Canada: OSFI Looks To Further Tighten Mortgage Underwriting Standards, Issues Revised Guideline B-20 For Comment

On July 6, 2017, the Office of the Superintendent of Financial Institutions (OSFI) issued a revised version of Guideline B-20 – Residential Mortgage Underwriting Practices and Procedures (Draft Guideline) for comment. This Draft Guideline comes after OSFI issued a letter to the industry, on July 7, 2016, highlighting its concerns with residential mortgage underwriting practices and the adequacy of risk management controls implemented by residential mortgage originators. The letter indicated that OSFI would be reviewing Guideline B-20 to ensure it is aligned with prudent industry practice and Canadian housing market realities. The Draft Guideline is the product of OSFI's review.

The basic framework of Guideline B-20 has not changed: the five fundamental principles for sound residential mortgage underwriting remain. However, OSFI has tightened and clarified its expectations, as well as introduced new expectations.

These changes address OSFI's concerns regarding Canada's residential mortgage market: possible housing bubbles in Vancouver and Toronto, the likelihood of rising interest rates and their potential negative effects on households with high residential mortgage debt, and governance controls.

Below we look at some of the new measures proposed by OSFI in the Draft Guideline to address these concerns.


OSFI expects mortgage originators and their insurers to demonstrate an understanding of mortgage portfolio risk and appropriately manage that risk. Accordingly, federally regulated financial institutions (FRFIs) who engage in residential mortgage lending are now expected to verify that their residential mortgage operations are well supported by prudent underwriting practices and have sound risk management and internal controls that are commensurate with these operations. FRFIs should also revisit their Residential Mortgage Underwriting Policy (RMUP) on a regular basis to ensure that there is strong alignment between their risk appetite statement and their actual mortgage underwriting, acquisition and risk management policies and practices.


Last fall, the Government of Canada announced tighter mortgage insurance rules to require all insured homeowners to qualify for mortgage insurance at an interest rate that is deemed to be the greater of their contractual mortgage rate and the Bank of Canada's conventional five-year fixed posted rate, which is currently 4.64 per cent. By applying the higher rate to calculate the borrower's "Gross Debt Service", which cannot exceed 39 per cent, and "Total Debt Service", which cannot exceed 44 per cent, FRFIs are in effect now "stress testing" the borrower's ability to service his or her mortgage debt even if interest rates rise. These existing requirements for insured residential mortgage loans are already reflected in the mortgage insurers' requirements regarding debt serviceability, and the Draft Guideline stipulates that FRFIs should meet those requirements.

Under the Draft Guideline, the requirement for tighter stress tests now extends to uninsured mortgage loans, but in some respects goes even further than the requirements for insured mortgage loans. For uninsured mortgage loans, OSFI expects FRFIs to take into account current and future conditions when considering qualifying rates and make appropriate judgements and, at a minimum, ensure that uninsured borrowers can withstand a rate hike of at least two per cent above the contract rate. However, the subjective aspects of OSFI's expectation means that lenders should evaluate the specific risks associated with each loan application and apply commensurate stress testing measures; relying on the two per cent minimum will not be sufficient in all cases.

The practical implication of this requirement for stress testing is that borrowers may no longer qualify for the size of mortgages that they originally anticipated.


OFSI has articulated concerns with overvaluation in certain Canadian housing markets, such as Greater Vancouver and Toronto, and certain proposals in the Draft Guideline are intended to ensure that risks associated with a potential fall in these or other housing markets are appropriately monitored and mitigated. Accordingly, the Draft Guideline contemplates more rigorous standards for determining the loan-to-value (LTV) ratio for a residential mortgage loan. In particular, each FRFI should:

  • Maintain and implement a framework for critically reviewing and, where appropriate, effectively challenging the assumptions and methodologies underlying valuations and property appraisals
  • In markets that have experienced rapid house price increases, use more conservative approaches to estimating the property value for LTV calculations and not assume that prices will remain stable or continue to rise
  • Ensure that its LTV limit structure reflects the risk attributes of different types of mortgage loans and is consistent with its RMUP
  • Have a robust process for regularly monitoring, reviewing and updating the LTV ratio framework
  • Update the property analysis periodically (not only at renewal) in order to effectively evaluate credit risk

OSFI expects FRFIs to take a critical view of the sustainability of housing market prices and appropriately adjust the property value when making an underwriting decision on non-conforming loans and on home equity lines of credits (HELOCs), including calculating the LTV and pricing the loan. OSFI also expects FRFIs to adjust maximum LTV limits downwards in the presence of multiple higher-risk attributes or deficiencies in a loan application. For HELOCs, this means that the maximum authorized amount on the HELOC may need to be downwards adjusted if there is a material decline in the value of the underlying property. This may affect the marketability of HELOCs, especially if property values begin to drop.


In a few instances, OSFI's expectations regarding the underwriting process have been heightened from "sufficient" or "reasonable" to "rigorous". For example, the existing Guideline B-20 requires "reasonable steps" to obtain income verification, whereas the Draft Guideline requires that FRFIs use "rigorous efforts" to verify income.

