OSFI Clarifies Treatment of Real Estate Secured Lending Products
The Office of the Superintendent of Financial Institutions (OSFI) decided to maintain the Domestic Stability Buffer for banks at 2.50% of the total risk-weighted assets. The buffer remains unchanged from the level set in June 2021 which came into effect from October 31, 2021. Additionally, OSFI is reviewing the Domestic Stability Buffer, including its design and range, and expects to complete this work in the Fall 2022. OSFI also released an Advisory on clarifying the treatment of innovative real estate secured lending (RESL) products under Guideline B-20.
The Advisory 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 Advisory complements the existing expectations under Guideline B-20, which articulates expectations in respect of three innovative real estate secured lending products: Combined Loan Plans or CLPs, reverse residential mortgages, and residential mortgages with shared equity features. OSFI expects that:
- for most borrowers using Combined Loan Plans, any and all lending above the 65% Loan-to-Value (LTV) limit, which cannot exceed 80% LTV, will be both amortizing and non-re-advanceable. Principal payments applied to the portion above 65% should be matched by a reduction in the overall authorized limit until this overall Combined Loan Plan authorized limit reduces to 65% LTV for all segments, on a combined basis.
- mortgage lending with shared equity features will be subject to all criteria under the federally regulated financial institutions Residential Mortgage Underwriting Policy (RMUP), consistent with Guideline B-20. The federally regulated financial institutions may supply financing for uninsured mortgages with shared equity features, as long as the mortgage provided by the financial institutions is in the first lien position and the equity investment provider’s contribution is a bona fide equity investment.
- for reverse mortgage instruments, federally regulated financial institutions should demonstrate heightened due diligence and ongoing risk management in respect of the collateral management, property appraisal, and longevity risk; the institutions should also establish prudent LTV limits in their RMUPs (that is, a maximum of 65% at origination).
For most borrowers using Combined Loan Plans, these changes will have no effect on the way that they use their products. For those who owe more than 65% LTV, there will be a gradual period where a portion of their principal payments will go toward reducing their overall mortgage amount until it is below 65% of its original loan to value and not be re-advanceable. This will typically happen the next time borrowers renew their Combined Loan Plan after the end of October or December 2023, depending on the lender’s fiscal year. The implementation date for federally regulated lenders with October 31 Fiscal Year End will be October 31, 2023. For federally regulated lenders with December 31 Fiscal Year End, the implementation date will be December 31, 2023. Consumers with Combined Loan Plans will not see a change to their product structure until their next renewal after these dates.
- News Release on Domestic Stability Buffer
- News Release on Real Estate Lending
- Advisory on Real Estate Lending Products
Keywords: Americas, Canada, Banking, Domestic Stability Buffer, Basel, Regulatory Capital, D-SIBs, Mortgage Lending, Guideline B-20, Credit Risk, Real Estate Secured Lending, Lending, RESL, OSFI
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