OTTAWA ─ July 7, 2016 ─ Office of the Superintendent of Financial Institutions

The Office of the Superintendent of Financial Institutions Canada (OSFI) today released a letter to all federally regulated financial institutions (FRFIs) reinforcing its expectation that federally regulated financial institutions engage in prudent underwriting of residential mortgage loans.

With Canadian household debt levels at all-time highs, persistently low interest-rates, and rapid house price increases in some areas, the prudential risks and vulnerabilities for financial institutions have increased.

Given this environment, OSFI has enhanced its supervisory oversight and identified a number of issues that warrant close attention by mortgage lenders. OSFI will continue its scrutiny in the areas of income verification, non-conforming loans, debt service ratios, appraisals and loan-to-value (LTV) ratio calculations, and institutional risk appetite.

OSFI expects mortgage lenders to verify that their mortgage operations are well supported by prudent underwriting practices, as well as sound risk management and internal controls that are commensurate with these operations.

“With rapid price increases in some areas and current exceptionally low interest rates, the risks are getting larger,” said Superintendent Jeremy Rudin. “OSFI wants to see sound mortgage underwriting procedures in place that adapt to the ever-changing circumstances in this area”.

OSFI will be placing a greater emphasis on confirming that controls and risk mitigating practices at mortgage lenders and mortgage insurers are sound and consistent with the principles underpinned by OSFI Guideline B-20 — Residential Mortgage Underwriting Practices and Procedures and OSFI Guideline B-21 — Residential Mortgage Insurance Underwriting Practices and Procedures.

OSFI is also moving forward with initiatives announced in a December 2015 letter aimed at strengthening the measurement of capital held by the major banks and mortgage insurers, to better position them to withstand potential losses stemming from their residential mortgage underwriting and mortgage insurance operations.