- Type of Publication: Guideline
- Category: Sound Business and Financial Practices
- Date: November 2014
- No: B-20
I. Purpose and Scope of the Guideline
The Financial Stability Board (FSB) has published Principles for Sound Residential Mortgage
Underwriting Practices (“FSB Principles”), which call on all jurisdictions to ensure that entities
that originate mortgages or own the resulting risk, including any entities involved in outsourcing
of mortgage underwriting, adhere to the FSB Principles.
This Guideline sets out OSFI’s expectations for prudent residential mortgage underwriting, and is
applicable to all federally-regulated financial institutions (FRFIs) that are engaged in
residential mortgage underwriting and/or the acquisition of residential mortgage loan assets in Canada.
It complements relevant provisions of the Bank Act, Trust and Loan Companies Act, the Insurance Companies Act and the Cooperative Credit Associations Act, as well as the Government of
Canada’s mortgage insurance guarantee framework, which establishes the rules for government-backed
For the purpose of this Guideline, a “residential mortgage” includes any loan to an individual that
is secured by residential property (i.e., one to four unit dwellings). Home equity lines of credit
(HELOCs), equity loans and other such products that use residential property as security are also
covered by this Guideline.
This Guideline articulates five fundamental principles for sound residential mortgage
underwriting. The first principle relates to FRFI governance and the development of overarching
business objectives, strategy and oversight mechanisms in respect of residential mortgage
underwriting and/or the acquisition of residential mortgage loan assets.
The next three principles focus on the residential mortgage credit decision and the underwriting
process, specifically the assessment of:
- The borrower’s identity, background and demonstrated willingness to service their debt
obligations on a timely basis (Principle 2);
- The borrower’s capacity to service their debt obligations on a timely basis (Principle 3);
- The underlying property value/collateral and management process (Principle 4).
These three principles should be evaluated by lenders using a holistic, risk-based approach –
unless otherwise specified in this guidance. The borrower’s demonstrated willingness and
capacity to service their debt obligations on a timely basis should generally be the primary basis
of a lender’s credit decision. Undue reliance on collateral can pose challenges, as the process to
obtain title to the underlying property security can be difficult for the borrower and costly to the
The fifth principle addresses the need for mortgage underwriting and purchasing to be supported
by effective credit and counterparty risk management, including, where appropriate, mortgage
insurance. The final section of the Guideline summarizes disclosure and supervisory
Principle 1: FRFIs that are engaged in residential mortgage underwriting and/or the
acquisition of residential mortgage loan assets should have a comprehensive Residential
Mortgage Underwriting Policy (RMUP). Residential mortgage practices and procedures of
FRFIs should comply with their established RMUP.
Residential Mortgage Underwriting Policy (RMUP)
The Board-approved Risk Appetite Framework should establish limits regarding the level of
risk that the FRFI is willing to accept with respect to residential mortgages, and this should form the basis for the RMUP. The RMUP should further align with the FRFI’s enterprise-wide
strategy and, in turn, be linked to the enterprise risk management framework.
The RMUP should reflect the size, nature and complexity of a FRFI’s residential mortgage
business and should give consideration to factors and metrics such as:
Significant elements of the FRFI’s business strategy and approach to residential mortgage
underwriting and the acquisition of residential mortgage loan assets (e.g., products,
markets) – in Canada and internationally;
At the portfolio level, risk management practices and processes with respect to residential
mortgage loans and loan assets (e.g., lending, acquisition, product, and geographic
At the individual residential mortgage loan level, acceptable underwriting and acquisition
standards, criteria and limits for all residential mortgage products (e.g., credit scores,
loan-to-value ratios, debt service coverage, amortization period);
Limits on any exceptions to residential mortgages underwritten and/or acquired;
Identification and escalation processes for residential mortgage underwriting and/or
acquisition exceptions, if any, including a process for approval and exception reporting;
The roles and responsibilities for those positions charged with overseeing and
implementing the RMUP.
Board and Senior Management Oversight
Senior Management is responsible for the development and implementation of the RMUP.
However, the Board of Directors (Board) of the FRFI has a critical role in providing high-level
guidance to, and oversight of, Senior Management with respect to matters relating to mortgage
underwriting and portfolio management.
