The final version of the revised
Guideline B-20 Residential Mortgage Underwriting Practices and
Procedures was published by OSFI on June 21, 2012. The
Guideline, together with the tightening of the rules for
government-backed insured mortgages announced by the Minister of
Finance on the same day (to, among other things, reduce the maximum
amortization period to 25 years and lower the maximum amount that
Canadians can borrow when refinancing from 85% to 80%), form part
of the Canadian Government's attempts to strengthen the
Canadian housing finance system.
The Guideline sets outs 5 principles for managing risk
associated with residential mortgage underwriting and/or the
acquisition of residential mortgage loan assets in Canada.
All federally regulated financial institutions (FRFIs) are
expected to fully comply with the Guideline by the end of fiscal
year 2012/13, and where possible, comply with the principles and
expectations set out in the Guideline as of the date of its
Principle #1: FRFIs that are engaged in
mortgage underwriting and/or purchasing should have a
comprehensive, Board-approved Residential Mortgage Underwriting
Policy (RMUP) that is linked to the FRFI's Board-approved risk
strategy and risk management framework, and the Board should ensure
that it is being complied with.
Principle #2: FRFIs should perform reasonable
due diligence on the borrower to assess the borrower's
identity, background and demonstrated willingness to service its
debt obligations on a timely basis.
Principle #3: FRFIs should adequately assess
the borrower's capacity to service debt on a timely basis
including taking steps to verify the borrower's income and the
establishment of appropriate debt serviceability metrics.
Principle #4: FRFIs should have sound
collateral management and appraisal processes for the underlying
mortgage properties. Non-amortizing Home Equity Lines of Credit
(HELOCs) must be limited to a maximum authorized LTV ratio of less
than or equal to 65%.
Principle #5: FRFIs should have effective
credit and counterparty risk management practices and procedures
that support residential mortgage and underwriting and asset
portfolio management, including, as appropriate, mortgage
insurance. Where a FRFI purchases mortgages that have been
originated by a third party, the FRFI should ensure that the
underwriting practices of the third party are consistent with its
own practices, its RMUP and the Guideline, and not rely solely on
the attestation (i.e., a representation and warranty) from the
Public Disclosure Requirements:
For greater transparency, clarity and public confidence, FRFIs
should publicly disclose sufficient information related to their
residential mortgage portfolios for market participants to be able
to conduct an adequate evaluation of the soundness and condition of
the FRFI's residential mortgage operations, including key
mortgage metrics (e.g. LTV ratios and amortization).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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