OSFI’s final B-20 and B-21 underwriting guidelines left some unanswered questions, especially on validating income for self-employed (a.k.a. business for self, or BFS) borrowers. 

For enlightenment, we connected with OSFI to clarify three specific points.

Guidelines B-21 and B-20 state that income documentation for self-employed borrowers should: 

1.      Be from a source that is “difficult to falsify.”

The question: What sort of documents might be deemed unsatisfactory given this “difficult to falsify” condition? Does this impact electronically sent documents? Lenders commonly receive electronic copies of documents that dishonest individuals can attempt to falsify (e.g., Photoshopping an income number, resaving the image file and electronically faxing it to a lender or broker).

The answer: OSFI tells CMT that it “has not produced a comprehensive list of documents that are ‘unsatisfactory.'” Hence, lenders must use reasonable judgment.

2.      “[Directly address] the amount of the declared income.”

The question: What does “directly address” mean? Does it mean the income on the documentation must match exactly with the borrower’s stated income? For example, if a lender and insurer use a borrower’s bank statement to support his/her income, does “directly address” mean that the bank statement must show the exact amounts of the borrower’s declared income being deposited into his/her personal bank account? Or is it sufficient that the bank statements show gross company revenue that is more than the personal income being declared by the business owner?

The answer: OSFI says, “Documentation should directly address and be able to substantiate the amount of declared income. In [the above] example of a prospective borrower who reports gross company revenues only (and omits expenses), the documentation would provide only partial information about net income.” (Italics ours)

3.      “…Not contradict other information provided by the borrower in the underwriting process.”

The question: Lenders and private insurers sometimes ask for NOAs only to confirm that no taxes are owing. For self-employed borrowers, some lenders and private insurers do not reference the income on line 150 of the NOAs because it can legitimately be lower than the borrower’s actual income, for various reasons. Despite that, does this condition mean that if the income on those NOAs is less than the borrower’s stated income, that the lender should not approve that income?

The answer: OSFI clarifies that: “A Notice of Assessment (NOA) may be one input, among others, that is used to substantiate income. Lower income on a NOA (than that which is declared) does not necessarily imply a contradiction. Lenders and mortgage insurers are expected to weigh the balance of all information and documentation when making their underwriting decision.”

 

OSFI notes that “each loan circumstance is unique and lenders and mortgage insurers need to use appropriate judgment” in all cases. Fortunately for self-employed borrowers, lenders still maintain some flexibility and discretion in interpreting OSFI’s documents guidelines. Failing that, BFS borrowers would be stuck with significantly worse rates and terms at non-prime lenders.