* Plan to stop co-lending arrangements that circumvent rules
* OSFI seeking consultation from interested parties
* OSFI plans effective date for implementation later in 2017
* Home Capital, Equitable participate in co-lending
* Equitable shares down 0.6 pct; Home Capital down 0.4 pct (Adds context, size of market, share prices and background)
TORONTO, July 6 (Reuters) - Canada plans to ban some "bundled" residential mortgages to clamp down on risky lending, a regulator said on Thursday, six months after a Reuters investigation revealed that regulated mortgage providers were teaming up with unregulated rivals to circumvent rules limiting how much they can lend against a property.
Regulators are looking to rein in risky lending amid fears of housing bubbles in the cities of Toronto and Vancouver and are concerned that the loans, which enable desperate homebuyers to borrow up to 90 percent of a property's value, could turn bad if prices begin to retreat.
Problems at lender Home Capital Group, which has seen depositors withdraw 95 percent of funds from high-interest savings accounts, have exacerbated concerns about whether mortgage underwriting standards in Canada are stringent enough.
The Office of the Superintendent of Financial Institutions (OSFI) on Thursday said it is considering "expressly prohibiting co-lending arrangements that are designed, or appear to be designed, to circumvent regulatory requirements." It is asking for feedback from interested parties and the wider public before Aug. 17, and said it will finalize the guidelines and set an effective date for implementation later in 2017.
Reuters reported in January that regulated mortgage providers were teaming up with unregulated rivals called Mortgage Investment Corporations (MICs), which pool money from wealthy individuals, to get around rules limiting how much mortgage providers can lend against a property.
In an interview with Reuters in February, Carolyn Rogers, assistant superintendent at OSFI, warned lenders against such activity.
The government does not track bundling, and the practice is sometimes carried out in a discreet fashion, with lenders working directly with the MICs or referring mortgage brokers to them to work out a loan with a borrower. But Finance Ministry data shows that the share of unregulated lenders had shot to 12.5 percent of Canada's C$1.6 trillion mortgage market in 2015, up from 6.6 percent in 2007.
Home Capital Group, which last month agreed to a C$2 billion loan from Warren Buffett's Berkshire Hathaway Inc, and Equitable Group, are two listed mortgage providers that have told Reuters they participate in bundled lending.
Equitable Group Chief Executive Andrew Moor said that slightly less than one in 10 mortgages provided by the lender involve bundled arrangements. Home Capital has not disclosed how much of its business depends upon it.
Home Capital and Equitable did not immediately respond to requests for comment on Thursday.
Shares of Equitable were down 0.3 percent while Home Capital shares, which have lost nearly half their value since the start of the year, were down 1.9 percent. Another alternative lender, Street Capital, was down 3.8 percent.
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Bundled or co-lending agreements with an unregulated entity can enable lenders to offer combined mortgages worth up to 90 percent of a property's value.
Under federal rules, regulated lenders in Canada are not allowed to lend more than 65 percent of the value of a home to borrowers with bad or nonexistent credit records.
They also cannot lend more than 80 percent of a property's value - even to borrowers with solid credit - without obtaining government-backed insurance. Under rules rolled out last October, that insurance requires the banks to run income stress tests on borrowers.
Canadian authorities have said bundling represents a small portion of the mortgage market. However, mortgage brokers say the arrangements have proliferated as Canadian regulators have tightened lending standards to shield borrowers in case a decade-long housing boom goes bust.
The regulator also proposed rules on Thursday requiring a stress test for all uninsured mortgages and that the maximum amounts lent out against a property's value are adjusted for local market conditions.
The proposals are the latest in a series of measures implemented by Canadian authorities over the past 12 months amid concerns about housing market bubbles, where prices have spiked.
The Ontario government introduced a number of measures in late April to try to cool the housing market in Toronto, including a foreign buyers tax. Sales in Canada's largest city fell 37 percent in June compared with a year ago, the Toronto Real Estate Board said on Thursday. (Reporting by Matt Scuffham; Editing by Jeffrey Benkoe, Bernard Orr)