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