A deep dive into OSFI’s increased scrutiny

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The banking regulator issued a letter to the institutions is oversees Tuesday, expressing its intention to reinforce its lending requirements. These are the areas it will more heavily scrutinize.

Income Verification

The regulator said it’s aware of cases where mortgage lenders accepted falsified income and/or employment information, and says institutions should have proper processes to minimize chances of these issues arising.

“OSFI expects all financial institutions to exhibit rigour in the verification of a borrower’s income as it is a critical element in the residential mortgage underwriting process,” Superintendent Jeremy Rudin said in the letter. “Inadequate income verification can adversely affect the assessment of credit risk, anti-money laundering and counter terrorist-financing (AML/CTF) compliance, capital requirements, and mortgage insurability.”

Non-Conforming Loans

“The 65 percent LTV threshold used in OSFI Guideline B-20 should not be used as a demarcation point below which sound underwriting practices and borrower due diligence do not apply,” Rudin said. “The mortgage underwriting principles of OSFI Guideline B-20 apply equally to conforming and non-conforming loans.

“Moreover, an assessment of a borrower’s character and capacity to service the loan should always take precedence over the value of the collateral when underwriting mortgage loans and mortgage insurance.”

OSFI advises lenders to establish their own limits on the percentage of non-conforming loans they originate and ensure they are minimized.

Debt Service Ratios

“A borrower’s income should be calculated conservatively and its resilience appropriately questioned,” Rudin said. “In particular, the resilience of rental income from the underlying property, or other potentially variable income in the event of borrower stress amidst declining property values, should be carefully assessed.”

Appraisals and LTV Calculation

The regulator advises lenders to implement the proper policies to ensure they are able to challenge appraisals, which have become less reliable due to rapid house price increases.

Risk Appetite and Portfolio Risk Management

OSFI says it’s important for lenders to ensure their risk appetite aligns with the loans they originate.

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