Vol. 144, No. 8 — April 14, 2010

Registration

SOR/2010-68 March 25, 2010

BANK ACT
COOPERATIVE CREDIT ASSOCIATIONS ACT
INSURANCE COMPANIES ACT
TRUST AND LOAN COMPANIES ACT

Mortgage Insurance Business (Banks, Authorized Foreign Banks, Trust and Loan Companies, Retail Associations, Canadian Insurance Companies and Canadian Societies) Regulations

P.C. 2010-388 March 25, 2010

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, hereby makes the annexed Mortgage Insurance Business (Banks, Authorized Foreign Banks, Trust and Loan Companies, Retail Associations, Canadian Insurance Companies and Canadian Societies) Regulations pursuant to

(a) subsections 418.1(2) (see footnote a) and 552(2) (see footnote b) of the Bank Act (see footnote c);

(b) subsection 382.2(2) (see footnote d) of the Cooperative Credit Associations Act (see footnote e);

(c) subsections 469.1(2) (see footnote f) and 542.061(2) (see footnote g) of the Insurance Companies Act (see footnote h); and

(d) subsection 418.1(2) (see footnote i) of the Trust and Loan Companies Act (see footnote j).

MORTGAGE INSURANCE BUSINESS (BANKS, AUTHORIZED FOREIGN BANKS, TRUST AND LOAN COMPANIES, RETAIL ASSOCIATIONS, CANADIAN INSURANCE COMPANIES AND CANADIAN SOCIETIES) REGULATIONS

INTERPRETATION

1. The following definitions apply in these Regulations.

“institution” means any of the following:

(a) a bank, as defined in section 2 of the Bank Act;

(b) an authorized foreign bank, as defined in section 2 of the Bank Act;

(c) a retail association, as defined in section 2 of the Cooperative Credit Associations Act;

(d) a company, as defined in subsection 2(1) of the Insurance Companies Act;

(e) a society, as defined in subsection 2(1) of the Insurance Companies Act;

(f) a company, as defined in section 2 of the Trust and Loan Companies Act. (institution)

“insurer” includes a government agency that provides mortgage insurance to an institution. (assureur)

“mortgage insurance” means an insurance policy or a guarantee against default on a residential mortgage. (assurance hypothécaire)

“residential mortgage” means a loan made in Canada on the security of residential property that has four or less residential units. (hypothèque résidentielle)

APPLICATION

2. These Regulations do not apply in respect of an institution that has obtained mortgage insurance from an insurer if neither the institution nor any of its affiliates charges borrowers an amount for that insurance.

DETERMINATION OF ACTUAL COST

3. (1) For the purposes of sections 418.1 and 552 of the Bank Act, section 382.2 of the Cooperative Credit Associations Act, sections 469.1 and 542.061 of the Insurance Companies Act and section 418.1 of the Trust and Loan Companies Act, the actual cost to an institution shall be determined by deducting from the cost incurred by the institution for mortgage insurance provided to the institution by an insurer all payments or benefits, including rebates or discounts, that are received directly or indirectly by the institution from the insurer, whether in the form of a fee or commission or in any other form.

(2) For the purpose of the determination referred to in subsection (1), the following payments or benefits are not to be considered part of the actual cost:

(a) any payment or benefit that is not related to the provision of mortgage insurance to the institution by the insurer;

(b) any payment or benefit received by the institution for an activity permitted by section 4; and

(c) any payment received by the institution from the insurer in respect of a claim made by the institution under the mortgage insurance as a result of a default on the residential mortgage that is the subject of the insurance.

PERMITTED ACTIVITIES

4. (1) An institution may enter into an arrangement with an insurer that provides the institution with mortgage insurance to receive payments or benefits from the insurer for the products and services that are offered by the institution to its customers and to the public in the normal course of business, if the institution undertakes that arrangement on market terms and conditions.

(2) An institution may enter into an arrangement with an insurer that provides the institution with mortgage insurance to receive payments or benefits from the insurer for anything other than a product or service referred to in subsection (1), if the institution undertakes that arrangement on terms and conditions that might reasonably be expected to apply in a similar transaction in an open market under conditions requisite to a fair transaction between parties who are at arm’s length and who are acting prudently, knowledgeably and willingly, and the arrangement

(a) is necessary for the provision of that insurance; and

(b) does not involve a payment or benefit in respect of any of the activities referred to in paragraph 5(a).

