The Office of the Superintendent of Financial Institutions (OSFI) recently released an Interim Update on Draft Guideline B-20 (for further details, see our March 2012 Blakes Bulletin: More Federal Regulatory Guidance on Consumer Mortgage Businesses in which we reported on Draft Guideline B-20 – Residential Mortgage Underwriting Practices and Procedures).
According to the Update, OSFI has now assessed the comments it received relating to the Draft Guideline and is preparing the final version of Guideline B-20 for release later this summer. The Update also discloses OSFI's decisions on certain key matters addressed by the Draft Guideline. While OSFI has remained steadfast on most of the matters discussed in the Update, it has revised its initial position for some matters.
The following is a brief analysis of the approach OSFI proposes to take on the matters dealt with in the Update.
Requalification at Renewal
OSFI clarified that its intent is not to significantly alter the current practice of most federally regulated financial institutions (FRFIs) regarding their reviews of borrowers' qualifications when renewing residential mortgages. Going forward, however, FRFIs will also be expected to refresh borrowers' credit metrics "periodically". It is unclear whether this is a modification of the Draft Guideline which states FRFIs must update the borrowers' credit metrics "at appropriate intervals" and whenever a borrower's condition or property risk changes "materially", but it is certain that FRFIs will need to complete updates at some point over the lifetime of a mortgage.
OSFI maintained its position that the Home Equity Line of Credit (HELOC) portion of a residential mortgage must be restricted to a maximum loan-to-value ratio of 65%. However, OSFI has reconsidered (and will not go forward with) the requirement in the Draft Guideline that FRFIs must have "clearly articulated amortization requirements in place for all outstanding HELOC balances". The Update states that HELOCs at or below a loan-to-value ratio of 65% do not need to be amortized. This revised requirement better takes into account the intent of many consumers who want a revolving line of credit and will allow FRFIs to continue to provide this sought-after product, although the imposition of an inherently arbitrary loan-to-value limit by way of a guideline is at odds with the scheme of the federal legislation as well as good regulatory practice. The Update does not mention how this limit may apply to existing HELOCs with a loan-to-value ratio in excess of 65%.
International Applicability of Guideline B-20
The Update states that Guideline B-20 will "primarily" apply only to domestic operations of Canadian FRFIs. At a minimum, international mortgage lending and acquisition activities of FRFIs must be reflected in the Residential Mortgage Underwriting Policy (RMUP) of FRFIs. FRFIs should consider whether complying with Guideline B-20 will indirectly impact other aspects of their international operations and begin developing strategies to ensure they are not at any disadvantage relative to their international competitors who will not be subject to Guideline B-20.
OSFI demonstrated some recognition of the importance of balancing domestic stability and security with international competitiveness. While FRFIs must disclose the information listed in Part III of the Draft Guideline, such as the amount and percentage of the total residential mortgage loans and HELOCs that are insured versus uninsured, information that is "proprietary" to the FRFI or would "cause a competitive disadvantage" does not need to be disclosed. FRFIs should plan to develop policies that clearly set out what is proprietary and competitive information and train their staff to consistently apply such policies once Guideline B-20 is finalized.
The Update is unclear on the role OSFI expects the board of directors of an FRFI (the FRFI Board) to play in the development and assessment of the RMUP and general oversight of the FRFI's mortgage operations and internal controls. The Update states FRFI Boards are expected to play a "substantive" role, but the Draft Guideline only mentions that FRFI Boards should review and approve the RMUP annually. There may be further details on this matter in the final Guideline B-20.
Applicability of Guideline B-20 to Mortgage Insurers
The Update clarifies that Guideline B-20 will only apply to mortgage originators (or acquirers). A separate draft guideline applicable to mortgage insurers is expected to be published for consultation in the near future. With this in mind, mortgage insurers should carefully review the assessment criteria identified in the Draft Guideline that FRFIs are expected to consider when conducting due diligence on a mortgage insurer. Any upcoming draft guideline will most likely elaborate on OSFI's expectations of mortgage insurers on the same matters, such as balance sheet strength and reinsurance arrangements. The Update does not mention the expected timing for release of a draft guideline applicable to mortgage insurers.
Automated Valuations of Property versus On-Site Appraisals
OSFI maintained its position, set out in the Draft Guideline, that FRFIs must take a comprehensive and risk-based approach to assessing the value of a property. FRFIs must be able to demonstrate that they have applied a variety of methods when conducting property valuations.
The final Guideline B-20 will set out OSFI's expectations in terms of the timeline for implementation. The Update hints that different timelines will apply to different elements of Guideline B-20 but does not provide any further detail.
At the OSFI Legislation and Approvals Seminar held in Toronto on May 17, 2012, OSFI announced that it is engaged in updating and revising several other guidelines and advisories as well as developing new rulings on a variety of issues. Guideline B-20 may be only the first of many developments this summer and FRFIs should take this into account when planning implementation.
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