The Board of the FRFI should review and discuss the RMUP or any changes to the RMUP.
The Board should understand the decisions, plans and policies being undertaken by Senior
Management with respect to residential mortgage underwriting and/or the acquisition of
residential mortgage loan assets, and their potential impact on the FRFI. It should probe,
question and seek assurances from Senior Management that these are consistent with the
Board’s own decisions and Board-approved business and risk strategy for the FRFI, and that
the corresponding internal controls are sound and being implemented in an effective manner.
The Board should require timely, accurate, independent and objective reporting on the related
risks of the residential mortgage business, including the procedures and controls in place to
manage the risks, and the overall effectiveness of risk management processes.
The Board should be aware of, and be satisfied with, the manner in which material exceptions to
policies and controls related to residential mortgages are identified, approved and monitored, the
nature of reporting to the Board, and the consequences and processes when exceptions are
Internal Controls, Monitoring and Reporting
Effective control, monitoring and reporting systems and procedures should be developed and
maintained by FRFIs to ensure on-going operational compliance with the RMUP. FRFIs should
identify, measure, monitor and report the risks in all residential mortgage lending and acquisition
operations on an on-going basis, and across all jurisdictions. The FRFI’s residential mortgage
risk appetite and tolerance profile should be understood at all relevant levels of the organization.
FRFIs should have adequate processes in place with respect to residential mortgages to
independently and objectively:
- Identify, assess and analyze the key risks;
- Monitor risk exposures against the Board-approved risk appetite of the FRFI;
- Ensure that risks are appropriately controlled and mitigated, and provide assurances to the
Board and Senior Management;
- Ensure that risk management policies, processes and limits are being adhered to, and
provide assurances to the Board and Senior Management;
- Provide exception reporting, including the identification of patterns, trends or systemic
issues within the residential mortgage portfolio that may impair loan quality or risk
mitigation factors; and
- Report on the effectiveness of models.
Mortgage Underwriting Declaration
A senior officer of a FRFI should make an annual declaration to the Board confirming that the
FRFI’s residential mortgage underwriting and acquisition practices and associated risk
management practices and procedures meet, except as otherwise disclosed in the declaration, the
standards set out in this Guideline.
When a deviation from this Guideline has taken place, the nature and extent of the deviation, and
the measures taken or proposed to correct (and mitigate the risk associated with) the
deviation, should be documented and disclosed to the Board and to OSFI in full.
Principle 2: FRFIs should perform reasonable due diligence to record and assess the
borrower’s identity, background and demonstrated willingness to service his/her debt
obligations on a timely basis.
Background and Credit History of Borrower
FRFIs should ensure that they make a reasonable enquiry into the background, credit history, and
borrowing behaviour of a prospective residential mortgage loan borrower as a means to establish
an assessment of the borrower’s reliability to repay a mortgage loan.
For example, a credit bureau score, offered by the major credit bureaus, is an indicator often used
to support credit granting. However, a credit score should not be solely relied upon to assess
borrower qualification, as such an indicator measures past behaviour and does not immediately
incorporate changes in a borrower’s financial condition or demonstrated willingness to service
their debt obligations in a timely manner.
FRFIs should also ensure that they obtain appropriate borrower consent for this assessment and
comply with relevant provincial and federal legislation governing the use and privacy of personal
information (e.g., Personal Information Protection and Electronic Documents Act).
Maintaining sound loan documentation is an important administrative function for lenders. It
provides a clear record of the factors behind the credit granting decision, supports lenders’ risk
management functions, and permits independent audit/review by FRFIs and by OSFI. As well,
maintaining sound documentation is necessary for lenders to demonstrate compliance with
mortgage insurance requirements and ensure insurance coverage remains intact.
