Canada's Office of the Superintendent of Financial Institutions has drafted a proposed set of guidelines for sound residential mortgage underwriting practices.
Mark Zelmer, assistant superintendent, regulation sector, issued a press statement indicating that although financial institution mortgage portfolios have been performing well, there is concern about several “vulnerabilities” in the country's financial system, including high household debt levels.
The Canadian regulator indicated that it looking for industry feedback on the guidelines, which it said would not affect any of the government's rules for insured mortgages.
The Financial Stability Board's guidelines would apply to all of Canada's federally-regulated financial institutions that underwrite, purchase or in some cases provide mortgage insurance on residential loans in Canada and internationally. Residential loans are defined as mortgages secured by one-to-four unit properties, including both open and closed end home equity products.
There are some main principles in the guidance for mortgage market participants covered by the guidelines that include:
• Use a comprehensive, board-approved underwriting policy and have residential mortgage practices and procedures that comply with it.
Among other things, the policy should “at a minimum” detail the market participant's underwriting purchasing, and/or insurance in terms of products or markets.
Also it should include information on risk management, including lender, purchasing, insurance product and geographic concentration limits, as well as delegated limits of lending personnel and limits on any exceptions, including portfolio sub-limits on higher-risk residential mortgage business.
In addition, there should be identification and escalation processes for exceptions, in any, including a process for approval and exception reporting.
There should also be information on the use and applicability of residential mortgage models, the roles and responsibilities of those responsible for overseeing and implementing the underwriting policy (including the approval process), ownership of and accountability for the policy, and updates to it as needed to reflect changing market conditions and regulatory environments.
• Perform “reasonable” due diligence to record and assess the borrower's identity, background and demonstrated ability to service his or her debt obligations on a timely basis.
• Have “sound” collateral management and appraisal processes for mortgaged properties.
• Use “effective” credit and counterparty risk management practices and procedures that support residential mortgage underwriting and asset portfolio management, “including, as appropriate, mortgage insurance.”
