ARCHIVED — Vol. 146, No. 26 — December 19, 2012

Registration

SOR/2012-281 December 10, 2012

PROTECTION OF RESIDENTIAL MORTGAGE OR HYPOTHECARY INSURANCE ACT

Eligible Mortgage Loan Regulations

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 Eligible Mortgage Loan Regulations.

Ottawa, December 7, 2012

JAMES MICHAEL FLAHERTY
Minister of Finance

ELIGIBLE MORTGAGE LOAN REGULATIONS

INTERPRETATION

Definitions

1. (1) The following definitions apply in these Regulations.

  • “credit score”
    « pointage de crédit »
  • “credit score” means a score that is
    • (a) issued by a credit reporting agency that is incorporated by or under an Act of Parliament or of the legislature of a province; and

    • (b) based on a scale that is substantially equivalent to a scale used on June 26, 2011 by a credit reporting agency that was at that time incorporated by or under an Act of Parliament or of the legislature of a province.
  • “eligible residential property”
    « immeuble résidentiel admissible »
  • “eligible residential property” means a property consisting of one to four housing units, together with any associated property interests or real rights, structures and facilities.
  • “funded”
    « financé »
  • “funded” means, in respect of a mortgage or hypothecary loan, that money under the loan has been advanced to the borrower.
  • “gross debt service ratio”
    « coefficient d’amortissement brut de la dette »
  • “gross debt service ratio” means the percentage of a borrower’s gross annual income that is required to cover the annual payments associated with the eligible residential property against which a mortgage or hypothecary loan is secured.
  • “high ratio loan”
    « prêt à ratio élevé »
  • “high ratio loan” means a mortgage or hypothecary loan that is secured by an eligible residential property and whose principal amount, together with the outstanding balance of any loan having an equal or prior claim against the eligible residential property, is greater than 80% of the value of the eligible residential property at the time the loan is approved.
  • “housing unit”
    « unité de logement »
  • “housing unit” means a unit that provides living, sleeping, eating, food preparation and sanitary facilities for one household, with or without other essential facilities shared with other housing units.
  • “low ratio loan”
    « prêt à faible ratio »
  • “low ratio loan” means a mortgage or hypothecary loan that is secured by an eligible residential property and whose principal amount, together with the outstanding balance of any loan having an equal or prior claim against the eligible residential property, is less than or equal to 80% of the value of the eligible residential property at the time the loan is approved.
  • “quarter”
    « trimestre »
  • “quarter” means any period of three consecutive months beginning on January 1, April 1, July 1 or October 1.
  • “total debt service ratio”
    « coefficient d’amortissement total de la dette »
  • “total debt service ratio” means the percentage of a borrower’s gross annual income that is required to cover their annual payments associated with housing and all other debts.
  • “value of the eligible residential property”
    « valeur de l’immeuble résidentiel admissible »
  • “value of the eligible residential property” means the value that is ascribed to an eligible residential property by a mortgage or hypothecary lender or a mortgage insurer for the purpose of granting or insuring a mortgage or hypothecary loan and that is verified using a method that is generally accepted by prudent lenders, insurers or professional residential property appraisers. If the purpose of the loan includes the purchase of the property, the value must not exceed
    • (a) the purchase price of the property; or

    • (b) the purchase price of the property plus the estimated cost to the borrower of planned improvements to the property, if the purpose of the loan also includes those improvements.

Verification of value

(2) For the purposes of the definition “value of the eligible residential property” in subsection (1), generally accepted methods of verifying value include

  • (a) the use of a statistically reliable and up-to-date valuation model that assesses the value’s reasonableness;

  • (b) a fair-market-value appraisal by a professional residential property appraiser who is independent of the borrower;

  • (c) a drive-by appraisal; or

  • (d) a review of the value of comparable properties.

Principal amount

(3) For the purposes of these Regulations, the principal amount of a loan does not include any mortgage or hypothecary insurance premiums.

APPLICATION

No pre-existing contract

2. These Regulations apply to every mortgage or hypothecary loan that is not insured under a contract of insurance that could be deemed to be a policy under section 19 of the Protection of Residential Mortgage or Hypothecary Insurance Act.

CRITERIA

Eligibility

3. (1) Subject to subsections (4) and (5), to be an eligible mortgage loan, a mortgage or hypothecary loan must meet the criteria set out in section 4 and, as applicable, section 5 or 6.

