OSFI Updates NCCF Returns, Consults on Mortgage Underwriting Guideline
The Office of the Superintendent of Financial Institutions (OSFI) updated the Financial Information Committee (FIC) regulatory forms and instructions for the Net Cumulative Cash Flow or NCCF (Form 660). As part of this update Form 660 NCCF return will be decommissioned and replaced by three separate returns, which are expected to be effective from April 30, 2023. These three returns are applicable to different categories of Small and Medium-Sized Banks or SMSBs: Comprehensive NCCF for D-SIBs and Category 1 SMSBs, Streamlined NCCF for Category II SMSBs, and the Operating Cash Flow Statement Category II SMSBs. The NCCF returns are to be completed using the prescribed methodologies and calculations and are in line with the Liquidity Adequacy Requirements from OSFI. Any resulting updates to the validation rule reports or the XML/XSD schemas will be published on the OSFI Web site later. OSFI is also seeking stakeholder feedback on revisions to the Guideline B-20, with respect to a set of proposed complementary debt serviceability measures aimed at better managing the prudential risks arising from high consumer indebtedness. The feedback is expected to be submitted by April 14, 2023.
In the Annual Risk Outlook 2022-23, OSFI committed to initiating consultations on the B-20 Guideline in the first calendar quarter of 2023. In this consultation, the proposed debt-serviceability measures include loan-to-income (LTI) and debt-to-income (DTI) ratios that restrict mortgage debt or total indebtedness as a multiple, or percentage, of borrower income. The proposed measures also include the debt service coverage ratio, which restricts ongoing debt service obligations as a percentage of borrower income, and the interest rate affordability stress tests, which is a minimum interest rate that is applied in debt service coverage calculations to test the ability of a borrower to afford higher debt payments in the event of negative financial shocks. These measures could be implemented at the loan and the lender levels. At the lender level, limits can also be applied at different levels of measurement, restricting either the dollar value or count of the flow, or volume, of new mortgages underwritten, or stock of outstanding mortgages. OSFI may publish interim guidance to the industry based on this consultation; therefore, it is seeking inputs on the following:
- Proposal to adopt a high loan-to-income threshold of 4.5x, with a 25% quarterly volume limit on originations that exceed this threshold. The proposed limit would apply to the total dollar value of quarterly originations. Compared to a restriction on loan count, this would limit incentives to concentrate high loan-to-income lending in a small number of loans
- Consideration on the formulas and definitions for Gross Debt Service and Total Debt Service and whether to adopt those that currently exist for insured mortgages
- Appropriate Gross Debt Service and Total Debt Service thresholds for uninsured mortgages, which could involve graduated or tiered limits
- An explicit amortization limit used for qualification in B-20 Guideline that, in combination with debt service ratio restrictions, would limit excessive leverage
- An explicit principles-based expectation that lenders establish, monitor and report on different Minimum Qualifying Rates, or MQRs, in addition to the current Minimum Qualifying Rate set in regulation, according to different risk characteristics and product types
- Expectation that the Minimum Qualifying Rate be applied to a borrower’s total debt service (that is, for other existing mortgages and non-mortgage debt obligations), in addition to gross debt service
- Tests of affordability and other debt serviceability measures for non-mortgage retail lending outside of the B-20 Guideline.
In 2023, OSFI will conduct a full review of B-20, starting with this initial consultation on debt-serviceability measures and examining the additional tools to preserve credit quality and sound underwriting at the federally regulated financial institutions. The inputs received will inform revisions to B-20, which will be issued for public consultation at a future date. OSFI may also publish an interim guidance to the industry, based on this consultation.
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Keywords: Americas, Canada, Banking, Basel, Reporting, Lending, Macro-Prudential Policy, Credit Risk, Liquidity Risk, NCCF Returns, OSFI
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