PROHIBITED ACTIVITIES

5. An institution may not

(a) enter into an arrangement to accept directly or indirectly from an insurer that provides mortgage insurance to the institution, or from any of the insurer’s affiliates, any payment or benefit in respect of marketing or advertising or any promotional activities carried out by the institution, the insurer or any other person;

(b) permit any of its employees or representatives to accept directly or indirectly from an insurer referred to in paragraph (a), or from any of the insurer’s affiliates, a payment or benefit referred to in that paragraph; or

(c) permit any affiliate that it controls, or any employees or representatives of that affiliate, to enter into an arrangement to accept a payment or benefit referred to in paragraph (a) directly or indirectly from an insurer or from any of the insurer’s affiliates that provides mortgage insurance to the institution.

COMING INTO FORCE

6. These Regulations come into force on July 1, 2010.

REGULATORY IMPACT
ANALYSIS STATEMENT

(This statement is not part of the regulations.)

Issue and objectives

As part of the measures to address the economic crisis, the Government noted that it would bring forward measures related to mortgage insurance, credit cards and financial literacy to assist consumers. A strong and stable financial system depends on the ability of its users to make informed decisions in respect of financial products and services.

On March 12, 2009, An Act to implement certain provisions of the budget tabled in Parliament on January 27, 2009 and related fiscal measures (Bill C-10) received Royal Ascent. The implementation of the consumer protection measures in Bill C-10 requires regulations to become effective.

Description and rationale

In Canada, federally regulated lenders are required to obtain insurance against default where a residential mortgage is provided for more than 80% of the value of the property. While the requirement is on the lender to obtain the insurance policy, lenders generally require that borrowers pay for the coverage as a condition of obtaining a mortgage.

While the Cost of Borrowing Regulations require federally regulated lenders to itemize the cost of mortgage insurance in the disclosure provided to borrowers, many consumers do not fully understand the role of this type of insurance or how it functions.

Existing practices in other jurisdictions, such as the United States, have led to allegations that consumers are being charged a price for insurance that exceeds the true cost to the lender, as lenders were receiving volume discounts or rebates from insurers in exchange for business.

In order to guard against undesirable practices emerging in Canada that could artificially inflate the cost to consumers for mortgage insurance, the Government is moving forward with two sets of regulations. The Mortgage Insurance Business Regulations sets out how institutions calculate the true cost of mortgage insurance, as well as establishing permitted and prohibited activities. In addition, the Mortgage Insurance Disclosure Regulations enhances transparency and aids consumers in better understanding the mortgage insurance transaction.

Mortgage Insurance Business Regulations

Bill C-10, An Act to implement certain provisions of the budget, tabled in Parliament on January 27, 2009 and related fiscal measures, establishes that lenders cannot charge borrowers more for a mortgage insurance policy than the actual cost to the lender. The Mortgage Insurance Business Regulations (the Business Regulations) define what is included in the determination of actual cost to the lender.

Under the Business Regulations, federally regulated lenders must tabulate the actual cost as the price paid by the lender for the mortgage insurance premium, minus any funds received by the institution from the insurer. The Business Regulations exclude payment of claims and some business arrangements from the determination of actual cost. They also exclude payment in respect of arrangements that are not related to the provision of mortgage insurance such as payment for products and services provided by the lender that are also provided to the general public (e.g. banking accounts), as long as the products and services are undertaken on market terms and conditions. Other business arrangements may also be excluded if they are necessary for the provision of mortgage insurance and are undertaken on market terms and conditions (e.g. underwriting analysis or data storage).

Payment for arrangements that are not directly related to the provision of mortgage insurance, like market research or social housing, are also excluded from the determination of the actual cost of mortgage insurance.

Finally, the Business Regulations prohibit lenders from receiving payments or benefits from insurers for marketing, advertising, or promotional activities.

Mortgage Insurance Disclosure Regulations

Federally regulated lenders are currently required to itemize the cost of mortgage insurance in their disclosure to borrowers. To provide greater transparency and aid consumers’ understanding of the mortgage insurance transaction, the Mortgage Insurance Disclosure Regulations (the Disclosure Regulations) set out some additional disclosure.

Primarily, lenders are required to disclose the beneficiary under the insurance policy and the amount the lender is being charged for the policy.

In addition, the Disclosure Regulations require that lenders disclose any business arrangements between the lender and the insurer that are related to mortgage insurance, except for claims and for the provision of products and services that the lender also provides to the general public (e.g. banking accounts). The Disclosure Regulations do not require the lender to disclose any arrangements prior to the coming in force of the Mortgage Insurance Business Regulations.