Replacement of security and increased balance

(2) For greater certainty, if an insured mortgage or hypothecary loan is modified to both replace its security with a new eligible residential property and increase its outstanding balance, the increased portion is to be considered, for the purposes of these Regulations, as a new loan approved on the day on which the increase is approved, which must meet the criteria that apply on that day to be an eligible mortgage loan.

Other modifications

(3) If any other modification is made to an insured mortgage or hypothecary loan that requires the payment of an additional mortgage or hypothecary insurance premium, the loan is to be considered, for the purposes of these Regulations, as a new loan approved on the day on which the modification is approved, which must meet the criteria that apply on that day to be an eligible mortgage loan. Any modification that does not require the payment of an additional mortgage or hypothecary insurance premium does not affect the eligibility of the loan.

Loan workout

(4) A mortgage or hypothecary loan that is made or modified in relation to a loan workout whose purpose is to reduce or avoid losses on a real or potential mortgage or hypothecary insurance claim on an outstanding insured mortgage or hypothecary loan is itself an eligible mortgage loan if it meets the criteria set out in paragraph 4(a) and does not require the payment of an additional mortgage or hypothecary insurance premium.

Loan discharge

(5) A mortgage or hypothecary loan whose purpose is to discharge the outstanding balance of a prior insured mortgage or hypothecary loan is an eligible mortgage loan if the new loan meets the criteria to which the prior loan was subject at the time of the discharge and does not require the payment of an additional mortgage or hypothecary insurance premium.

General criteria

4. A mortgage or hypothecary loan must be

  • (a) underwritten and administered by a qualified mortgage lender or held in a registered retirement savings plan or a registered retirement income fund and administered by a qualified mortgage lender; and

  • (b) secured in first or second priority position by an eligible residential property.

High ratio loans

5. (1) A high ratio loan must meet the following criteria:

  • (a) at the time the loan is approved, its principal amount, together with the outstanding balance of any loan having an equal or prior claim against the eligible residential property against which the loan is secured, must be less than or equal to 95% of the value of the eligible residential property;

  • (b) the purpose of the loan must either
    • (i) include the purchase of the eligible residential property against which it is secured, or

    • (ii) be the discharge of the outstanding balance of a prior uninsured low ratio loan;
  • (c) the loan must be scheduled to amortize over a period that does not exceed 25 years;

  • (d) the value of the eligible residential property against which the loan is secured must be less than $1,000,000;

  • (e) if the loan agreement allows for fluctuations in the amortization period as a result of a variable rate of interest during the term of the loan, the loan payment must be recalculated at least once every five years to conform to the original amortization schedule;

  • (f) the loan agreement must establish scheduled principal and interest payments that will begin reducing the outstanding principal in accordance with the overall amortization schedule agreed to at the making of the loan, commencing on
    • (i) the day on which the loan is funded,

    • (ii) the day on which the agreement of purchase and sale closes, or

    • (iii) the day on which the improvement, conversion or development of the eligible residential property is completed;
  • (g) at the time the loan is approved, at least one of its borrowers or guarantors must have a credit score that is greater than or equal to 600;

  • (h) at the time the loan is approved, the gross debt service ratio and total debt service ratio must not exceed 39% and 44%, respectively;

  • (i) the eligible residential property against which the loan is secured must contain at least one housing unit that will be occupied by the borrower or by a person related to the borrower by marriage, common-law partnership or any legal parent-child relationship; and

  • (j) at the time the loan is approved, it must be reasonably likely to be repaid, having regard to the borrower’s capacity to make the loan payments while paying their other debts and meeting their other obligations over the term of the loan, based on reasonable assumptions as to what the highest loan payment over the term of the loan will be.

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 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:

  • (a) the first four quarters of the preceding five quarters;

  • (b) the first four quarters of the preceding six quarters; or

  • (c) the first four quarters of the preceding seven quarters.

Debt service ratio calculations — certain loans

(3) For the purposes of paragraph (1)(h), if a high ratio loan has a term of less than five years or is not a fixed-rate loan, 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 has less than five years remaining in its term or is not a fixed-rate loan, 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

  • (a) the interest rate set out in the loan agreement, and

  • (b) the five-year conventional mortgage interest rate, as determined weekly by the Bank of Canada, that was in effect on the Monday of the week in which the calculation is performed.

Reasonable likelihood of repayment

(4) A high ratio loan does not meet the criterion set out in paragraph (1)(j) 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.

