Vol. 151, No. 26 — December 27, 2017

Registration

SOR/2017-270 December 7, 2017

PROTECTION OF RESIDENTIAL MORTGAGE OR HYPOTHECARY INSURANCE ACT

The Minister of Finance, having consulted with the Governor of the Bank of Canada and the Superintendent of Financial Institutions, pursuant to subsection 42(1) of the Protection of Residential Mortgage or Hypothecary Insurance Act (see footnote a), makes the annexed Regulations Amending the Eligible Mortgage Loan Regulations.

Ottawa, December 4, 2017

William Francis Morneau
Minister of Finance

Regulations Amending the Eligible Mortgage Loan Regulations

Amendments

1 (1) Paragraph 5(1)(e) of the French version of the Eligible Mortgage Loan Regulations (see footnote 1) is replaced by the following:

(2) The portion of subsection 5(2) of the Regulations before paragraph (a) is replaced by the following:

Credit score exception

(2) The criterion set out in paragraph (1)(g) does not apply if no more than 3% of the lender’s high ratio loans and low ratio loans that were approved for insurance and funded during one of the following periods were loans in respect of which no borrower or guarantor had a credit score of at least 600:

(3) The portion of subsection 5(3) of the Regulations before paragraph (a) is replaced by the following:

Debt service ratio calculations

(3) For the purposes of paragraph (1)(h), the gross debt service ratio and total debt service ratio are to be calculated using the annual payments, in respect of the loan and any other loan with an equal or prior claim against the eligible residential property, that would be required to conform to the amortization schedule agreed to by the borrower and the lender if the interest rate were the greater of

2 (1) Paragraph 6(b) of the Regulations is repealed.

(2) Paragraph 6(d) of the Regulations is amended by striking out “or” at the end of subparagraph (iii), by adding “or” at the end of subparagraph (iv) and by adding the following after subparagraph (iv):

(3) Section 6 of the Regulations is amended by striking out “and” at the end of paragraph (c) and by adding the following after paragraph (d):

(4) Section 6 of the Regulations is renumbered as subsection 6(1) and is amended by adding the following:

Credit score exception

(2) The criterion specified in paragraph (1)(j) does not apply if no more than 3% of the lender’s high ratio loans and low ratio loans that were approved for insurance and funded during one of the following periods were loans in respect of which no borrower or guarantor had a credit score of at least 600:

Debt service ratio calculations

(3) For the purpose of paragraph (1)(k), the gross debt service ratio and total debt service ratio must be calculated using the annual payments, in respect of the loan and any other loan with an equal or prior claim against the eligible residential property, that would be required to conform to the amortization schedule agreed to by the borrower and the lender if the interest rate were the greater of

Reasonable likelihood of repayment

(4) A low ratio loan does not meet the criterion set out in paragraph (1)(m) unless the mortgage or hypothecary lender or mortgage insurer has made reasonable efforts to verify the borrower’s income and employment status or, if the borrower is self-employed, to assess the plausibility of the income reported by the borrower.

3 Section 9 of the Regulations and the heading before it are replaced by the following:

Transitional Provisions

High ratio loans

9 (1) A high ratio loan is to be governed by these Regulations as they read on October 16, 2016 if, on any day before October 17, 2016,

Low ratio loans

(2) A low ratio loan is to be governed by these Regulations as they read on October 16, 2016

Coming into Force

4 These Regulations are deemed to have come into force on October 17, 2016.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the regulations.)

Issues

These regulatory amendments (1) adjust the eligibility criteria for high ratio mortgage insurance to require that all high ratio mortgages qualify for mortgage insurance using debt service ratios calculated at the greater of the contract interest rate set out in the loan agreement and the five-year conventional mortgage interest rate as determined by the Bank of Canada; (see footnote 2) and (2) apply the eligibility criteria for high ratio mortgage insurance to low ratio mortgage insurance.

These changes relate to the Eligible Mortgage Loan Regulations, made pursuant to the Protection of Residential Mortgage or Hypothecary Insurance Act, which apply to private mortgage insurers, and the Insurable Housing Loan Regulations, made pursuant to the National Housing Act, which apply to Canada Mortgage and Housing Corporation (CMHC).

Mortgage insurance covers two main categories of loans:

Federally regulated lenders are required by legislation to insure high ratio loans at the time the loan is granted; low ratio mortgage insurance is optional and can be purchased at any time throughout the life of the loan.

