On July 7, 2016, the Office of the Superintendent of Financial
Institutions ("OSFI") released a letter
advising federally regulated financial institutions
("FRFIs") that it is tightening its
supervisory expectations for residential mortgage underwriting and
that it will be reviewing Guideline B-20 - Residential Mortgage
Underwriting Practices and Procedures ("Guideline
B-20") to ensure that it is aligned with prudent
industry practice and Canadian housing market realities.
Such realities include rapidly increasing housing prices
(especially in Toronto and Vancouver), high Canadian household debt
and low interest rates; risk factors which have been identified by
the Bank of Canada as escalating in prevalence. OSFI's
increased scrutiny is a precautionary measure to protect FRFIs from
financial risks such as loan losses through mortgage defaults, and
decreased value of real estate pledged as collateral in mortgage
loans. The July letter builds upon OSFI's December 11, 2015
letter which described, among other things, OSFI's intent to
study and update the regulatory capital requirements for
residential mortgages and home equity lines of credit (as described
in our previous
OSFI has identified five areas that will be particularly
scrutinized: (i) income verification (especially foreign income),
(ii) non-conforming loans, (iii) debt service ratios, (iv)
appraisals and loan-to-value (LTV) ratio calculations, and (v)
institutional risk appetite.
In addition, and consistent with its plans to update regulatory
capital requirements for residential mortgages, OSFI aims to
implement various capital policy initiatives by November 2016 and
January 2017 for banks and mortgage insurers, respectively, which
will better equip FRFIs to endure and manage potential losses
stemming from residential mortgage underwriting and mortgage
insurance operations. Such initiatives include a risk sensitive
floor and a new regulatory capital framework being developed for
federally regulated mortgage insurers. OSFI is also evaluating a
proposal by the Basel Committee on Banking Supervision (BCBS) aimed
at increasing the sensitivity of standardized credit risk
approaches for loans secured by residential real estate. There is
no set target date for the completion of this review.
In addition to increased supervisory oversight and updating
capital policy initiatives, OSFI reinforced the need for prudent
residential mortgage underwriting practices based on the principles
of Guideline B-20 and Guideline B-21- Residential Mortgage
Insurance Underwriting Practices and Procedures.
The review and tightening of the underwriting practices of
federally regulated lenders will likely result in a decrease in the
volume of mortgages and in the size of the mortgages being
approved. It remains to be seen whether these mortgages will be
picked up by provincially regulated lenders such as credit unions,
or if such lenders will choose to similarly follow the guidance
published by OSFI.
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.
The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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