March 29, 2019

Cross-Border Mortgage Regulation - Stress Tests v. Qualified Mortgages

At the ABA Business Law Section Spring 2019 Meeting, the Housing Finance Subcommittee sponsored a panel regarding the cross border regulation of residential mortgages. This panel focused on a comparison of the U.S. and Canadian residential mortgage markets and regulatory systems. The panel was moderated by Thomas Kearney, Partner at Akerman, and the panelists were Robin Dunn of Dechert, Suhuyini Abudulai of Cassells Brook, and Professor Stephanie Ben-Ishai of the Osgoode Hall Law School, York University.

The panelists described the residential mortgage system in Canada, including information on the mortgage market, the lenders, their regulatory agencies, and the changes in lending standards and underwriting requirements that were first put into place around 2008.  In Canada, both the federal government and the provinces have authority over certain types of mortgage lenders. Federally-chartered lenders, such as banks, are regulated by the Office of the Superintendent of Financial Institutions (OSFI). Non-bank lenders and credit unions are regulated by the provinces.

In 2012, the OSFI issued Guideline B-20, which sets out five fundamental principles for sound residential mortgage underwriting. One principle provides that federally-regulated lenders should adequately assess the borrower’s capacity to service his/her debt obligations on a timely basis. Effective January 1, 2018, new stress test requirements were put into place. These new requirements apply to borrowers that have uninsured mortgages. Under this additional stress test, borrowers must prove they can make payments if interest rates rise. Borrowers must have the ability to afford payments based on the greater of the Bank of Canada’s five-year benchmark rate or the borrower’s current mortgage rate plus two percentage points. Prior to the new stress test rule, only insured borrowers were subject to this test. These rules do not currently apply to loans made by non-banks but there is discussion of extending these requirements to loans made by non-banks. However, a number of credit unions regulated by the provinces agreed voluntarily to follow the stress test guidelines.