The final version of the revised Guideline B-20 Residential Mortgage Underwriting Practices and Procedures was published by OSFI on June 21, 2012. The Guideline, together with the tightening of the rules for government-backed insured mortgages announced by the Minister of Finance on the same day (to, among other things, reduce the maximum amortization period to 25 years and lower the maximum amount that Canadians can borrow when refinancing from 85% to 80%), form part of the Canadian Government’s attempts to strengthen the Canadian housing finance system.
The Guideline sets outs 5 principles for managing risk associated with residential mortgage underwriting and/or the acquisition of residential mortgage loan assets in Canada.
All federally regulated financial institutions (FRFIs) are expected to fully comply with the Guideline by the end of fiscal year 2012/13, and where possible, comply with the principles and expectations set out in the Guideline as of the date of its release.
- Principle #1: FRFIs that are engaged in mortgage underwriting and/or purchasing should have a comprehensive, Board-approved Residential Mortgage Underwriting Policy (RMUP) that is linked to the FRFI’s Board-approved risk strategy and risk management framework, and the Board should ensure that it is being complied with.
- Principle #2: FRFIs should perform reasonable due diligence on the borrower to assess the borrower’s identity, background and demonstrated willingness to service its debt obligations on a timely basis.
- Principle #3: FRFIs should adequately assess the borrower’s capacity to service debt on a timely basis including taking steps to verify the borrower’s income and the establishment of appropriate debt serviceability metrics.
- Principle #4: FRFIs should have sound collateral management and appraisal processes for the underlying mortgage properties. Non-amortizing Home Equity Lines of Credit (HELOCs) must be limited to a maximum authorized LTV ratio of less than or equal to 65%.
- Principle #5: FRFIs should have effective credit and counterparty risk management practices and procedures that support residential mortgage and underwriting and asset portfolio management, including, as appropriate, mortgage insurance. Where a FRFI purchases mortgages that have been originated by a third party, the FRFI should ensure that the underwriting practices of the third party are consistent with its own practices, its RMUP and the Guideline, and not rely solely on the attestation (i.e., a representation and warranty) from the third party.
Public Disclosure Requirements:
For greater transparency, clarity and public confidence, FRFIs should publicly disclose sufficient information related to their residential mortgage portfolios for market participants to be able to conduct an adequate evaluation of the soundness and condition of the FRFI’s residential mortgage operations, including key mortgage metrics (e.g. LTV ratios and amortization).