Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances

From: Financial Consumer Agency of Canada

I. Introduction

1. The Financial Consumer Agency of Canada (FCAC) has developed a Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances (Guideline) to set out its expectations for federally regulated financial institutions (FRFIs)^{Footnote 1} to contribute to the protection of consumers of financial products and services by providing tailored support to consumers at risk.

2. For the purposes of this Guideline, the term “consumers at risk” refers to natural persons with an existing residential mortgage loan on their principal residence who are experiencing severe financial stress, as a result of exceptional circumstances, and are at risk of mortgage default. These exceptional circumstances include the current combined effects of high household indebtedness, the rapid increases in interest rates and the increased cost of living.

3. FCAC expects an FRFI to provide support to consumers at risk, including:

3.1 those whose payments on their variable-rate mortgages fluctuate with interest rates (variable payments) and whose payments have thus increased materially
3.2 those with fixed payments on variable-rate mortgages who have seen a materially larger portion (or all) of their payments allocated towards the increased interest costs or who may be facing negative amortization^{Footnote 2}
3.3 those with fixed-rate mortgages reaching near-term maturity who may be facing a material increase in payments

4. FCAC expects an FRFI to establish and implement effective policies and procedures for providing support to consumers at risk. These policies and procedures should, at a minimum, cover:

4.1 proactive monitoring for, and identification of, early signs of financial stress
4.2 the criteria for offering mortgage relief measures
4.3 an appropriateness assessment to ensure appropriate relief measures are made available
4.4 the disclosure of information to the consumer to ensure express consent

5. FCAC expects an FRFI to design its policies and procedures with consideration for all available mortgage relief measures that may be appropriate for consumers at risk, such as waiving prepayment penalties, waiving internal fees and costs, not charging interest on interest, and extending amortization.

6. FCAC recognizes that an FRFI may establish and implement its policies and procedures to align with the nature, size and complexity of its business, distribution channels, and products and services.

7. This Guideline should be read in conjunction with all applicable legislation, regulations and guidance.

II. Key principles

8. FCAC expects an FRFI to establish and implement effective policies and procedures that adhere to the following principles:

Fairness

Consumers at risk are treated with a similar level of care and attention as other consumers at risk, having regard to their circumstances, including their financial needs.^{Footnote 3}

Appropriateness

Consumers at risk are offered mortgage relief measures that are appropriate to their circumstances, including their financial needs.

Accessibility

Consumers at risk are contacted proactively and can easily access mortgage relief measures.

III. Fairness

9. FCAC expects an FRFI’s policies and procedures to ensure that it is fair and equitable in its dealings with consumers at risk. This includes offering similar mortgage relief measures to consumers at risk who have similar circumstances and needs.

10. Once an FRFI and a consumer have together determined that there is a risk of mortgage default, FCAC expects the FRFI to assess and offer appropriate, individualized mortgage relief measures to the consumer as soon as feasible.

11. In support of working with a consumer at risk towards implementing a sustainable arrangement, FCAC expects an FRFI to provide mortgage relief that is temporary in nature, such as:

11.1 waiving prepayment penalties when
- 11.1.1 a consumer at risk makes a lump sum payment to avoid negative amortization, or
- 11.1.2 a consumer at risk sells their principal residence
11.2 waiving internal fees or costs for a limited period^{Footnote 4} when activating mortgage relief measures that otherwise would be charged
11.3 for a limited period, where mortgage relief measures result in negative amortization, ensuring that no interest is charged on interest that has been capitalized

12. At the time of mortgage renewal, FCAC expects an FRFI will not offer a less advantageous rate based on the consumer’s inability to adjust their mortgage credit agreement or qualify with other lenders.

13. Once mortgage relief measures are implemented as a result of an FRFI and a consumer at risk agreeing on a new mortgage payment arrangement, FCAC expects that the consumer at risk’s credit report should not reflect a late payment or delinquency, should the late payment or delinquency be in accordance with the new mortgage payment arrangement.

