In June 2012 Canada’s banking regulator (OSFI) created guideline B-20 to tighten underwriting practices on conventional mortgages.
To date, provincially regulated lenders (like credit unions) haven’t been significantly impacted by B-20 because OSFI only supervises federally regulated lenders.
But now, for the first time (that we know of), a province has put forth its own underwriting standards along the lines of OSFI’s B-20. That province is B.C. and these are its proposed Residential Mortgage Underwriting Guidelines (PDF).
CMT asked Doug McLean, Deputy Superintendent of FICOM, for details on why these rules were needed and what effect they’ll have. Among other things, it looks like we might be saying goodbye to 80% loan-to-value revolving HELOCs in B.C.
CMT: Are these “regulations” or is there flexibility here?
Mr. McLean: FICOM provides guidance to communicate standards and expectations to the credit union system as part of its continued efforts to increase transparency and understanding of its supervisory practices. Adherence to these guidelines is what FICOM will measure when assessing a credit union’s risk management and governance.
CMT: Who did FICOM consult with when drafting these guidelines?
Mr. McLean: FICOM’s Residential Mortgage Underwriting Guideline has been issued for consultation, we are still seeking feedback from credit unions and other interested parties. With that said, FICOM has undertaken considerable work over the past two years evaluating residential mortgage underwriting practices. The draft guideline was informed by observations from FICOM’s internal assessments of BC credit unions and by standards for residential mortgage underwriting issued by national and international bodies.
CMT: Was this prompted in any way by a suggestion or request from OSFI, the Department of Finance or some other federal policymakers?
Mr. McLean: No.
CMT: The draft says “A credit union’s residential mortgage underwriting policy ensures that its residential mortgage portfolio is aligned with its risk appetite and strategy.” What if the CU’s risk appetite is for 80% LTV HELOCs? Is there any exception to your 65% LTV limit on the revolving portion?
Mr. McLean: Credit unions are expected to limit the non-amortizing HELOC component of a residential mortgage to a maximum LTV ratio of less than or equal to 65%…Any mortgages beyond the 65% are amortized appropriately and documented as an exception to policy that is approved, monitored and reported in accordance with the requirements within the credit union’s residential mortgage underwriting policy.
CMT: Is there any evidence that the status quo is so risky as to warrant these tighter rules?
Mr. McLean: Residential mortgage loans represent a significant portion of credit union system assets and approximately 70% of loans. This guideline ensures credit unions are aware of supervisory expectations for this core line of business.
The guideline documents and communicates our guidance to the broader credit unions’ systems with the aim to promote transparency as well as to provide some consistency in underwriting across credit unions.
It’s also important to note that FICOM’s draft guideline is informed by results of recent self-assessments and surveys on credit union residential mortgage underwriting practices. FICOM issued a number of credit union self-assessments and surveys over the past year.
CMT: Are there exceptions to the rule that CUs must get 2-3 years of tax returns for self-employed borrowers?
Mr. McLean: The guideline notes that where tax assessments are unavailable, a credit union ensures that it has an alternative reliable and documented form of income verification.
CMT: Do CUs need to use CMHC debt service ratio calculations on conventional mortgages also?
Mr. McLean: Yes, the draft guideline proposes this requirement.
CMT: Will FICOM still allow amortizations over 30 years on conventional mortgages?
Mr. McLean: As noted in the draft guideline:
· In determining a borrower’s capacity, a credit union documents any amortization beyond 30 years as an exception to policy that is approved, monitored and reported in accordance with the requirements within the credit union’s residential mortgage underwriting policy.
· An appropriate exception to policy portfolio concentration tolerance is documented in the residential mortgage underwriting policy with the board receiving quarterly reporting on this segment of the loan portfolio.
CMT: Will B.C. CUs still be allowed to qualify people for conventional variable rate mortgages using less than the 5yr fixed Bank of Canada benchmark rate?
Mr. McLean: We expect to receive feedback from credit unions on this issue during the draft guideline consultation period.
Sidebar: If you want to comment on these guidelines you have until Friday May 23, 2014. Send your feedback to FICOM’s Melanie Achtemichuk, Director, Policy Initiatives at CUandTrusts@ficombc.ca.
Rob McLister, CMT (email)
Last modified: April 25, 2014