Low ratio loans

6. A low ratio loan must meet the following criteria:

  • (a) the loan agreement must establish scheduled principal and interest payments that will begin reducing the outstanding principal in accordance with the overall amortization schedule agreed to at the making of the loan, commencing on
    • (i) the day on which the loan is funded,

    • (ii) the day on which the agreement of purchase and sale closes, or

    • (iii) the day on which the improvement, conversion or development of the eligible residential property is completed; and
  • (b) if at the time the loan is approved, its principal amount, together with the outstanding balance of any loan having an equal or prior claim against the eligible residential property against which it is secured, is greater than 60% of the value of the eligible residential property, at least one of its borrowers or guarantors must have a credit score that is greater than or equal to 580.

EXCEPTIONS

High ratio loans — before October 15, 2008

7. (1) The criteria set out in section 5 do not apply to a high ratio loan that meets the requirements of a mortgage or hypothecary loan insurance product that was offered by the mortgage insurer before October 15, 2008 if, before that date,

  • (a) the mortgage insurer received a mortgage or hypothecary insurance application in respect of the loan;

  • (b) the lender made a legally binding commitment to make the loan to the borrower; or

  • (c) the borrower entered into a legally binding agreement of purchase and sale in respect of the eligible residential property against which the loan is secured.

High ratio loans — October 15, 2008 to April 18, 2010

(2) The criteria set out in paragraphs 5(1)(b), (c), (d), (h) and (i) do not apply to a high ratio loan if it is scheduled to amortize over a period that does not exceed 35 years and, during the period beginning on October 15, 2008 and ending on April 18, 2010,

  • (a) the mortgage insurer received a mortgage or hypothecary insurance application in respect of the loan;

  • (b) the lender made a legally binding commitment to make the loan to the borrower; or

  • (c) the borrower entered into a legally binding agreement of purchase and sale in respect of the eligible residential property against which the loan is secured.

High ratio loans — April 19, 2010 to March 17, 2011

(3) The criteria set out in paragraphs 5(1)(b), (c), (d) and (h) do not apply to a high ratio loan if

  • (a) at the time the loan is approved, its principal amount, together with the outstanding balance of any loan having an equal or prior claim against the eligible residential property against which it is secured, is less than or equal to 90% of the value of the eligible residential property if the purpose of the loan does not include the purchase of that property;

  • (b) the loan is scheduled to amortize over a period that does not exceed 35 years;

  • (c) the mortgage insurer has calculated the gross debt service ratio and total debt service ratio in accordance with the method set out in subsection 5(3); and

  • (d) during the period beginning on April 19, 2010 and ending on March 17, 2011,
    • (i) the mortgage insurer received a mortgage or hypothecary insurance application in respect of the loan,

    • (ii) the lender made a legally binding commitment to make the loan to the borrower, or

    • (iii) the borrower entered into a legally binding agreement of purchase and sale in respect of the eligible residential property against which the loan is secured.

High ratio loans — March 18, 2011 to June 21, 2012

(4) The criteria set out in paragraphs 5(1)(b), (c), (d) and (h) do not apply to a high ratio loan if

  • (a) at the time the loan is approved, its principal amount, together with the outstanding balance of any loan having an equal or prior claim against the eligible residential property against which it is secured, is less than or equal to 85% of the value of the eligible residential property if the purpose of the loan does not include the purchase of that property;

  • (b) the loan is scheduled to amortize over a period that does not exceed 30 years;

  • (c) the mortgage insurer has calculated the gross debt service ratio and total debt service ratio in accordance with the method set out in subsection 5(3); and

  • (d) during the period beginning on March 18, 2011 and ending on June 21, 2012,
    • (i) the mortgage insurer received a mortgage or hypothecary insurance application in respect of the loan,

    • (ii) the lender made a legally binding commitment to make the loan to the borrower, or

    • (iii) the borrower entered into a legally binding agreement of purchase and sale in respect of the eligible residential property against which the loan is secured.

High ratio loans — June 22, 2012 to July 8, 2012

(5) The criteria set out in paragraphs 5(1)(b), (c), (d) and (h) do not apply to a high ratio loan in respect of which the mortgage insurer received a mortgage or hypothecary insurance application during the period beginning on June 22, 2012 and ending on July 8, 2012 if it meets the criteria set out in paragraphs (4)(a) to (c) and it is funded no later than

  • (a) December 31, 2012; or

  • (b) June 30, 2013, if it is documented as being scheduled to be funded no later than December 31, 2012 but is delayed due to unforeseen circumstances beyond the borrower’s control.

