Canada: OSFI – Draft Residential Mortgage Insurance Guideline – The Impact On Mortgage Lenders

Last Updated: May 22 2014
Article by Sean Brandreth, Stephanie M. Robinson, Pat Forgione and Ahsan Mirza

The Office of the Superintendent of Financial Institutions Canada ("OSFI") released Draft Guideline B-21 Residential Mortgage Insurance Underwriting Practices and Procedures (the "Draft Guideline") on April 14th, 2014. Once the final version of the Draft Guideline is implemented it will apply to federally-regulated insurers governed by the Insurance Companies Act that either provide residential mortgage loans in Canada or reinsure such loans. The Draft Guideline sets out six fundamental principles relating to mortgage insurance underwriting and insurer disclosure obligations. This bulletin explains how the Draft Guideline will impact mortgage originators and acquirers of residential mortgage loan assets.1 For an in-depth analysis on the impact of the Draft Guideline on insurers and reinsurers, please refer to the bulletin found here.

The Draft Guideline:

The Draft Guideline sets out six fundamental principles for sound residential mortgage insurance underwriting. These six principles are as follows:

  1. Residential Mortgage Insurance Underwriting Plan Residential mortgage insurers are required to have a Residential Mortgage Insurance Underwriting Plan ("RMIUP") that consolidates the insurer's key mortgage underwriting policies including its business objectives, risk appetite and risk-management policies. The Draft Guideline also stipulates that senior management of an insurer should be responsible for the development and implementation of the RMIUP.
  2. Establishing Standards for the Initial Assessment and Qualification of Mortgage Lenders the Draft Guideline requires insurers to establish standards for the assessment and qualification of mortgage lenders that apply for mortgage insurance coverage.
  3. Mortgage Insurance Criteria and Insurance Coverage Requirements for Lenders insurers should establish prudent underwriting practices that specify the characteristics and parameters of insurable mortgage loans for lenders. At a minimum, an insurer is expected to set out criteria for managing risk and include at least the following components for each mortgage insurance product and insurance type:

    1. mortgage loan parameters (which includes allowable loan purpose, allowable loan security position, allowable loan term and amortization length and maximum loan to value ratio);
    2. borrower's background and willingness and capacity to service debt (such as verifying the borrower's income and employment, and ensuring there is an adequate down-payment);
    3. a proper assessment of the value of the underlying mortgage property; and
    4. actuarially-sound premium rates are established which reflect the insurer's risk assessment.
    Insurers are also expected to outline through binding and enforceable insurance policy documents ("Master Policy Agreements") certain obligations of lenders that must be satisfied for the lender to obtain and continue mortgage insurance coverage, including an obligation to provide up-to-date and timely information to the insurer, to retain documents in the prescribed manner, and to discharge certain obligations related to the management and realization of property upon mortgage loan defaults or delinquencies, or servicing transfers.
  4. Insurer's Periodic Assessment of Lenders' Underwriting Practices insurers are expected to exercise "reasonable due diligence" through periodic assessments of lenders' underwriting practices to ensure compliance with the requirements contained in Master Policy Agreements. Such reviews can include automated reviews, desk-reviews, or on-site inspections by a team of reviewers.
  5. Assessment and Validation of Underwriting Systems, Models, and Underwriters' Processes Insurers are expected to assess and validate their respective insurance underwriting systems, models and underwriters' processes to assess consistency with the insurer's RMIUP.
  6. Effective Portfolio Risk Management and other Risk Mitigation insurers are expected to undertake appropriate risk management such as through stress testing or reinsurance, where necessary.

Insurers are also required to abide by disclosure requirements to allow market participants to evaluate the soundness and condition of their insured residential mortgage portfolio.

The Impact on Mortgage Lenders

The Draft Guideline is meant to complement the previously implemented Guideline B-20 Residential Mortgage Underwriting Practices and Procedures ("Guideline B-20") released in June 2012. Guideline B-20 applies to mortgage originators and acquirers of residential mortgage loan assets, rather than insurers. The Draft Guideline stipulates that insurers must monitor and supervise lender mortgage underwriting practices for those loans for which mortgage insurance is provided such that lenders and insurance companies abide by proper and complementary risk-management techniques. Many of the requirements for insurers found in the Draft Guideline follow the requirements for mortgage lenders set out in Guideline B-20.

For example, the Draft Guideline provides that insurers should ensure that lenders abide by certain loan parameters and verify lenders' borrower loan-verification criteria, whereas Guideline B-20 already requires these lenders to abide by similar loan parameters and be satisfied with borrowers' ability to service debt obligations. On this basis, it is expected that the Draft Guideline will not substantially impact lenders' day to day mortgage origination processes or the acquisition of residential mortgage assets, as many of these requirements reflect what is already done in the market.

However, the Draft Guideline effectively mandates another level of oversight for lender compliance. In fact, OSFI expects insurers to undertake remedial action and set out an escalation process for non-compliant mortgage lenders that in many ways resembles OSFI's own remediation and escalation policy to handle non-compliant federally regulated financial institutions. This additional, contractually-imposed oversight of mortgage lenders will likely add to the cost of mortgage lending as many of OSFI's expectations in the Draft Guideline will require mortgage lenders to cooperate and work closely with their mortgage insurers through onerous disclosure requirements and other compliance obligations.

Furthermore, mortgage insurers and mortgage lenders will now be mandated to work together to develop adequate risk-management policies and implement such policies in Master Policy Agreements. To the extent that lenders and insurers are not already developing such policies in concert, such negotiation will add to the complexity, time and cost of obtaining mortgage insurance. Lenders will want to ensure ongoing compliance with the risk-management policies and expectations of insurers so as to avoid any disputes or exclusions of coverage.

Rebate and Incentive Programs

OSFI has also reiterated in the Draft Guideline that incentive and rebate payments (so called "cash back" programs) should not form part of a borrower's down-payment. Guideline B-20 requires mortgage lenders to use reasonable efforts to determine whether borrowers are sourcing down-payments from their own savings or the lender's sources, and also discourages lenders from including cash back arrangements as part of the down-payment calculation. The Draft Guideline now imposes a parallel obligation on insurers by stipulating that insurers should mandate in their Master Policy Agreements with mortgage lenders that the lender should not consider cash back arrangements to be part of the down-payment.


The focus of the Draft Guideline is for insurers to promote and oversee sound mortgage underwriting and lending practices, including through the imposition of risk-management policies in Master Policy Agreements with lenders. While mortgage lenders will be familiar with many of the expectations set out in the Draft Guideline due to the previously released Guideline B-20, the Draft Guideline will add another level of oversight for lenders and increase the cost of originating and processing mortgages with mortgage insurance. Comments on the Draft Guideline are due by May 23rd, 2014 and OSFI is expected to release the final guideline later in 2014.


1 Referred to collectively as "mortgage lenders" in this bulletin.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2014

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Sean Brandreth
Stephanie M. Robinson
Pat Forgione
Ahsan Mirza
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions