28 January 2019

Moreover, they lend out a larger part of a property’s value. In case the private lenders are hit, it may affect the overall lending and lead to a faster house price decrease.

So far, private lenders don’t deal with the B-20 rules, as they are supervised by provincial regulators and not by the federal regulator. Putting them under federal supervision will lead to changes in the law.

According to the sources, one of the variants is asking the provinces to introduce the B-20 guidelines as well. As a result, private lenders will have to make stress tests on borrowers at a higher interest rate, or at a contracted rate plus 2%.

A gentler option is recommending provinces to make sure private lenders run thorough checks on the ability of their borrowers to pay off the debts, but without the real stress test.

No final decision has been made so far, and the agencies don’t comment.

The main driver of the private sector are mortgage investment companies, providing the funds for wealthy individuals to lend to borrowers, who are often rejected by the banks.

According to Benjamin Tal, deputy chief economist at CIBC World Markets, private lenders may raise their market share up to 15%-20% in case the regulators don’t take measures. In his opinion, it’s important to apply the B-20 rules to this sector as soon as possible.

“It may have macro-economic significance,” – he noted. “When the number exceeds 10%, it’s already too much, and without changes, private lenders could grow to more than 15%”.

However, Canadian Finance Minister Bill Morneau says he doesn’t have any additional regulation for this sector in mind so far.

“I’m not currently considering any stress tests on private mortgage lenders,” – he noted answering the question in Ottawa about his possible concerns over the growth of private lending in Canada’s mortgage market.

“We always look at the entire mortgage picture in order to ensure the necessary protections for Canadians. It means we have to think not only about the market part we are affecting directly, but also about the consequences for other parts of the credit sector”, – he added.