On Thursday, the Office of the Superintendent of Financial Institutions (OSFI) announced its complete B-21 guidelines for underwriting insured mortgages. But it didn’t stop there. The banking regulator also tweaked some of its B-20 guidelines, rules that shook the mortgage market when they were initially released in summer 2012.

This time around, OSFI’s actions will have far less impact on the housing market. 

Here’s some of what it had to say:

On cash-back mortgages:

The regulator clarified that it has no issue with lenders providing cash-back incentives to mortgagors. However, it said “incentive and rebate payments (i.e., ‘cash back’) should not be considered part of the down payment” unless it’s related to a government-funded affordable housing program.

On borrowed down payments:

OSFI confirmed for CMT that borrowed funds can still be used for down payments (including funds borrowed off a credit card), subject to the lender/insurer’s policies and borrower qualification. We could see this being one of the next loopholes to be closed. It’s hard to justify allowing people to borrow a down payment at 18%+ interest while banning cash-back down payment programs (which often have effective interest rates that are just a half-point above normal).

OSFI adds, “Where non-traditional sources of down payment are being used, further consideration should be given to establishing greater risk mitigation and/or additional premiums to compensate for increased risk. One example of higher risk mitigation might be a larger down payment…Borrowed funds are expected to be considered in the total debt service (TDS) calculations used by mortgage insurers, which captures loan obligations beyond the mortgage loan. The use of borrowed funds would typically increase the value of an insurer’s quantitative Total Debt Service ratio. In some cases, borrowed funds may result in a borrower (e.g., marginal borrower) breaching the insurer’s TDS limit and the loan being denied mortgage insurance.”

On debt-ratio calculations:

OSFI said it “encourages the use of an industry-wide standard for the calculation of debt service coverage ratios.” Its standard of choice is CMHC’s method (e.g., 39%/44% maximum GDS/TDS using CMHC’s guidelines for calculating inputs like heating cost, rental income treatment, etc.).

On evaluating self-employed income:

For self-employed borrowers, the lender must verify the income from an “independent source” that is difficult to falsify. In reality, though, the days of true “stated income” are so far gone at federally regulated lenders that this clarification is almost a non-event.

On monitoring lenders:

Insurers must keep a close eye on lenders’ underwriting practices. Moreover, OSFI says it expects insurers to “exercise a relatively higher level of examination and scrutiny in respect of underperforming lenders (e.g., those with proportionately higher levels of delinquencies and claims, on a risk-adjusted basis) or whose practices have been found unsatisfactory…(e.g., poor loan documentation, inconsistent reporting, evidence of misrepresentation, forms of negligence, etc.).” OSFI stressed the importance of on-site lender reviews, and said insurers must consider the results of lender assessments when considering whether to approve an application from that lender. If this wasn’t painfully obvious before, now it’s even clearer: absolutely no lender in Canada wants to (or can afford to) post abnormally high arrears and insurance claims numbers.


The industry has until June 30, 2015 to implement the new B-20 and B-21 guidelines. OSFI’s full comments and policies are available here.

Rob McLister, CMT