Consequently, FRFIs should maintain complete documentation of the information that led to a
mortgage approval. This should generally include:
- A description of the purpose of the loan (e.g., purchase, refinancing, renovation, debt
- Employment status and verification of income (see Principle 3);
- Debt service ratio calculations, including verification documentation for key inputs (e.g.,
heating, taxes, and other debt obligations);
- LTV ratio, property valuation and appraisal documentation (see Principle 4);
- Credit bureau reports and any other credit enquiries;
- Documentation verifying the source of the down payment;
- Purchase and sale agreements and other collateral supporting documents;
- An explanation of any mitigating criteria or other elements (e.g., “soft” information) for
higher credit risk factors;
- A clearly stated rationale for the decision (including exceptions); and
- A record from the mortgage insurer validating approval to insure the mortgage where
there may be an exception to the mortgage insurer’s underwriting policies.
The above documentation should be obtained at the origination of the mortgage and for any
subsequent refinancing of the mortgage. FRFIs should update the borrower analysis
periodically (not necessarily at renewal) in order to effectively evaluate their credit risk. In
particular, FRFIs should review some of the aforementioned factors if the borrower’s condition
or property risk changes materially.
As a general principle, an independent third-party conducting a credit assessment of a FRFI’s
mortgage loan should be in a position to replicate all aspects of the underwriting criteria, based
on the FRFI’s sound documentation, to arrive at the derived credit decision.
Anti-Money Laundering/Anti-Terrorist Financing
As part of a FRFI’s assessment of the borrower, if the FRFI is aware, or there are reasonable
grounds to suspect, that the residential mortgage loan transaction is being used for illicit
purposes, then the FRFI should decline to make the loan and consider filing a suspicious
transaction report to the Financial Transactions Reports Analysis Centre of Canada (FINTRAC)
with respect to the attempted transaction.
FRFIs should ensure that residential mortgage loans are subject to the requirements of the
Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and the
Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR), as
well as OSFI’s Guideline B-8 (Deterring and Detecting Money Laundering and Terrorist
Financing) with respect to detecting and deterring the possible use of a property purchase or
mortgage to launder the proceeds of crime or assist in terrorist financing.
In particular, FRFIs should ensure that they comply with the customer identification and record
keeping requirements of the PCMLTFR, and also ensure that they obtain sufficient information
about the borrower to determine whether the customer is a higher risk customer, as defined under
the PCMLTFA and PCMLTFR.
Principle 3: FRFIs should adequately assess the borrower’s capacity to service his/her debt
obligations on a timely basis.
A borrower’s income is a key factor in the assessment of their capacity to repay the mortgage
loan, and verification of income helps detect and deter fraud. FRFIs should make reasonable
inquiries and take reasonable steps to verify a borrower’s underlying income. This includes
- Employment status; and
- The income history of the borrower.
For borrowers who are self-employed, FRFIs should take reasonable steps to obtain income
verification (e.g., Notice of Assessment) and relevant business documentation. 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/documentation does not contradict other information provided by the borrower in the underwriting process.
Guarantors and Co-Signors of Mortgages
Where a FRFI obtains a guarantee or co-signor supporting the mortgage, it should also undertake
sufficient credit due diligence on the guarantor/co-signor. For example, this should include
verification of the guarantor’s/co-signor’s income, as well as a credit bureau report and a net
worth statement. The guarantor/co-signor should fully understand his/her legal obligations.
Debt Service Coverage
A fundamental component of prudent underwriting is an accurate assessment of the adequacy of
a borrower’s income, taking into account the relevant mortgage payments and all debt
commitments. As part of this assessment, FRFIs should establish debt serviceability metrics
(including the method to calculate these metrics), set prudent measures for debt serviceability
(articulated in the RMUP) and calculate each borrower’s debt serviceability ratios for the
purposes of assessing affordability.
Two ratios that are commonly used are the Gross Debt Service (GDS) ratio and the Total Debt
Service (TDS) ratio. For example, for insured mortgages, the Canada Mortgage Housing
Corporation (CMHC) defines GDS and TDS ratios and sets maximum GDS and TDS limits.
Private mortgage insurers also define similar debt serviceability metrics and limits for mortgage
insurance products. OSFI expects that the average GDS and TDS scores for all mortgages
underwritten and/or acquired to be less than the FRFI’s stated maximums, as articulated in its
RMUP or mortgage policies, and reflect a reasonable distribution of GDS and TDS ratios across
FRFIs should have clear policies with respect to the contributing factors for the calculation of
GDS and TDS ratios, including, but not limited to:
- Principal and interest;
- Other sources of income;
- Heating costs;
- Property taxes;
- Guarantor or co-signor income; and
- Monthly payment amounts for other credit facilities.
