Home Equity Loan Guidelines

Guidance B-20: The Office of the Superintendent of the Financial Institutions Canada (OSFI) expects the Office of the Superintendent of Financials Canada (OSFI) to conduct circumspect home ownership asset management transactions in accordance with its resident Mortgage Underwriting Practices and Procedures (the Guideline), which applies to all government-regulated finance entities (FRFIs) involved in the home ownership and/or purchase of home ownership in Canada.

This Directive does not have retroactive effect on existing private mortgage loans. The OSFI expects the FPFIs to be in full conformity with the Guideline by the end of the financial year 2012 and the OSFI has indicated that the FPFIs should, as far as possible, fulfil the policies and meet the objectives laid down in the Guideline of 21 June 2012.

It includes all mortgages to a person backed by real estate (i.e. one- to four-part apartments), home equity facilities (HELOCs), home equity mortgages and other similar items that use home ownership as collateral. There are five basic guiding principals for solid subscription of housing in the Directive, each of which is explained below.

Front-end Financial Institutions (FRFIs) dealing with the asset backing of housing mortgages and/or the purchase of housing loans should have a full resident mortgage lending and underwriting policy (RMUP). FRFI private mortgages practice and procedure should be consistent with their incumbent MRP. It addresses the supervision by the Executive Committee and senior managers of construction financing policies and processes.

The Board's approval of a Board of Directors' approval of a Board Appetite Framework (the terms of which will be laid down in a future revision of the OSFI Directive Guidelines on Governance ) should define thresholds for the levels of risks that the FRFI is willing to agree to in relation to private mortgage lending and this should provide the foundation for the RCRM.

It should be based on the FRFI's company-wide policy and in turn be connected to the company's overall riskmanagement frameworks. They should mirror the scale, type and complexities of an FRFI's private mortgaging operations. The OSFI anticipates that the FRFI Governing Body will examine and debate the FRFI RMP or any changes thereto and that it will fully appreciate the decision, plan and policy of top managers with regard to the endorsement of real estate and/or the purchase of housing finance and their possible implications for the FRFI.

It should review, challenge and obtain assurance from executive officers that it is in line with its own decision-making and the FRFI operational and riskmanagement strategies endorsed by the Governing Body, and that the relevant operational control mechanisms are robust and effectively enforced. In practice, the Governing Body should be able to prove to the OSFI that it has met these aspirations and should record the communication in a way that enables it to do so.

As a general rule, an FRFI should, through its monitoring role in the field of riskmanagement, have appropriate procedures in place to autonomously and objectively identifying, assessing, analysing, monitoring, controlling, monitoring and mitigating private mortgage-related exposures and to ensuring that riskmanagement guidelines are followed (and assured to the directors and top management) and to report on exemptions and model efficacy.

An executive of an FRFI should annually submit a statement to the Administrative Council certifying that the FRFI's subscription and purchase policies and processes for housing and related risks comply with the Directive's established standard, unless otherwise stated in the statement and communicated to the Administrative Council and the OSFI.

Adequate due care should be exercised by an FRFI to identify and evaluate the identification, backgrounds and proven readiness of the debtor to meet its indebtedness in a timely manner. Under the Guideline, an FRFI should make sure that it conducts an appropriate investigation of the context, loan histories and lending patterns of a potential mortgagor in order to provide an evaluation of the borrower's credibility when repaying a loan.

Therefore, the FRFI should keep full records of the information that resulted in a loan authorisation, which should include a definition of the loan objective, job history and review of earnings, calculation of the loan servicing rate, LTV rate, real estate valuations and estimates, report of the loan office and any other loan request, records confirming the origin of the down payments,

Sales and purchasing contracts and other accompanying documentation, an account of any extenuating criterion or other element for higher exposure levels, a clear justification for the choice (including exceptions), and a set of data from the homeowner confirming permission to insulate the homeowner if there may be an exemption from the homeowner's policy.