Both the Mortgage Insurance Business Regulations and the Mortgage Insurance Disclosure Regulations only apply where an institution charges borrowers an amount for acquiring mortgage insurance.

Consultation

After pre-publication of the regulations, on August 8, 2009, in the Canada Gazette, Part I, comments related to about 20 different issues were received from various stakeholders, including industry associations, mortgage insurers and financial institutions.

Overall, the comments demonstrated an understanding for the government’s objective to avoid practices that are detrimental to consumers in the mortgage insurance market and to make mortgage insurance more transparent, understandable and affordable. The majority of comments received did not request changes to the regulations; rather, they sought clarification and have been addressed through revisions to the wording of the regulations.

The Mortgage Insurance Business Regulations have been adjusted as follows:

• Section 2 clarifies that the Business Regulations do not apply where institutions do not charge borrowers an amount for mortgage insurance;
• Section 3 clarifies that the Business Regulations apply only to mortgage insurance activities and not to other business activities undertaken by a mortgage insurer, such as securitization or market analysis;
• Section 4 has been modified to clarify the parameters against which arrangements can be assessed (e.g. undertaken on terms and conditions that might reasonably be expected to apply in a similar transaction in an open market); and
• Section 5 clarifies that the prohibition on receiving payments or benefits for marketing, advertising or any promotional activities applies regardless of who carries out the activity.

The Mortgage Insurance Disclosure Regulations have been adjusted as follows:

• Section 4 clarifies what information is to be made available to the general public (e.g. a description of the arrangements the lender has with each mortgage insurer) and what information has to be provided to the particular borrower (e.g. the amount of payments or benefits received by the institution from the insurer as a percentage of the amount the particular borrower pays for mortgage insurance). Consequential changes resulting from this clarification have been incorporated in sections 7 to 10; and
• Section 10 is a transitional provision to clarify that disclosure of arrangements and activities that were in place before the introduction Mortgage Insurance Business Regulations are not required, and that disclosure is made on a forward-looking basis when the Mortgage Insurance Disclosure Regulations first come into force.

Some comments have not been reflected as some stakeholders requested changes that were inconsistent with the policy intent of the regulations. For example, a recommendation advising an expansion of the prohibited activities would have the effect of reducing competition in the market, which is contrary to the Government’s policy to promote competition in the financial services sector. Other comments requesting a relaxation of the prohibition for advertizing, marketing and other promotional activities could be used by institutions and insurers to circumvent the policy intent of ensuring that consumers are charged no more than the true cost of mortgage insurance.

Implementation, enforcement and service standards

Industry representatives asked that the regulations come into force in accordance with a tiered implementation timetable ranging from 15 to 18 months. The industry highlighted technical challenges, e.g. an impact on systems and procedures, related to the implementation of the measures.

Given the importance of consumer protection for the Government, the Mortgage Insurance Business Regulations will come into force on July 1, 2010. The Mortgage Insurance Disclosure Regulations will come into force on January 1, 2011.

This approach balances the needs of consumers and the industry by bringing forward protections to restrict lenders from charging consumers more than the true cost of mortgage insurance, while providing institutions sufficient time — taking into account other changes required pursuant to other new regulations — to make the appropriate amendments to their systems and processes to disclose the required information.

The regulations do not require any new mechanisms to ensure compliance and enforcement. The Mortgage Insurance Business Regulations will be overseen by the Office of the Superintendant of Financial Institutions, which already administers regulations related to business arrangements of federally regulated financial institutions. The Mortgage Insurance Disclosure Regulations will be administered by the Financial Consumer Agency of Canada.

The two regulators oversee federally regulated financial institutions’ compliance with existing business practices and consumer provisions in the federal financial statutes. As such, they will ensure compliance with the new requirements, using its existing compliance tools that may include compliance agreements and administrative monetary penalties.

Contact

Jane Pearse
Director
Financial Institutions Division
Department of Finance
L’Esplanade Laurier, 15th Floor, East Tower
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. 2009, c. 2, s. 270

Footnote b
S.C. 2009, c. 2, s. 273

Footnote c
S.C. 1991, c. 46

Footnote d
S.C. 2009, c. 2, s. 277

Footnote e
S.C. 1991, c. 48

Footnote f
S.C. 2009, c. 2, s. 283

Footnote g
S.C. 2009, c. 2, s. 285

Footnote h
S.C. 1991, c. 47

Footnote i
S.C. 2009, c. 2, s. 290

Footnote j
S.C. 1991, c. 45

NOTICE:
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