Canadian banks are regulated by bodies like the Office of the Superintendent of Financial Institutions (OSFI) and the Financial Consumer Agency of Canada (FCAC), and the Bank of Canada also plays a role.
The regulations they adopt for mortgage brokers also apply to private mortgage lenders. Homebuyers and other borrowers should understand this information to make a good choice.
Key Regulator of Canadian Banks – OSFI
The Office of the Superintendent of Financial Institutions (OSFI) oversees federally regulated financial institutions, including pension plans, insurance companies, and banks. The OSFI has a series of guidelines and regulations that affect borrowers when they are looking for one of these products.
- Guideline B-20 is one of the big ones if you’re looking for a mortgage. It enforces the stress test, so borrowers must qualify for a higher interest rate than the first one offered.
- The OSFI has several underwriting standards that help curb risky loans, such as debt-to-income ratio limits and income verifications.
These rules apply to lenders that are federally regulated. These include major banks, federal credit unions, life insurance companies that offer mortgage products, and trust and loan companies.
Private lenders are omitted because they are regulated provincially.
How Banking Regulations Impact Mortgage Borrowers
These regulations are implemented to look after borrowers’ interests and rights in several ways.
The Underwriting Process is Fair and Standardized
The underwriting process takes a long look at a borrower’s financial profile. It also makes sure that things like a credit score, income and the value of the property line up with regulatory guidelines before there’s an approval.
Verifying Income
One of the standards for a traditional loan involves T4 slips, pay stubs, notices of assessment, and tax returns. This ensures that people who are looking to borrow money are assessed based on real income and not estimates or projections.
Disclosure Requirements Are Clear
Another federal government agency is the Financial Consumer Agency of Canada (FCAC). This agency protects and informs consumers and ensures that financial institutions comply with regulations.
The FCAC ensures that financial institutions, such as banks and credit unions, comply with codes of conduct, regulations, and laws protecting consumers. Here’s how this agency ensures that disclosure requirements are clear.
- It ensures that federally regulated banks and other institutions disclose information like fees, terms, and penalties. They accomplish that goal by monitoring compliance with the regulations under the Financial Consumer Protection Framework, The Cost of Borrowing Regulations and The Bank Act.
- The FCAC also ensures that standardized formats are used for documents like mortgage pre-approval letters. These documents need to be written in plain, easy-to-understand language, and that relevant conditions, fees, and terms must be included.
- This agency also offers resources for managing debt, mortgages, budgeting, and looking at credit scores.
Protecting consumers’ rights when it comes to financing also means providing a complaint resolution framework. While they don’t intervene in disputes and offer any compensation, they do monitor to insure procedures are in place.
Risky Mortgage Products Are Regulated
The Bank of Canada (BoC) plays a big part in insuring that Canada’s financial system is regulated and stabilized. It doesn’t regularly work with banks and other financial institutions directly, like the FCAC and the OSFI, but it contributes to monetary policy.
- The BoC influences the prime lending rate offered by banks. It does its part to control economic growth and inflation by adjusting these interest rates to address high consumer debt and housing bubbles that can lead to risky mortgage products.
- The BoC works with the FCAC and the OSFI. These three agencies share information about housing markets, household debt, and mortgage lending trends to head off trouble and risks. All three agencies work together to contribute to important reports like the Financial System Review.
Who Regulates Mortgage Brokers in Canada?
A mortgage broker is regulated provincially. The Financial Services Regulatory Authority of Ontario (FSRA) regulates mortgage brokers in that province. All mortgage brokers need to be licensed through the province where they work.
Here’s what the FSRA does.
- First, this regulatory agency requires all mortgage brokers and their agents to be licensed. They also need to complete a series of background checks and the required education. The FSRA approves and sets the standards for the courses.
- This body also audits and reviews brokerages to ensure they comply with the Mortgage Brokerages, Lenders, and Administrators Act, 2006 (MBLAA).
This regulatory body also does several other things, including investigating public complaints, publishing guidance, and providing regulatory updates. The FSRA also enforces a code of conduct. Part of that is making sure there are transparent disclosures about penalties and interest rates.
Private Mortgage Lending
People looking for a private loan should understand that many of the same requirements are at play for these lenders.
A private lender can work with a mortgage broker or be one themselves, but the FSRA must license them. Either way, they are subject to the MBLAA. Although their application process is streamlined, they still need to assess an applicant’s creditworthiness.
A private second mortgage through one of these lenders has a more streamlined application process, and the income requirements are different. A traditional bank usually requires several years of verifiable, steady income, T4 slips, and maybe even a letter of employment.
A private mortgage lender will accept contract work and income that fluctuates, such as the kind that comes from seasonal ventures like landscaping.
Looking for Private Lenders That Are Properly Regulated?
You can get in touch with Jonathan Alphonso at 416-499-2122 or by email at ron@powerofsalesontario.ca. Learn more at one of his two websites, mortgagebrokerstore.com and powerofsalesontario.ca