GDS and TDS ratios should be calculated conservatively (i.e., appropriately stressed for varied
financial and economic conditions and/or higher interest rates). As an example, for insured
mortgages, the Government of Canada’s mortgage insurance guarantee framework requires that
for all variable interest rate mortgages, regardless of the term, and fixed rate mortgages with a
term less than the standard five-year term, lenders use the greater of the contractual mortgage
rate or the five-year benchmark rate published by the Bank of Canada.
For uninsured residential mortgages, FRFIs should contemplate current and future conditions as
they consider qualifying rates and make appropriate judgments, and not assume that the internal
five-year rate is sufficiently prudent for their analysis. At a minimum, the qualifying rate for all
variable interest rate mortgages, regardless of the term, and fixed rate mortgages with a term less
than five years should be the greater of the contractual mortgage rate or the five-year benchmark
rate published by the Bank of Canada.
Additional Assessment Criteria
In addition to income and debt service coverage, FRFIs should take into consideration other
factors that would not ordinarily be captured by debt serviceability metrics, such as the
borrower’s assets (e.g., savings), other living expenses and recurring payment obligations (e.g.,
To the extent possible, income assessments should also reflect the stability of the borrower’s
income, including possible negative outcomes (e.g., variability in the salary/wages of the
borrower). Conversely, temporarily high incomes (e.g., overtime wages, irregular commissions
and bonuses) should be suitably normalized or discounted.
The mortgage amortization period for the loan is an important factor in the credit lending
decision, as it affects the required debt service for the borrower, the speed of repayment of the
mortgage and the growth of borrower equity in the underlying property. FRFIs should have a stated maximum amortization period for all residential mortgages that are
OSFI expects that the average amortization period for mortgages underwritten to
be less than the FRFI’s stated maximum, as articulated in its RMUP. Section III of this
Guideline outlines public disclosure requirements for amortization periods.
Principle 4: FRFIs should have sound collateral management and appraisal processes for the
underlying mortgage properties.
Generally, mortgage loans are granted on the basis of the borrower’s demonstrated willingness
and capacity to service his/her debt obligations because the process to obtain title to the
underlying property security can be costly. However, to the extent that the lender would ever
need to realize on the underlying property serving as security, it is important to have sound
collateral practices and procedures.
A significant amount of leverage is often involved in residential mortgage lending and there is
general reliance on collateral to provide adequate recourse for repayment of the debt if the
borrower defaults. As such, a proper and thorough assessment of the underlying property is
essential to the residential mortgage business and key to adequately mitigating risks. FRFIs
should have clear and transparent valuation policies and procedures in this regard.
In assessing the value of a property, FRFIs should take a risk-based approach, and consider a
combination of valuation tools and appraisal processes appropriate to the risk being undertaken.
The valuation process can include various methods, including on-site inspections, third-party
appraisals and/or automated valuation tools.
- On-site inspection
In general, FRFIs should conduct an on-site inspection on the
underlying property, to be performed by either a qualified employee or an appraiser,
depending on the nature of the property or transaction. Beyond the valuation of the
property, an on-site property inspection is beneficial in the process of validating the
occupancy, condition and, ultimately, the existence of the property.
- Third-party appraisal
FRFIs that use third-party appraisers should ensure that
appraisals are prepared with the appropriate professional appraisal skill and diligence,
and that appraisers are designated, licensed or certified, and meet qualification standards.
As well, these appraisers should be independent from the mortgage acquisition, loan
processing and loan decision process.
- Automated valuation tools
Where FRFIs use automated valuation tools, processes
should be established to monitor their on-going effectiveness in representing the market
value of the property. Controls should also be in place to ensure that the tools are being
used appropriately by lending officers.
In general, FRFIs should not rely on any single method for property valuation. FRFIs should
undertake a more comprehensive and prudent approach to collateral valuation for higher-risk
transactions, such as residential mortgage loans with a relatively high LTV ratio.
