Canada watchdog eases proposed mortgage guidelines

OTTAWA (Reuters) - Canada’s bank regulator has backed down on a proposal that would have required borrowers to provide banks with new proof of their creditworthiness each time they renewed their mortgages, the watchdog said on Wednesday.

In guidelines aimed at tightening mortgage lending practices as Canadians struggle under record debt loads, the Office of the Superintendent for Financial Institutions (OSFI) agreed with the banks that their preferred approach of focusing on a person’s payment record was effective.

Its initial proposal, released in March would have required banks to demand proof of income and property valuation, among other paperwork, for a mortgage renewal.

“Current practice regarding residential mortgage renewals has served FRFIs (federally-regulated financial institutions) well,” wrote Mark Zelmer, assistant superintendent at OSFI, in a letter to the banks posted on OSFI’s web site.

“OSFI, therefore, expects that FRFIs themselves will remain responsible for deciding what level of review to place on borrowers’ qualifications at the time of renewal.”

The proposed mortgage underwriting guidelines for federally-regulated banks were first published in March and the consultation period ended May 1. OFSI released a summary on Wednesday of the final version of the guidelines to be released over the summer.

Canada avoided a U.S.-style housing crash and banking crisis, but regulators have sounded the alarm over record high consumer debt, boosted by low lending rates that will rise at some point.

But the OFSI guidelines still aim to lower the minimum loan-to-value of uninsured home equity lines of credit to 65 percent from 80 percent, a nod to the increasing role that these credit lines play in consumer debt loads.

However, OFSI will not expect banks to amortize these home equity lines of credit as it has initially proposed.

OSFI is also demanding greater board oversight of mortgage lending practices and increased reporting by banks on their exposure to various mortgage products and markets.

However, the watchdog said banks will not have to disclose proprietary information that could put them at a competitive disadvantage to international competitors or to banks not regulated by OSFI.

The new guidelines will apply to banks’ Canadian operations only, OFSI said.

Reporting By Louise Egan; Editing by Janet Guttsman