FRFIs will now need to require proof of property insurance and, in the case of insured mortgage loans, obtain a record from the mortgage insurer validating its commitment to insure the mortgage. The insurer's record is required for all insured mortgage loans, whereas previously, a record of the insurer's approval was only required where there may be an exception to the insurer's underwriting policies.

The Draft Guideline expands on the requirement to describe the purpose of the loan. A new section under Principle 2, titled "Purpose of Mortgage Loan" has been added. Per this new section, OSFI expects FRFIs to ascertain and document the purpose of the prospective loan, including the intended use of the loan, type of purchase or refinancing. OSFI considers that the purpose of the loan is a key consideration in assessing credit risk. For example, a property that relies on rental income to service the loan will require the lender to understand the rental market and factor any associated risks into its credit decision and underwriting processes.


Concerns with foreign ownership have been well documented in the media. As a prudential regulator, OSFI's focus is on ensuring that lenders exercise the same rigorous underwriting and credit decision standards for foreign as well as domestic buyers. To that end, the Draft Guideline emphasizes that where borrowers are relying on income from sources outside of Canada, lenders must conduct thorough diligence. The result may be that fewer foreign buyers will qualify for a residential mortgage and this may have a cooling effect on the markets.


A new section on misrepresentation has been added, which stipulates that FRFIs should maintain adequate mechanisms for the detection, prevention and reporting of fraud and misrepresentation, such as falsified income documents. FRFIs are expected to report suspected or confirmed fraud or misrepresentation to the mortgage insurer where the mortgage loan application is for an insured mortgage.


FRFIs cannot lend more than 80 per cent against the value of a mortgaged property without obtaining mortgage insurance. OSFI also expects FRFIs to impose a maximum LTV ratio less than or equal to 65 per cent for nonconforming residential mortgages, which may include non-income qualifying loans, loans to those with low credit scores and mortgages on illiquid properties.

Under the Draft Guideline, FRFIs should not arrange or appear to arrange with another lender a mortgage or combination of a mortgage and other lending products secured by the same property in any form that circumvents the maximum LTV ratio or other limits it establishes in its RMUP. Accordingly, FRFIs will be precluded from entering into arrangements with unregulated mortgage lenders, including mortgage investment corporations (MICs), to offer mortgage loans that exceed the prescribed limits.


OSFI has clarified that a "residential mortgage" includes any loan to a borrower that is secured by residential property, as opposed to a loan to an individual that is secured by residential property, as currently provided under Guideline B-20. This change resolves any uncertainty as to whether Guideline B-20 applied to a residential mortgage loan made to a corporation or other entity.


FRFIs that acquire residential mortgage loans from third-party originators must consider the risks associated with the functions that may be performed by the third party in respect of those acquired loans, including servicing functions. A FRFI will want to ensure that it has adequately assessed counterparty risk when acquiring residential mortgage loans, whether for its own book, as a mortgage aggregator, or for inclusion in a bank-sponsored conduit.


FRFIs that engage in residential mortgage lending or the acquisition of residential mortgage loans will need to anticipate changes to their governance and underwriting processes, and begin looking now at what operational changes will need to be implemented once the Draft Guideline is finalized. Particular attention should be paid to the more rigorous standards that will be expected by OSFI.

Under the existing Guideline B-20, FRFIs that acquire residential mortgage loans originated by a third party should ensure that the underwriting standards of that third party are consistent with the FRFI's RMUP and compliant with the existing Guideline B-20. This requirement continues to apply under the Draft Guideline, so non-FRFI mortgage lenders who sell their mortgages to FRFIs will also need to update their processes to ensure that they are able to sell mortgages to FRFIs.


The industry has until August 17, 2017 to provide comments on the Draft Guideline. Comments can be emailed to OSFI will publish a non-attributed summary of the comments they receive, along with OSFI's responses, on its website when the final version of Guideline B-20 is released. OSFI expects to release the final guideline in fall 2017 and expects it to come into effect shortly afterward. OSFI also expects to make consequential changes to Guideline B-21 – Residential Mortgage Insurance Underwriting Practices and Procedures shortly after the final version of Guideline B-20 comes into effect.

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.

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.

Events from this Firm
23 Jan 2019, Other, Toronto, Canada

We invite you to join members of our National Restructuring & Insolvency Group as they review key restructuring and insolvency developments and trends across Canada in 2018.

30 Jan 2019, Other, Toronto, Canada

Join leading lawyers from Blakes for an interactive discussion that will span a cross-section of recent developments and hot-button topics such as:

  • Emerging class action risks
  • National and multijurisdictional class actions
  • Cybersecurity and data breaches
  • Employment, competition and securities class actions
  • Settlement structures and considerations
14 Feb 2019, Other, Toronto, Canada

Indigenous issues continue to influence business decisions and government policies in energy, mining, infrastructure and other industries.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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