administering residential mortgage and hypothecary loans in Canada for the subsidiary and to be accountable to the approved mortgage insurer for the subsidiary’s performance in relation to those loans; or

  • (c) have paid-up capital of at least $5,000,000 and employ at least two mortgage officers who each have a minimum of ten years’ residential mortgage or hypothecary administration experience and who are responsible for administering the lender’s residential mortgage and hypothecary loans in Canada.

REINSURANCE

Exceptions to reinsurance restrictions

4. For the purposes of subsection 11(2) of the Act, an approved mortgage insurer may

  • (a) cause itself to be reinsured against any risk that it has undertaken under its policies only if the reinsurer is also an approved mortgage insurer; and

  • (b) reinsure any risk that another insurer has undertaken under that insurer’s contracts of insurance only if those contracts of insurance are, or could be deemed under section 19 of the Act to be, policies.

PERSONS OR ENTITIES IN PRESCRIBED RELATIONSHIP

Nature of relationship

5. For the purposes of section 13(1)(c) of the Act, a person or entity is in a prescribed relationship with an approved mortgage insurer if that person or entity is a qualified mortgage lender and

  • (a) the mortgage insurer and any entities controlled by that mortgage insurer within the meaning of section 3 of the Insurance Companies Act beneficially own in total more than 20 per cent of the outstanding shares of any class of the qualified mortgage lender’s voting shares; or

  • (b) another person or entity and any entities controlled by that other person or entity within the meaning of section 3 of the Insurance Companies Act beneficially own in total

    • (i) more than 20 per cent of the outstanding shares of any class of the qualified mortgage lender’s voting shares, and
    • (ii) more than 20 per cent of the outstanding shares of any class of the approved mortgage insurer’s voting shares.

Acting in concert

6. (1) For the purposes of section 5, two or more persons or entities are deemed to be a single person or entity that beneficially owns the total number of shares or ownership interests that are beneficially owned by them if they have agreed, under any agreement, commitment or understanding, whether formal or informal, verbal or written, to act jointly or in concert in respect of any

  • (a) shares of a qualified mortgage lender or of an approved mortgage insurer that they beneficially own;

  • (b) shares or ownership interests that they beneficially own of any entity that beneficially owns shares of a qualified mortgage lender or approved mortgage insurer; or

  • (c) shares or ownership interests that they beneficially own of any entity that controls any entity that beneficially owns shares of a qualified mortgage lender or approved mortgage insurer.

Veto or consent

(2) Without limiting the generality of subsection (1), two or more persons or entities are deemed, for the purposes of section 5, to be a single person or entity that beneficially owns the total number of shares or ownership interests that are beneficially owned by them if they have entered into an agreement, commitment or understanding

  • (a) by which any of them or their nominees may veto any proposal put before the board of directors of the qualified mortgage lender or approved mortgage insurer, as the case may be; or

  • (b) under which no proposal put before the board of directors of the qualified mortgage lender or approved mortgage insurer, as the case may be, may be approved except with the consent of any of them or their nominees.

Exception

(3) Persons or entities are not presumed to have agreed to act jointly or in concert solely because

  • (a) one is the proxyholder of one or more of the others in respect of shares or ownership interests referred to in subsection (1); or

  • (b) they exercise the voting rights attached to shares or ownership interests referred to in subsection (1) in the same manner.

Prohibited policies — exception

7. For the purposes of section 14 of the Act, an approved mortgage insurer may be a party to a policy under which the beneficiary is a person or entity referred to in paragraph 13(1)(c) of the Act if, at least 60 days before that occurs, the Minister has been notified that the insurer is or expects to be in a prescribed relationship with that person or entity.

FEES FOR RISK EXPOSURE

Method of calculating

8. (1) The fees that an approved mortgage insurer must pay under section 9 of the Act with respect to a given calendar year are to be determined in accordance with the formula

A × 2.25%

where

A is the total amount of premiums due to the approved mortgage insurer in respect of policies that it entered into during that calendar year.

Fees due and recoverable

(2) The fees are due and payable on March 1 of the following year and may be recovered as a debt due to Her Majesty.

TRANSITIONAL PROVISION

Reduced capital requirement

9. For a period of one year beginning on the day on which these Regulations come into force, the amount of unencumbered paid-up capital required under subparagraph 3(1)(b)(i) is $1,000,000.

COMING INTO FORCE

S.C. 2011, c. 15

10.These Regulations come into force on the day on which section 20 of the Supporting Vulnerable Seniors and Strengthening Canada’s Economy Act comes into force, but if they are registered after that day, they come into force on the day on which they are registered.

[25-1-o]

Footnote 1
Underwriting a mortgage loan means evaluating the borrower for credit risk and deciding whether to make the loan or not. Administering the mortgage loan means providing the necessary services related to the loan once the loan is made, for example collecting the mortgage payments. The underwriting and administering functions may be performed by the same lender, or they may be performed by separate lenders who agree to split the functions.

Footnote a
S.C. 2011, c. 15, s. 20