Realistic, substantiated and supportable valuations should be conducted to reflect the current
price level and the property’s function as collateral over the term of the mortgage. Consistent
with Principle 2 above, comprehensive documentation in this regard should be maintained.
FRFIs should ensure that the claim on collateral is legally enforceable and can be realized in a
reasonable period of time or, absent that verification, ensure that title insurance from a third
party is in place.
When extending loans to borrowers, FRFIs should impose contractual terms and conditions that
secure their full protection under the laws applicable in the relevant jurisdiction, and seek to
preserve an appropriate variety of recourses (including, where applicable, actions on personal
covenant) should the borrower default. In addition, FRFIs should have the necessary action
plans in place to determine the best course of action upon borrower default. Such action plans
- The likely recourses/options available to the FRFI upon default in all relevant
- The identification of the parties against whom these recourses may be exercised; and
- A strategy for exercising these options in a manner that is prudentially sound.
Loan-to-Value (LTV) Ratio
The commonly-used LTV ratio is an evaluation of the amount of collateral value that can be used
to support the loan. Past experience suggests it is highly correlated with credit risk. Those residential mortgage loans with higher LTV ratios generally perform worse than those with a
lower LTV ratio (i.e., higher proportion of equity).
FRFIs should adhere to an appropriate maximum LTV ratio (for various types of mortgage
transactions). The maximum LTV ratio may be determined by law or based on current and
expected market conditions, as well as other risk factors that may impact borrowers’ ability to
service their debt and/or lenders’ ability and cost to realize on their security. Section III of this
Guideline outlines public disclosure requirements for LTV ratios.
Traditional Residential Mortgages
By law, residential mortgages underwritten for the purpose of purchasing, renovating or
improving a property must be insured if their LTV ratios are greater than 80 percent. Also,
OSFI expects FRFIs to impose a maximum LTV ratio less than or equal to 65 percent for nonconforming
residential mortgages. OSFI expects that the average LTV ratios for all
conforming and non-conforming residential mortgages to be less than the FRFI’s stated
maximums, as articulated in its RMUP, and reflect a reasonable distribution of LTV ratios across
The LTV ratio should be re-calculated upon any refinancing, and whenever deemed prudent,
given changes to a borrower’s risk profile or delinquency status, using an appropriate
FRFIs should not structure a mortgage or combination of a mortgage and other lending products
(secured by the same property) in any form that facilitates circumvention of the maximum LTV
ratio limit it establishes in its RMUP. Further, the LTV ratio should not be relied upon solely as
an alternative to assessing the borrower’s demonstrated willingness and capacity for repayment
of the loan (see Principles 2 and 3).
With respect to the borrower’s down payment for both insured and uninsured mortgages, FRFIs
should make reasonable efforts to determine if it is sourced from the borrower’s own resources
or savings. Where part or all of the down payment is gifted to a borrower, it should be accompanied by a letter from those providing the gift confirming no recourse. Incentive and
rebate payments (i.e., “cash back”) should not be considered part of the down payment.
Property Value used for the LTV Ratio
FRFIs should assess, and adjust as appropriate, the value of the property for the purposes of
calculating the LTV by considering appropriate risk factors that make the underlying property
more vulnerable to a significant house price correction or that may significantly affect the
marketability of the property. These factors would include, but are not limited to, the location of
the property, the type of property, its current market price and the expected use of the property
for which the loan is granted.
Home Equity Lines of Credit (HELOCs)
A HELOC is a form of non-amortizing (revolving) credit that is secured by a residential
property. Unlike a traditional residential mortgage, most HELOCs are not constructed to fit a
pre-determined amortization, although regular, minimum periodic payments are generally
required by most lenders.
HELOC products provide an alternative source of funds for consumers. However, FRFIs should
recognize that, over time, these products can also significantly add to consumer debt loads.
While some borrowers may elect to repay their outstanding HELOC balances over a shorter
period of time relative to the average amortization of a typical traditional mortgage, the
revolving nature of HELOCs can also lead to greater persistence of outstanding balances, and
greater risk of loss to lenders. As well, it can be easier for borrowers to conceal potential
financial distress by drawing on their lines of credit to make timely mortgage payments and,
consequently, present a challenge for lenders to adequately assess credit risk exposure.
