OSFI to increase supervision on mortgage underwriting

The Office of the Superintendent of Financial Institutions released a letter Thursday addressed to all federally regulated financial institutions about its expectations for prudent underwriting

The Office of the Superintendent of Financial Institutions released a letter Thursday addressed to all federally regulated financial institutions about its expectations for prudent underwriting.

“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.”

Vulnerabilities for financial institutions have increased, according to OSFI, due to record-high debt levels and rapid home price increases.

“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,” OSFI said.

The regulator will be more stringently policing institutions to ensure risk mitigation practices are sufficient among mortgage lenders, and that they are in line with both B-20 and B-21.

OSFI has identified five areas related to B-20 that it will now scrutinize more heavily. They are; income verification, non-conforming loans, debt service ratios, appraisal and loan-to-value calculations, risk appetite and portfolio risk management.

“Given the current economic environment in Canada, with record levels of household indebtedness and growing risks and vulnerabilities in some housing markets, OSFI’s supervisory scrutiny in the area of mortgage underwriting will continue,” OSFI said. “Moving forward, OSFI will place an even greater emphasis on confirming that financial institutions conduct prudent mortgage underwriting, and that their internal controls and risk management practices are sound and take into account market developments.”

To read the letter in its entirety, click here.