Low ratio loans — before October 15, 2008

8. (1) The criteria set out in section 6 do not apply to a low ratio loan in respect of which the mortgage insurer received a mortgage or hypothecary insurance application before October 15, 2008 if it meets the requirements of a mortgage or hypothecary loan insurance product that was offered by the mortgage insurer before that date.

Low ratio loans — October 15, 2008 to April 17, 2011

(2) The criterion set out in paragraph 6(a) does not apply to a low ratio loan in respect of which the mortgage insurer received a mortgage or hypothecary insurance application during the period beginning on October 15, 2008 and ending on April 17, 2011.

COMING INTO FORCE

S.C. 2011, c. 15

9. These Regulations come into force on the day on which section 20 of the Supporting Vulnerable Seniors and Strengthening Canada’s Economy Act, chapter 15 of the Statutes of Canada, 2011, comes into force, but if they are published in the Canada Gazette, Part Ⅱ, after that day, they come into force on the day on which they are published.

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. SI/2012-87 fixed January 1, 2013, as the coming into force date of this legislative framework.

The regulations are required in order to fully implement this legislative framework, and are in addition to three Governor in Council regulations published in Part Ⅱ of the Canada Gazette on November 21, 2012:

  • The Protection of Residential Mortgage or Hypothecary Insurance Regulations (PRMHI Regulations), made pursuant to the PRMHIA, apply to the private mortgage insurers and outline requirements for qualified mortgage lenders, reinsurance, and fees.
  • The Housing Loan (Insurance, Guarantee and Protection) Regulations (Housing Loan Regulations), made pursuant to the NHA, apply to CMHC and outline requirements for approved lenders.
  • The Regulations Amending the Assessment of Financial Institutions Regulations, 2001, made pursuant to the OSFI Act, add PRMHIA-related supervisory expenses to the Office of the Superintendent of Financial Institutions’ (OSFI) base assessments.

Description

There are two ministerial regulations: the Eligible Mortgage Loan Regulations and the Insurable Housing Loan Regulations. The provisions of these regulations are equivalent to those contained in the guarantee agreements with the private mortgage insurers and the current arrangement with CMHC. The regulations also reflect the changes the Government made to the rules for government-backed insured mortgages in 2008, 2010, 2011, and most recently in June 2012.

Eligible Mortgage Loan Regulations

The Eligible Mortgage Loan Regulations, made pursuant to the PRMHIA, outline the criteria that a mortgage or a hypothecary loan must meet to be eligible for insurance by an approved mortgage insurer (AMI), i.e. a private mortgage insurer that benefits from the Government’s guarantee. The criteria include, among other things, the maximum allowable loan-to-value ratio, and the maximum allowable amortization period.

Insurable Housing Loan Regulations

The Insurable Housing Loan Regulations, made pursuant to the NHA, outline the criteria housing loans must meet in order to be eligible for insurance by CMHC. These criteria are the same as contained in the Eligible Mortgage Loan Regulations, but the Insurable Housing Loan Regulations apply certain carve-outs that are necessary for the purposes of CMHC’s social housing responsibilities. CMHC may insure particular categories of housing loans, such as loans with the purpose of carrying out a Government social housing program, and loans secured by properties situated on a reserve within the meaning of the Indian Act. CMHC may also insure loans secured by properties consisting of more than four family housing units.

Consultation

The two ministerial regulations were exempted from prepublication. The Governor of the Bank of Canada and the Superintendent of Financial Institutions were consulted on the regulations. CMHC, Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Company were also consulted on the drafts of the regulations to ensure consistency with current requirements.

“One-for-One” Rule

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

Small business lens

The small business lens does not apply to this proposal because there are no costs to small business.

Rationale

The criteria and requirements contained in the two 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. There is no cost associated with the regulations.

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 would remain the same in accordance with OSFI’s risk-based Supervisory Framework.

Implementation, enforcement and service standards

The two 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 Eligible Mortgage Loan Regulations. OSFI will use its existing compliance tools that may include compliance agreements and administrative monetary penalties with regard to private mortgage insurers.

The Insurable Housing Loan 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. The Superintendent of Financial Institutions also has the authority under the NHA to review and monitor the safety and soundness of CMHC’s commercial activities.

Contact

Jane Pearse
Director
Financial Institutions Division
Department of Finance Canada
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