ARCHIVED — Vol. 146, No. 24 — November 21, 2012

Registration

SOR/2012-231 November 1, 2012

PROTECTION OF RESIDENTIAL MORTGAGE OR HYPOTHECARY INSURANCE ACT

Protection of Residential Mortgage or Hypothecary Insurance Regulations

P.C. 2012-1450 November 1, 2012

His Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to paragraphs 41(b) to (e) and (h) of the Protection of Residential Mortgage or Hypothecary Insurance Act (see footnote a), makes the annexed Protection of Residential Mortgage or Hypothecary Insurance Regulations.

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 3(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 federal financial institution or an authorized foreign bank within the meaning of section 2 of the Bank Act,

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

    • (iv) 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 meets 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 meets 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.

Exception — designated cooperative credit societies

(4) A cooperative credit society referred to in subparagraph (1)(b)(iv) need not meet the criteria set out in subsection (2) to underwrite mortgage or hypothecary loans or in subsection (3) to administer them if, before the coming into force of these Regulations, it was designated as a qualified mortgage lender under an agreement as defined in section 43 of the Act.

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 paragraph 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 direct premiums written by 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 PROVISIONS

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 at least $1,000,000.

Reinsurance by company

10. An approved mortgage insurer that caused itself, before the day on which these Regulations come into force, to be reinsured by a company within the meaning of section 2 of the Act against a risk that it had undertaken under its contracts of insurance may, despite paragraph 4(a), continue to be reinsured against that risk by that company for a period of no more than three years beginning on the day on which these Regulations come into force.

COMING INTO FORCE

S.C. 2011, c. 15

11. 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.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the regulations.)

Issues 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 the Canada Mortgage and Housing Corporation (CMHC) and from private mortgage insurers. Because 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 that formalizes 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 with 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), the Office of the Superintendent of Financial Institutions Act (OSFI Act) and the Budget Implementation Act, 2006. The regulations are required in order to fully implement this legislative framework.

Description

There are three 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 Protection of Residential Mortgage or Hypothecary Insurance Regulations outline the criteria that a lender must meet before it can be designated as a qualified mortgage lender by an approved mortgage insurer under the PRMHIA, including minimum capital requirements, and experience requirements related to underwriting and administering mortgage loans. (see footnote 1) Specifically, the Regulations require that a lender must be a corporation that is authorized to lend in the jurisdiction in which it operates, as well as meet one of a number of other criteria (e.g. be a bank). The criteria are the same as 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 Regulations 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 13(1)(c) of the PRMHIA, the Regulations 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’s 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 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 prescribe the formula for the fee (2.25% of premiums) and establish the due date for the fees (March 1 of the following year).

Housing Loan (Insurance, Guarantee and Protection) Regulations

The Housing Loan (Insurance, Guarantee and Protection) Regulations are made pursuant to the consequential amendments to the NHA mentioned above and apply to CMHC. The Regulations 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 for the most part mirror those outlined in the Protection of Residential Mortgage or Hypothecary Insurance Regulations, and are equivalent to those that exist under the current informal arrangements with CMHC (except for the increase in minimum capital requirements for unregulated lenders, as discussed above).

Regulations Amending the Assessment of Financial Institutions Regulations, 2001

The Regulations Amending the Assessment of Financial Institutions Regulations, 2001 are 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. The Assessment of Financial Institutions Regulations, 2001 has been amended to add PRMHIA-related expenses to the existing base assessments. The methodology for allocating OSFI’s PRMHIA-related expenses to each institution is based on each institution’s share of the aggregate minimum required capital of all institutions subject to the PRMHIA.

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 taken into consideration during that stage.

The three regulations were published in the Canada Gazette, Part Ⅰ, on June 23, 2012. Submissions related to nine separate comments were received from CMHC and the private mortgage insurers.

In general, mortgage insurers are supportive of the Government’s objective to formalize and strengthen the existing mortgage insurance regime, and the comments focused on seeking clarification rather than any change of the stated policy goals.

Following the consultation process, the Protection of Residential Mortgage or Hypothecary Insurance Regulations have been adjusted as follows:

  • Section 3 has been modified by
  • ensuring consistency with the Bank Act by referring directly to the definition of a federal financial institution pursuant to section 2 of the Bank Act rather than outlining those specific entities under the list of entities eligible to be a qualified mortgage lender; and
  • grandfathering credit unions that have been designated as qualified mortgage lenders before the Regulations come into force, to ensure that obligations entered into prior to the coming into force of the Regulations are respected;
  • Section 8 has been clarified by replacing the term “premiums due” with “direct premiums written” in order to clarify the calculation formula for the fee; and
  • Section 10 has been added to provide an exception to section 4. It grandfathers reinsurance arrangements between two private mortgage insurers entered into before the Regulations come into force.

Section 3 of the Housing Loan (Insurance, Guarantee and Protection) Regulations has been adjusted as follows:

  • Ensuring consistency with the Bank Act by referring directly to the definition of a federal financial institution pursuant to section 2 of the Bank Act rather than outlining those specific entities under the list of entities eligible to be an approved lender;
  • Adding two types of entities to the list of eligible entities for the approved lender designation to ensure that such entities can continue to carry out business with CMHC for various social housing programs: a federal or provincial government, agency or Crown corporation, and any other entity as long as the housing loans that it insures with the Corporation are guaranteed by Her Majesty in right of Canada or a province; and
  • Ensuring certain current obligations are respected by grandfathering credit unions, and federally or provincially regulated pension funds or the subsidiary of the pension fund, that have been designated as approved lenders before the Regulations come into force.

The Regulations Amending the Assessment of Financial Institutions Regulations, 2001 prompted a comment from one stakeholder seeking clarification on the proposed prudential assessment methodology for assessing OSFI’s PRMHIA-related expenses. After consultation with OSFI, no changes were made in relation to that comment because the provision fully reflects the Government’s policy intent.

Some comments from stakeholders have not been reflected in the Regulations because the additional clarification sought was deemed unnecessary. In addition, a comment on expanding the reinsurance arrangement for mortgage insurers was also not reflected, given that the current restriction fully reflects the Government’s policy intent.

“One-for-One” Rule

The “One-for-One” Rule does not apply to these regulations because there is no change in administrative costs to business.

Small business lens

The small business lens does not apply to these regulations because there are no costs on small business.

Rationale

The criteria and requirements contained in the three regulations represent key elements of the overall guarantee framework for the government’s backing of mortgage insurance through the private insurers and CMHC.

The benefits of the 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 regulations are minor and include general implementation costs as well as PRMHIA-related expenses recovered by OSFI from the private insurers. Given the above, the benefits of the regulations are expected to outweigh the costs.

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

Implementation, enforcement and service standards

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

The Regulations Amending the Assessment of Financial Institutions Regulations, 2001 will 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 Housing Loan (Insurance, Guarantee and Protection) Regulations will be implemented by CMHC. CMHC reports to Parliament through the Minister of Human Resources and Skills Development Canada and is subject to the accountability framework for Crown corporations.

As mentioned above, the Regulations 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

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

Footnote 1
Underwriting a mortgage loan means evaluating the borrower for credit risk and deciding whether to make the loan. 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.