More lender regulations could be on the horizon
If the Ontario Securities Commission has its way, mortgage investment corporations could become the next regulatory target. But according to one prominent MIC operator, smaller firms might not survive.
“Where I think they’ll make it hard is for smaller MICs with an increase in regulatory rules around compliance, KYC [Know Your Client],” said Nick Kyprianou, president & CEO of RiverRock Mortgage Investment Corporation. “I think when they start increasing regulations it will put pressure on the smaller MICs. Regulations make you have more infrastructure, and infrastructure costs money, and if you’re smaller you just can’t afford it.”
Earlier this week, the OSC’s chair sounded the alarm on the growth, and potential perils, of syndicated mortgages and MICs.
Given the sweeping regulations of recent years, many industry players have speculated alternative lenders of all varieties could be in the government’s crosshairs.
“As somebody becomes a larger piece of the market, it gets more attention and then regulations follow,” said Kyprianou. “Increasing regulation on private lending and MICs will be ongoing now because it’s taking a bigger piece of the market. When it was 2-3% of the space, it was nothing, but when it goes north of 5% it becomes meaningful and regulators take notice.”
Syndicated mortgages have received a lot of bad press lately and Jordan Kupisz, vice president of operations at FSI Financial, a mutual fund trust, agrees they need more oversight but says MICs are inherently different.
“Syndicated mortgages are a legitimate concern, in my opinion,” he said. “Is it suitable for the client? What process is being completed to ensure it’s suitable for the client? Who’s determining that risk is appropriate for the client? With a MIC, however, that determination is made ahead of time.
“I don’t know [if the OSC’s concern] is founded. From what I’ve seen, most MICs are conservative and, if anything, their business has improved with all the changes, in terms of the client’s quality. I’m doing business with clients who would have been bank clients six months ago, but they’re coming to us now.”
How much oversight can a MIC sustain before it isn’t merely hampered, but operations are brought to a screeching halt?
“They can’t really put regulations on how you lend because it’s like putting rules around a hedge fund, or what stocks you can buy—you can’t do that, either,” said Kyprianou. “What they can do is put a lot of regulation around compliance, money laundering, Know Your Client, making sure you’ve done a proper assessment of your investor to make sure this is the right investment vehicle for them. By all these additional rules around compliance, it makes it too costly to run the business if you don’t have a critical mass.”