IV. Appropriateness

14. FCAC expects an FRFI’s policies and procedures to include appropriateness assessments to determine specific mortgage relief measures for consumers at risk. The appropriateness assessments should be undertaken in accordance with FCAC’s Guideline on Appropriate Products and Services for Banks and Authorized Foreign Banks.

15. When the appropriate mortgage relief measure relates to extending the amortization period, FCAC expects that the extension would be for the shortest period possible, taking into consideration the ability for the consumer at risk to restore the amortization to the original period.

16. FCAC expects an FRFI and the consumer at risk to develop a plan, within a reasonable timeframe, for the consumer to restore the amortization to the original period. FCAC expects the plan to:

16.1 ensure that the total amortization period is reasonable
16.2 include information about options to restore the amortization to its original period
16.3 include an assessment and communication of the potential long-term, negative financial implications of this change on the consumer

17. FCAC expects an FRFI to disclose to the consumer at risk the following information prior to obtaining their express consent for any mortgage relief measures. This information should be communicated in a manner that is clear, simple and not misleading:

17.1 the outstanding amount owing on the original credit agreement for the mortgage before the mortgage relief measures take effect
17.2 the impact of the mortgage relief measures on the total cost of servicing the mortgage in dollars, as well as the remaining amortization period after the relief measures take effect
17.3 the new payment amount, due date and frequency
17.4 the new interest rate and type (e.g., fixed, variable)
17.5 the date on which the changes will take effect

18. When an FRFI and a consumer at risk determine that a consumer-led sale is an appropriate mortgage relief measure, FCAC expects the FRFI to communicate with the consumer at risk about the various considerations relating to selling their principal residence.

V. Accessibility

19. FCAC expects an FRFI to make mortgage relief measures easily accessible to consumers at risk, including by:

19.1. proactively contacting and providing information regarding mortgage relief measures so they can make timely and informed decisions
19.2. ensuring that information regarding mortgage relief measures is readily available over the phone, online and in person in a manner that meets consumers’ needs

20. FCAC expects an FRFI to proactively encourage consumers at risk to reach out to their lender if they are concerned that they may not be able to service their mortgage debts and/or are experiencing financial stress.

21. At no additional cost to consumers at risk, FCAC expects an FRFI to:

21.1 provide reputable educational tools and resources to support sound financial decision-making
21.2 encourage consumers at risk to seek information and advice from appropriate sources
21.3 direct consumers at risk to reputable support networks for information and advice on financial hardship

22. FCAC expects an FRFI to ensure its employees are trained to apply the expectations outlined in this Guideline, with a specific focus on equipping and training:

22.1 employees who offer, sell or service mortgage loans, so these employees can monitor, identify and proactively contact consumers at risk and discuss mortgage relief measures with them
22.2 employees who provide information and assistance to consumers at risk regarding mortgage relief measures

VI. Administrative processes and controls

23. FCAC expects an FRFI to monitor its consumers for early signs of severe financial stress and maintain accurate records of all those contacted for this purpose.

24. FCAC expects an FRFI to accurately record all mortgage relief measures being implemented.

25. FCAC expects an FRFI to maintain accurate and complete records of the implementation of its policies and procedures.

26. FCAC expects an FRFI to report, upon request from the FCAC, on the implementation of this Guideline and its records of mortgage relief measures.

VII. Miscellaneous

27. FRFIs that have questions relating to this Guideline can send their questions to compliance@fcac-acfc.gc.ca or mail them to:

Financial Consumer Agency of Canada
Attention: Deputy Commissioner, Supervision and Enforcement Branch
427 Laurier Ave West, 5th Floor
Ottawa, ON K1R 1B9

Footnote 1

The term FRFI refers to banks (including federal credit unions), authorized foreign banks, federal trust companies, federal loan companies, federal insurance companies and foreign insurance companies.

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Footnote 2

Negative amortization occurs when consumers with a variable-rate mortgage and fixed payments are no longer paying enough to cover the interest on their payments. Interest accrues, increasing the total amount owing.

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Footnote 3