Lenders get warning on bundled loans

‘ They are rules. They are not guidelines’

• Canada’s financial watchdog has warned regulated mortgage providers against teaming up with unregulated rivals to sidestep rules designed to clamp down on risky lendi ng, a top regulator told Reuters.

Carolyn Rogers, assistant superintendent at the Office of the Superintendent of Financial Institutions, said in an interview that the regulator was taking action to stamp out so- called “bundled” loans, which pair a primary mortgage with a second loan from unregulated groups called Mortgage Investment Corporations (MICs).

Reuters r eported l ast month that the practice can circumvent rules limiting how much mortgage providers can lend against a property, and the arrangements have proliferated as Canadian regulators have tightened lending standards.

“They are rules. They are not guidelines, and they are not principles. We absolutely expect regulated entities to be adhering to them,” Rogers said. “Any time a regulated entity is or appears to be designing a product or an approach that is, by its design, circumventing the rules we would take issue with that,” she added.

Home Capital Group and Equitable Group are two listed mortgage providers that have told Reuters they participate in bundled lending. Home Capital declined to comment and Equitable could not be reached for comment.

Rogers said she would not comment about specific institutions or about specific actions being taken by the regulator.

Under federal rules, regulated lenders in Canada are not allowed to lend more than 65 per cent of the value of a home to borrowers with bad or nonexistent credit records.

They also cannot l end more than 80 per cent of a property’s value — even to borrowers with solid credit — without obtaining government- backed insurance. Under rules rolled out in October, that insurance requires the banks to run income stress tests on borrowers.

However, “bundled” or co- lending with an unregulated entity can enable lenders to offer combined mortgages worth up to 90 per cent of a property’s value.

Rogers said the regulator and other Canadian authorities are paying increasing attention to the issue. “It is growing, so it’s something we’re watching. I know the Department of Finance is watching. I know the provincial regulators pay attention to it and the Bank of Canada pays attention,” she said.

One difficulty for regulators is the lack of data available on MICs, whose investors are often wealthy individuals. “By its nature, unregulated activity is challenging to get a really good view of, but we’re working on it in co- operation with our other federal partners,” she said.