Portfolio or “bulk” insurance is the most common form of low ratio mortgage insurance. Lenders pool together mortgages that are uninsured at origination and purchase default insurance on all the loans in the pool. The pools are then converted into tradeable financial assets through CMHC securitization programs and purchased by investors. Insuring and selling off pools of mortgages provides lenders a stable source of funding through which they can continue lending, thereby increasing the available amount of mortgage funding in the market.

If an insurer is unable to make insurance payouts to lenders (for insured mortgages in default), the Government backs 100% of CMHC’s mortgage insurance obligations. In order for private mortgage insurers to compete with CMHC, the Government also backs private mortgage insurers’ obligations to lenders (in the event that a private insurer is unable to make insurance payouts to lenders), subject to a deductible charged to the lender equal to 10% of the original principal loan amount.

The Government’s guarantee of mortgage insurance is intended to promote stability in the housing market, financial system and economy; support access to homeownership for creditworthy buyers; and foster lender competition. As part of its role to promote stability, and to protect the interests of taxpayers, the Government sets the eligibility rules for government-backed insured mortgages. These regulatory amendments introduce changes to the mortgage insurance eligibility rules.

These changes will help support a stable housing market over the long term and protect the interests of taxpayers. Requiring new high ratio homebuyers to qualify for mortgage insurance by applying the typically higher five-year conventional mortgage interest rate as determined by the Bank of Canada serves as a “stress test” for these homebuyers, helping to ensure that they have buffers to continue servicing their debts if economic circumstances change (for example if interest rates rise or the household’s income declines). Tighter eligibility requirements for low ratio insured loans will help bring consistency to the mortgage insurance eligibility rules and ensure that the funding support provided by low ratio mortgage insurance is directed toward low-risk lending.

Objectives

Description

“One-for-One” Rule

The “One-for-One” Rule does not apply to this proposal, as there is no change in administrative costs to business.

Small business lens

The small business lens does not apply to this proposal, as there are no costs on small business.

Consultation

The changes to eligibility criteria for high ratio and low ratio mortgage insurance were exempted from pre- publication due to their highly sensitive nature, and their potential to distort lending activity in advance of their implementation. The Minister of Finance consulted with the Governor of the Bank of Canada and the Superintendent of Financial Institutions on these changes, as required by subsection 42(1) of the Protection of Residential Mortgage or Hypothecary Insurance Act, and subsection 8.1(1) of the National Housing Act.

Following the announcement, the Department of Finance held discussions with CMHC and with private mortgage insurers for advice on drafting the regulatory amendments to implement the new policies.

Rationale

The Canadian economy faces ongoing vulnerabilities associated with elevated house prices and high household debt levels. The announced changes will improve the resiliency of the Canadian housing market, financial system and economy over the long term, while reducing taxpayers’ exposure to losses associated with potential mortgage defaults.

Requiring new high ratio homebuyers to qualify for their mortgage at the five-year conventional mortgage interest rate as determined by the Bank of Canada serves as a stress test for them and helps ensure that they have buffers so their mortgage payments remain manageable in the face of changing economic circumstances, such as a rise in interest rates or a loss of income. Tighter eligibility requirements for low ratio mortgage insurance will also help promote stability by ensuring that the funding advantages provided through this program are directed toward safe forms of lending.

Implementation, enforcement and service standards

The proposed regulations would not require any new mechanisms to ensure compliance and enforcement.

As the prudential regulator of federally regulated financial institutions, the Office of the Superintendent of Financial Institutions (OSFI) oversees private mortgage insurers’ compliance with the Eligible Mortgage Loan Regulations (made pursuant to the Protection of Residential Mortgage or Hypothecary Insurance Act). OSFI would use its existing compliance tools that may include compliance agreements and administrative monetary penalties with regard to private mortgage insurers.

CMHC reports to Parliament through the Minister of Families, Children and Social Development and is subject to the accountability framework for Crown corporations. Under the National Housing Act, the Superintendent of Financial Institutions is required to undertake examinations or inquiries to determine whether CMHC’s commercial activities are being conducted in a safe and sound manner, with due regard to its exposure to loss. The Superintendent must also report the results of any examinations or inquiries to the Government.

Contact

Elisha Ram
Director General
Capital Markets Division
Department of Finance
90 Elgin Street, 13th Floor
Ottawa, Ontario
K1P 5E9
Telephone: 613-369-3968
Fax: 613-369-3894
Email: Elisha.Ram@canada.ca