OSFI Rules Spell Opportunity for Some Credit Unions

CUsCredit 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
    • FRFIs will have to use the 5-year Bank of Canada posted rate to qualify borrowers who choose variable rates or fixed terms less than five years
    • 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.)

regulator-provincialTo 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:

  • Alberta: 14.4%
  • B.C.: 14.2%
  • Ontario: 13.5%

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.

regulationCUs 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.

Rob McLister, CMT

  1. Sure…how much capital will a non-OSFI compliant CU be able to raise?
    No more than they are right now. So how will they fund volume increases?

  2. Credit unions don’t have to be OSFI compliant. They are provincially regulated.
    Raising capital is the last of their worries. Most credit unions, especially the big ones, are quite liquid. Many don’t even securitize.

  3. I’m hearing the FEDS are seeking to have the credit unions move from provincial to federal jurisdiction. Harper wants full control.

  4. These rules will still apply to all CMHC backed mortgages and will be reviewed under the new rules before approval.
    Since OSFI was recently put in charge of overseeing CMHC, I guarentee they will tell all financial institutions to “play by our rules or you no longer have access to CMHC”.

  5. Understood BaySt. CUs are primarily funded by member deposits.
    To expand they must gain new members or dip into the capital market for secured borrowing. Is that correct?
    Capital markets won’t be fruitful unless they’re OSFI compliant.
    Increasing membership is a long shot.

  6. Hi Teamocil,
    Thanks for the post. For insured mortgages you’re absolutely right. On cashback downpayment mortgages, for example, you would likely not be able to get 95% insured financing at a credit union, plus 5% cash back (like you do today).
    You might only be able to get 80% financing plus 5% cash back, which means you’d have to put down 15% from your own resources. The market for that kind of product would admittedly be limited, although the option could still exist to offer it and sidestep insurance.
    For low-ratio financing (like HELOCs, conventional stated income, etc.), CMHC insurance is not required. It would seem quite a stretch in authority if OSFI banned insurers from dealing with provincially regulated credit unions who sold non-standard uninsured products.

  7. In order to shut down the income trust loophole we needed BCE (one of Canada’s largest taxpayers) to attempt conversion. DICO is the BCE of this story.

  8. One other caveat worth noting: According to OSFI, FRFIs that acquire mortgages from credit unions must “ensure that the underwriting standards of that third party are…compliant with” OSFI guidelines. So that may prohibit some CUs from offering the above products if they sell mortgages to banks.

  9. All of the large C.U.s (Vancity, Coast, Servus, Meridian) want to go national so I guarantee all will adopt OSFI’s guidelines. They may not publicly broadcast it but they will definitely incorporate the OSFI guidelines into their lending and underwriting practices and policies immediately.
    These whales of the C.U. system have significant pull with the respective provincial regulators so expect the same regulations to apply to all C.U.’s within their system shortly. It’s how C.U.’s have operated for as long as I remember!

  10. Good point and another clear reason why C.U.’s will adopt the OSFI’s new regulations

  11. Hi Banker,
    Credit unions that go national will definitely be bound by OSFI’s rules, as the above story notes.
    As to whether large inter-provincial CUs can sway provincial regulators to ban smaller competitors from offering 80% HELOCs, etc., that is questionable.

  12. You could be right about the HELOC changes. My comment pertained more to mortgage underwriting since many small C.U.’s securitize their mortgages within the C.U.’s and their Central’s funding systems or wish to always carry the option to in the future.
    For this reason, the conservative nature of C.U.`s lending for the reasons you mention, the influence the C.U. whales have on their provincial regulators and the many C.U.`s plans to go national, OSFI`s new rules will be far reaching and beyond the current FRFI`s.

  13. Only a minority of credit unions sell mortgages to banks.
    A bigger question would be, to what extent will CUs’ CMB/MBS issuance and dealings with OSFI-regulated credit union centrals constrain their ability to offer the above products. We’re looking into that more.

  14. Credit unions will raise funding the same way they always do. Keep in mind, they don’t need to go to the market to fund conventional products like HELOCs. Most of those products sit on their balance sheets and are funded internally.

  15. I wouldn’t say increasing membership is a long shot. The Internet lets credit unions market their compelling value proposition easier than ever.

  16. C.U’s raise liquidity and capital a number of ways, Independant third party deposit providers, new share issues, member deposit campaigns, securitizing their mortgages with their centrals and borrowing from their centrals to name a few. If they have well funded capital as many do, they would have no problem funding large growth although I doubt many wish to grow by aquiring business from marginally approved new clients who no longer qualify at banks under the new rules.

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