These documents should be obtained when the mortgages are created and for any future funding of the mortgages, and the borrowers' analyses should be regularly reviewed (not just at renewal). Principal 3: Financial intermediaries should make an appropriate assessment of the borrower's capability to meet its indebtedness in a timely manner. In order to evaluate a borrower's capability to meet its indebtedness, the Guideline provides that an FRFI should conduct appropriate investigations and take appropriate action to review a borrower's basic earnings (including occupational background and earnings history) and also conduct an adequate due-diligence credit assessment against a sponsor or subscriber.

ERFIs should define indicators of capacity to service debts, define conservative policies on capacity to service debts (which should be defined in the RMUP) and compile each borrower's capacity to service debts rates to assess affordability. The FRFI should have a specified payback time limit for all signed retail mortgage loans. The OSFI anticipates that the expected return on the subscribed mortgage will be less than the FRFI's ceiling as indicated in its MRP.

There is no requirement in the Directive that Frontiers have established depreciation rules for all HELOC outstandings. Policy 4: Financial intermediaries should have robust security collaterals in place and evaluation techniques for the underlyings. This Guideline provides that an FRFI should have clear and open evaluation guidelines and methods for the evaluation of the underlyings.

For example, on-site inspection, third parties valuations and/or automatic evaluation instruments are given as possible solutions, but the Directive makes it clear that FPIs should not base themselves solely on these, but should adopt a more global and careful real estate evaluation policy. The Loan to Value (LTV) metrics are often used to measure exposure to and OSFI recognizes the relationship between LTV metrics and exposure to exposure to credit risks.

Under the Directive, LTVs should be set at an appropriate LTV ration (for different kinds of hypothecary transactions) which may be set by legislation or established on the basis of actual and anticipated future economic circumstances and other risks. Legally, private mortgages taken out for the purchase, renovation or improvement of a real estate must be covered if their LTV share exceeds 80%.

OSFI also anticipates that the FRFI will require a LTV ceiling of less than or equal to 65 per cent for non-compliant private loans. For HELOCs, OSFI anticipates that FRFI will restrict the non-amortising HELOC part of a private mortgag to a LTV of less than or 65 per cent.

The OSFI anticipates that the LTV median for all compliant and non-compliant private loans and ELOCs will be below the FRFI ceilings as expressed in its MMRUP and reflects an appropriate spread of LTV rates across the portfolios. Policy 5: Financial intermediaries should have in place efficient loan and offsetting loan riskmanagement policies and processes to assist in the administration of private loans and reinsurance and the administration of loan investments, where appropriate include loan insurances.

In order to minimise the risks, Frontiers may take out mortgages with CMHC and commercial mortgages and OSFI points out that the use of these two insurances is appropriate, provided that a Frontiers carries out a regular duty of care towards the mortgages provider according to its own levels of risks towards that one. The OSFI has pointed out that the Directive does not cover mortgages companies, although a proposal for a Directive on mortgages companies is foreseen.

The FRFI acquiring housing finance granted by a third person should make sure that the subscription standard of that third person is in line with the FRFI MMRP and with the Directive. This Guideline lays down the general rule that an FRFI should publish enough information on its construction financing portfolio to enable operators to make an appropriate assessment of the solidity and state of the FRFI's construction financing business.

Recommendations for disclosure to the general authorities in relation to housing mortgaged assets should, but are not restricted to, (i) the amount and rate of overall secured and unsecured housing mortgaged credits and heelocs, (ii) the rate of housing mortgaged credits falling within different amortisation periods relevant to the FRFI, (iii) the mean LTV for emerging and emerging unsecured housing mortgaged credits and heelocs at the end of each cycle, and (iv) a debate on the possible effects on housing mortgaged credits and heelocs on the possible effects on housing mortgaged credits and heelocs.

An FRFI shall be obliged to keep its TMRUP and related managerial reporting up to date and make it available to the OSFI upon OSFI demand. In addition, an FRFI should immediately notify the OSFI if it becomes aware of any problems in subscribing to loans on real estate which could have a significant effect on its finances. If an FRFI does not take adequate consideration and oversight of the risk of subscription or purchase of private equity securities, OSFI may take remedial action or demand that the FRFI take remedial action, which may include increased oversight and/or adaptation of the FRFI's own funds requirement or of an approved asset-to-capital multiplier, appropriate to the risk incurred by the FRFI.