OSFI Examines Impact of Revised Guideline on Mortgage Underwriting
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.
Related Links
Keywords: Americas, Canada, Banking, Guideline B-20, Credit Risk, Residential Mortgage Underwriting, Stress Testing, OSFI
Featured Experts
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Nihil Patel
Data scientist; SaaS product designer; credit portfolio analyst and product strategist; portfolio modeler; correlation researcher
Previous Article
APRA to Transition to Annual Stress Testing of Large Banks in 2020Related Articles
OSFI Issues Phase2 Consultation on Climate Scenario Exercise for Banks
The Office of the Superintendent of Financial Institutions (OSFI) recently announced a consultation on the second phase of the Standardized Climate Scenario Exercise (SCSE) for banks and other financial institutions it regulates in Canada.
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.