Brokers feeling first effects of B-21

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Lenders on the B-side are now asking for bank statements to verify income, a requirement that brokers say is slowing down the deal process.

“Prior to B-21, monoline B-lenders were happy and comfortable confirming income with [pay stubs],” Joseph Park of JP Mortgage Services told “But now they want to match the invoices with deposit activity.”

According to Park, one of the advantages of using a B-lender in the past was because of the quick turnaround, but now they are taking as long with the underwriting as A-lenders.

And it’s a new trend, according to one player, as regulators are more closely monitoring lender activity.

According to Principle 4: FRMI’s Periodic Assessments of Lenders’ Underwriting Practices of OSFI’s B-21 guidelines, “OSFI expects a FRMI 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).”

Further, OSFI laid out more strict guidelines for verifying income in Principle 3: Mortgage Insurance Criteria and Insurance Coverage Requirements for Lenders of the guidelines. In it, OSFI states:

In determining the reasonableness of the documentation used to support the income, sound practice suggests that:
  • The income amount is verified by an independent source;
  • The verification source is difficult to falsify;
  • The verification source directly addresses the amount of the declared income; and
  • The income verification information and documentation does not contradict other information provided by the borrower in the underwriting process.
“I would say some of the lenders started doing this in January of this year,” Ranjit Dhillon of Centum Mortgage Smart Inc. told “When we get feedback from lenders, they tell us they’ve been audited by OSFI and that’s why they have to ask for the bank statements.”

As a result, Dhillon says alternative deals now take four times longer than they did in the past because of the increased back-and-forth that is required between himself, the client, and the lenders.

“On the prime side, there are a lot of expectations when it comes to documents,” Dhillon said. “Now what’s happening is the rules have changed and I accept that the rules have changed and they are tightening but when you are charging someone 4.19 per cent and one per cent fees on a 75 per cent LTV and appraisals and other fees at that point in time lenders on the sub-prime side need to be more lenient with the documentation.”
  • John Van Driel on 2015-06-11 9:54:53 AM

    Just another one of life's challenges!!

  • Ron Butler on 2015-06-11 11:03:59 AM

    Our B lenders have been fighting the good fight with OSFI for many years now. Most brokers don't know that OFSI has pressed for the current levels of documentation for years and our B lenders pushed them off. Sooner or later in the face of relentless government pressure even the toughest B lender has to succumb.

    The are always unintended consequences of government actions. By forcing traditional trust or bank B lenders to act more like A lenders OSFI has caused the growth of barely regulated small MICS. There have been so many new MICS in the last 2 years you need a spreadsheet to keep track of them.

    This will end in tears for the investors in these tiny lenders. B lenders like Home Trust and Equitable are very careful about property underwriting and very skilled at managing default. The truth is that some of the new MICS treat these issues lightly, some of folks who run the MICS are just taking a skim off the top and frankly are not aligned with investors on the final outcomes of the lending. The folks who run some of these new MICS make money from lending and are not tied to the default outcome so the more lent the better for the MIC owners.

    Don't get me wrong there are many great, old MICS who do a brilliant job and possibly some of the new ones will be well run. But realistically, when the property market does finally turn the investors in some of these MICS will be gutted.

    If the government had just left Home Trust and Equitable etc. to do the jobs they were very good at, this future bad outcome could be avoided.

  • Kevin on 2015-06-11 3:47:35 PM

    BOO HOO brokers have to provide documentation to support the information that they submit to lenders. The nerve of the government to expect that people actually provide verification of the information that they provide.

    Maybe if the levels of fraud stopped rising at alarming rates it might be less of an issue.

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