OSFI Rules Spell Opportunity for Some Credit Unions
Credit unions in some provinces will soon get a leg up on banks and other federally regulated financial institutions (FRFIs).
That’s because some of the key mortgage restrictions in OSFI’s new B-20 underwriting guidelines may not apply to them. Reason being, OSFI’s guidelines are drafted for banks and federal trust companies, but credit unions are regulated provincially.
While some provinces may apply OSFI’s rules anyway, others will not. Some credit unions in the latter provinces could therefore snatch some market share from banks.
The CU advantage may be greatest in the eyes of customers who seek:
80% loan-to-value HELOCs
OSFI will soon limit HELOCs at banks and federal trust companies to 65% LTV
But CUs in some provinces (like Ontario) will still be allowed to offer 80% LTV to qualified borrowers
Self-employed stated income mortgages
OSFI guidelines encourage FRFIs to ask for official income documents (like notices of assessment from CRA) to satisfy income reasonability tests for self-employed borrowers
Some provinces, however, may allow CUs to lend with less stringent documentation requirements on low-ratio mortgages, risk permitting
Conventional mortgages with lower qualification rates
But, when an applicant’s qualifications permit, CUs in some provinces (like Ontario) will still be allowed to use more lenient qualification rates (like a 3-year discount rate instead of the 5-year posted)
Cashback down payments
Will be banned at FRFIs but still allowed at credit unions in some provinces (including Alberta and Ontario, and perhaps others…although technically speaking, Alberta CUs don’t generally sell cashback down payment mortgages, says the CUDGC, even though it’s not prohibited.)
To get more details, we consulted with three of the largest provincial regulators: DICO (Ontario), FICOM (B.C.) and CUDGC (Alberta).
CUDGC Executive Vice President Walker Rogers, who oversees Alberta’s 34 credit unions, said, “I think credit union guidelines are reasonably prudent already.”
DICO Chief Executive Officer Andy Poprawa agreed, noting that, “Our institutions have been very conservative.” He added that Ontario credit unions have had prudent underwriting procedures in place for a “long, long” time. “At this point in time, I don’t see any major (mortgage underwriting) changes being required,” he said.
Rogers and Poprawa have each seen credit unions adopt more conservative mortgage policies on their own, especially in the areas of HELOCs and qualification rates.
Poprawa says additional rules on HELOCs and cashback mortgages are unnecessary in Ontario. “We don’t want to tell people how to run their business,” he says. “What we want to do is make sure that they’re managing their risk properly.”
In an email interview with FICOM CEO and Superintendent Carolyn Rogers, she and her team noted that, “FICOM has informed all B.C. credit unions that it will conduct a comparative review of present mortgage underwriting practices against the B-20 guideline. This review is expected to be completed in the coming weeks.”
She also said, “The credit union system is well capitalized.” So, we asked each regulator “how well capitalized are your credit unions?”, and they provided CMT with the following figures. This is how each measures up to the new Basel III minimum “total capital” ratio of 10.5% on a risk-weighted basis:
According to an analyst we spoke with, banks are a bit higher at 15.2% in aggregate, but credit unions are still arguably more conservative in their lending overall. That’s partly because CUs have smaller capital bases that make them more sensitive to individual losses.
In addition, FICOM says much of credit unions’ capital is in the form of retained earnings, which qualifies as more conservative “Tier I capital” under Basel III rules. In B.C., for example, “85 per cent of the credit union system capital is in the form of retained earnings,” it said.
CUs are conservative by other measures as well.
“Credit unions operate in a slightly different environment than our banks do,” explains Mr. Rogers. “Credit unions are smaller and they tend to know individual members and their local markets better. They also tend to have more ‘vanilla’ business operations with more conservative balance sheets.”
That allows CUs to be more “practical” when underwriting and “offer greater latitude to mortgage applicants when appropriate,” he says.
Despite their lending flexibility, one B.C. credit union CEO we spoke with says most credit unions price risk accordingly (i.e., impose higher rates) as required. In other words, borrowers that are not AAA prime customers will pay somewhat higher rates in certain cases.
In the coming weeks, Alberta and B.C. regulators will be reviewing lender practices and feedback from credit unions.
Thereafter, both provinces (and other provinces as well) will send out more detailed advice on things like HELOC loan-to-values and stated income guidelines. Those recommendations may or may not tighten existing rules further.
Credit unions that are not required to adopt OSFI-style guidelines, especially the HELOC and stated income restrictions, could see material volume increases. Much of that volume will come from mortgage brokers who re-route clients to credit unions. These are clients that would have gone to banks prior to the rule changes.
Sidebar: Credit unions that choose to do business nationwide will be bound by OSFI’s rules. (See: Mega Credit Unions Coming.) OSFI’s added regulations will certainly be a trade-off, but one that CUs with federal aspirations will definitely make.
Update: OSFI guidelines may also apply to CUs who deal with federally regulated institions in other ways. The implications there remains to be seen. In the end, it’s possible that only a minority of CUs would be able to offer the above products.