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The Regulator has come out with a Draft on proposed changes to Federally Regulated Financial Institutions. There has been a tremendous amount of lobbying that has seemed to work with some of their previous proposed changes. Such as qualyfying applicants everytime their mortgage would come up for renewal. Simple argument is what happens to someone who's never missed a payment but has suddenly lost their job or become sick/disabled? What happens then?

It's a very interesting time and we are hoping the governments over reaction doesn't end up hurting the market and economy.

Please Read below. Thank you, 

June 6, 2012

To:    Federally-Regulated Financial Institutions (FRFIs)

Subject:  Interim Update on Draft Guideline B-20 – Residential Mortgage Underwriting Practices

and Procedures

On March 19, 2012, OSFI published Draft Guideline B-20 – Residential Mortgage Underwriting

Practices and Procedures.  The comment period ended on May 1, 2012.  I would like to thank everyone

who provided submissions. 

OSFI has assessed the comments and is now in the process of preparing final Guideline B-20 for public

release in the near future.  Along with the final guideline, OSFI will publish a summary of the comments

received and an explanation of how they were dealt with in the final version of the guideline.

The following provides a brief description of OSFI’s decisions on key issues, which will be reflected in

the final Guideline. 

1. Re-qualification at Renewal – Current practice regarding residential mortgage renewals has served

FRFIs well.  OSFI agrees, for example, that having a good payment record is one of the best

indicators of credit worthiness.  OSFI, therefore, expects that FRFIs themselves will remain

responsible for deciding what level of review to place on borrowers’ qualifications at the time of

renewal.  FRFI renewal practices should be articulated in internal policies governing their

underwriting of residential mortgage loans.  FRFIs, however, will be expected to refresh the

borrowers’ credit metrics periodically (not necessarily at renewal) so that FRFIs can effectively

evaluate their credit risk.  

2. Home Equity Lines of Credit (HELOCs) – OSFI is maintaining its position that the HELOC

component of a mortgage be restricted to a maximum loan-to-value ratio of 65 per cent.  HELOCs

are inherently riskier products, given their revolving nature, persistence of debt balances and their

ineligibility for mortgage insurance.  However, HELOCs at or below an LTV ratio of 65 per cent will

not be required to be amortized, as the revolving aspect of a HELOC is a fundamental feature of the

product.     

3. Domestic vs. International Application of the Guideline – Guideline B-20 will primarily apply only

to the Canadian operations of FRFIs.  However, the international mortgage lending and acquisition

activities of FRFIs would need to be reflected in the Residential Mortgage Underwriting Policy

(RMUP) of FRFIs (or their residential mortgage underwriting policies) and in their governance and

risk management frameworks (i.e., business strategy and risk appetite).

4. Disclosure Requirements – For greater transparency, clarity and public confidence in FRFIs’

mortgage operations, OSFI is maintaining disclosure requirements in Guideline B-20.  These will

now focus on the domestic residential mortgage operations of FRFIs and key mortgage metrics (e.g.,

LTV ratios and amortization).  However, the disclosure requirements will not include information

that is considered proprietary to FRFIs, the disclosure of which could cause a competitive

disadvantage for FRFIs relative to non-FRFIs and international competitors that do not face similar

requirements.  

5. Residential Mortgage Underwriting Policy – Given the significance of mortgage operations to many

FRFIs, OSFI expects FRFI Boards to play a substantive role in the development and assessment of

the RMUP (or internal mortgage underwriting policies), as well as to provide general oversight of

FRFIs’ mortgage operations and internal controls.  OSFI will clarify the duties of the Board in this

regard in the revised guideline.

6. Application of the Guideline to FRFIs that are Mortgage Insurers – Sound mortgage underwriting

practices are critical for both mortgage originators (and acquirers) and mortgage insurers.  However,

given its general focus on the mortgage origination process, Guideline B-20 will only apply to FRFIs

that are mortgage originators (or acquirers).  A separate guideline applicable to FRFIs that are

mortgage insurers will be published for consultation at a later date.   

7. Automated Valuations of Property vs. On-Site Appraisals – No substantive changes will be made to

the draft guideline in this regard.  FRFIs are still expected to take a risk-based approach to assessing

the value of a property, with more comprehensive valuation approaches for higher-risk transactions. 

It is OSFI’s position that FRFIs should generally not rely on any single method for property

valuations.  

OSFI’s expectations with respect to FRFI implementation of Guideline B-20 and related timelines will be

clarified at the time of the release of the final Guideline.  

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