Given the unique features of HELOCS relative to traditional residential mortgages, FRFIs should
ensure appropriate mitigation of the associated risks of HELOCs, including the ability to expect
full repayment over time, and the need for increased monitoring of the borrowers’ credit quality.
OSFI expects FRFIs to limit the non-amortizing HELOC component of a residential mortgage to
a maximum authorized LTV ratio of less than or equal to 65 percent. OSFI expects that the
average LTV ratio for all HELOCs to be less than the FRFI’s stated maximums, as articulated in
its RMUP, and reflect a reasonable distribution of LTV ratios across the portfolio. Section III
outlines public disclosure requirements for LTV ratios and HELOCs.
Principle 5: FRFIs should have effective credit and counterparty risk management practices
and procedures that support residential mortgage underwriting and loan asset portfolio
management, including, as appropriate, mortgage insurance.
Mortgage default insurance (mortgage insurance) is often used as a risk mitigation strategy.
However, mortgage insurance should not be a substitute for sound underwriting practices by
FRFIs, as outlined in this Guideline. It should not be considered a substitute for conducting
adequate due diligence on the borrower, or for using other risk proxies such as the minimum
FRFIs may obtain mortgage insurance from CMHC and private mortgage insurance providers.
OSFI agrees that the use of either is appropriate, provided that a FRFI conduct due diligence on
the mortgage insurer commensurate with its level of exposure to that insurer. When performing
such an assessment, a FRFI should give consideration to, among other things, the mortgage
- Claims payment record;
- Expected future claims obligations;
- Balance sheet strength;
- Funding sources, including the level of and access to capital, and form, amount and
sources of liquidity;
- Management, including the quality of its governance practices and procedures; and
- Reinsurance arrangements and the direct and indirect impact that they may have on the
FRFI’s own arrangements with the insurer.
The evaluation of each FRFI’s mortgage insurance counterparty should be updated throughout
the life of the insurance contract. In cases where there may be material exposures incurred but
not reported losses, FRFI management should ensure that the evaluation continues beyond the
expiration date of the contract to ensure that the FRFI assesses potential insurance recoverable
from expected future claims.
For insured mortgages, FRFIs should meet any underwriting or valuation requirements set out by
the mortgage insurer to ensure the validity of insurance on those loans.
Purchase of Mortgage Assets Originated by a Third Party
FRFIs that acquire residential mortgage loans that have been originated by a third party should
ensure that the underwriting standards of that third party – including due diligence on the
borrower, debt service coverage, collateral management, LTV ratios, etc. – are consistent with
the FRFI’s RMUP and compliant with this Guideline. FRFIs should not rely solely on the
attestation of the third party.
Model Validation and Stress Testing
FRFIs often use models to contribute to residential mortgage underwriting and/or acquisition
decisions (e.g., valuation or bankruptcy models) or to make lending decisions by way of autoadjudication.
FRFIs are expected to have an independent validation process at both inception and on a regular
basis for these models. This would include the regular review and recalibration of risk
parameters with respect to their mortgage portfolio. The models used should reflect the nature of
the portfolio and, as appropriate, be adapted if there is substantial variation of risk within the
portfolio. This could include the development of new models to capture specific risk segments.
Additionally, FRFIs should have a stress-testing regime that considers unlikely, but plausible,
scenarios and their potential impact on the residential mortgage portfolio. The results of such
stress testing should be considered in the on-going validation of any models and substantially
reflected in FRFIs’ Internal Capital Adequacy Assessment Process (ICAAP) (deposit-taking
institutions) or internal target capital ratio (insurance companies).
Higher-Risk Asset Portfolios
FRFIs have the flexibility to underwrite and/or acquire a wide range of residential mortgages
with varying risk profiles. However, for residential mortgage loan asset portfolios of FRFIs that
constitute greater credit risks (e.g., non-conforming mortgages), OSFI expects FRFIs to exercise
heightened prudence through:
- Greater Board and senior management oversight of the asset portfolio;
- Increased reporting and monitoring of the residential mortgage loan asset portfolio by
- Stronger internal controls (i.e., additional substantiation of credit qualification
information, enhanced credit approval processes, greater scrutiny by the risk
management oversight function, etc.);
- Stronger default management and collections capabilities; and
- Increased capital levels backstopping the impact of portfolio risk (see next section).
