Canadian Mortgage-Backed Bonds Get U.S. Disclosure Exemption As Regulators Warn

Huzzah! Canada’s banks can tap American investors for mortgage funding again. Earlier this year, the U.S. SEC quietly granted a no-action exemption for covered bonds, allowing Canadian lenders to market them to American investors without the loan-level disclosure required for comparable U.S. products. The exemption arrived just months after Canada’s bank regulator clashed with lenders over inflated appraisals used to secure mortgages. It marks a significant shift in how the SEC treats foreign regulation—and may provide more fuel for a systemic risk Canada’s central bank has already warned is building. How Covered Bonds Lower Investor Risk Before we get into the nitty-gritty, a quick refresher. Bonds are debt instruments used to raise capital. An issuer sells bonds to investors and pays interest, or yield, in return. That yield reflects factors such as inflation, liquidity, and risk. Higher risk generally means a higher yield; lower risk means cheaper financing. Covered bonds are secured by a dynamic pool of uninsured mortgages that remain on the bank’s balance sheet. They give investors dual recourse: if the issuer fails to pay, they can pursue both the bank and the underlying mort...