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    OSFI Examines Impact of Revised Guideline on Mortgage Underwriting

    June 10, 2019

    OSFI published an Information Sheet on the guideline on residential mortgage underwriting practices and procedures (Guideline B-20). The document provides information on the role of OSFI in maintaining a safe and sound Canadian financial system, includes a brief history of the guideline, and reports on the impact the revised Guideline B-20 has had on the uninsured mortgage market in Canada. OSFI had issued an update to the Guideline B-20 in 2017 and the revised guideline came into effect in January 2018.

  • The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

    • To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
    • To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
    • To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
    • To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

    The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

     

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    Effective Date: June 18, 2019

    Press Release
  • Proposed Rule 1
  • Proposed Rule 2
  • Proposed Rule 3
  • Presentation on Regulatory Framework (PDF)
  • Presentation on Resolution Plan Rules (PDF)
  • OSFI states that the revisions to Guideline B-20 are working; the revisions are strengthening mortgage underwriting across Canada and improving the resilience of the Canadian financial system to future shocks. Mortgage underwriting quality is improving, as lenders are approving fewer mortgages for the most highly indebted or over-leveraged borrowers since the B-20 revisions were put in place. The Information Sheet highlights that concerns have been raised that the stress test could limit a borrower’s ability to obtain competitive rates at renewal. OSFI indicated it would be monitoring this closely and data from OSFI regulated lenders shows that following the introduction of the revised guideline, the difference between renewal and new mortgage rates for uninsured five-year fixed and variable rate mortgages has remained largely unchanged. While improvements have been made, OSFI will continue to monitor lender practices, particularly in the area of income verification, and will be proactive with lenders when it identifies areas requiring attention.  

    Guideline B-20 sets out the OSFI expectations for prudent residential mortgage underwriting and is applicable to all federally regulated financial institutions that are engaged in residential mortgage underwriting and/or the acquisition of residential mortgage loan assets in Canada. The guideline articulates five fundamental principles for sound residential mortgage underwriting. The first principle relates to the governance and the development of overarching business objectives, strategy, and oversight mechanisms in respect of residential mortgage underwriting and/or the acquisition of residential mortgage loan assets. The next three principles focus on the residential mortgage credit decision and the underwriting process; these three principles should be evaluated by lenders using a holistic, risk-based approach—unless otherwise specified in this guidance. The borrower’s demonstrated willingness and capacity to service their debt obligations on a timely basis should be the primary basis of a lender’s credit decision. The fifth principle addresses the need for mortgage underwriting and purchasing to be supported by effective credit and counterparty risk management, including, where appropriate, mortgage insurance. The final section of the guideline summarizes disclosure and supervisory requirements.

     

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    Keywords: Americas, Canada, Banking, Guideline B-20, Credit Risk, Residential Mortgage Underwriting, Stress Testing, OSFI

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