Adequacy of Regulatory Capital
OSFI expects that FRFIs will maintain adequate regulatory capital levels to properly reflect the
risks being undertaken through the underwriting and/or acquisition of residential mortgages.
FRFIs should reflect mortgage loan assets with inherently greater risk either in their risk-based
rating systems or through risk-sensitive increases in capital identified through their ICAAP
(deposit-taking institutions) or internal target capital ratio (insurance companies).
III. Guideline Administration
Increased disclosure leads to greater transparency, clarity and public confidence in FRFI
residential mortgage underwriting practices. As a matter of principle, FRFIs should publicly
disclose sufficient information related to their residential mortgage portfolios for market
participants to be able to conduct an adequate evaluation of the soundness and condition of
FRFIs’ residential mortgage operations.
Public disclosures related to residential mortgages should include, but not limited to, the
publishing by residential mortgage lenders and acquirers that are FRFIs, on a quarterly basis, and
in a format and location that will support public availability and understandability:
The amount and percentage of the total residential mortgage loans and HELOCs that are
insured versus uninsured. This should include the FRFI’s definition of “insured”. In
addition, a geographic breakdown for the amount and percentage of the total residential
mortgage loans and HELOCs that are insured versus uninsured – provincially in Canada,
as well as from foreign operations;
The percentage of residential mortgages that fall within various amortization period
ranges significant for the FRFI, e.g., 20-24 years, 25-29 years, 30-34 years, 35 years and
greater – in Canada, as well as from foreign operations;
The average LTV ratio for the newly originated and acquired uninsured residential
mortgages and HELOCs at the end of each period. In addition, a geographic breakdown
for the average LTV ratio for the newly originated and acquired uninsured residential
mortgage loans and HELOCs – provincially in Canada, as well as from foreign
A discussion on the potential impact on residential mortgage loans and HELOCs in the
event of an economic downturn.
To meet the above disclosure requirements, the presentation of foreign operations can be
grouped into one category, such as “other jurisdictions”.
Supervision of FRFI
Information for Supervisory Purposes
Enhanced transparency and sound documentation, will allow OSFI to better understand the
FRFI’s financial position and economic impacts and risks associated with a FRFI’s residential
mortgage underwriting and acquisition practices. A FRFI is required to maintain and provide to
OSFI, upon request, its RMUP and associated management reports. A FRFI should promptly
inform OSFI if it becomes aware of any mortgage underwriting issues that could materially
impact its financial condition.
Non-compliance with the Guideline
OSFI supervises FRFIs in order to determine whether they are in sound financial condition and
to promptly advise the FRFI Board and Senior Management in the event the institution is not in
sound financial condition or is not complying with supervisory requirements. OSFI is required to
take, or require the Board and/or Senior Management to take, necessary corrective measures or
series of measures to deal with prudential soundness issues in an expeditious manner and to
promote the adoption by management and boards of directors of financial institutions of policies
and procedures designed to control and manage risk.
Where a FRFI fails to adequately account and control for the risks of underwriting or acquisition
of residential mortgages, on a case-by-case basis, OSFI can take, or require the FRFI to take,
corrective measures. OSFI actions can include heightened supervisory activity and/or the
discretionary authority to adjust the FRFI’s capital requirements or authorized asset-to-capital
multiple, commensurate with the risks being undertaken by the FRFI.
IV. Other Guidance
This Guideline is complementary to, and should be read in conjunction with, other OSFI
- Corporate Governance Guideline
- Guideline B-1 (Prudent Person Approach)
- Guideline B-2 (Large Exposure Limits)
- Guideline B-8 (Deterring and Detecting Money Laundering and Terrorist Financing)
- Capital Adequacy Requirements Guideline
- Guideline A-4 (Internal Target Capital Ratio for Insurance Companies)