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Canada banks need more mortgage oversight-OSFI
April 5, 2012 / 6:02 PM / 6 years ago

Canada banks need more mortgage oversight-OSFI

* Board policies have at times not been followed - regulator

* New rules call for more oversight amid high debt levels

* RBC-CFTC lawsuit not in regulator’s “area of expertise”

By Cameron French

TORONTO, April 5 (Reuters) - Canada’s financial services regulator is demanding that banks tighten their board oversight of mortgage lending practices as loan books soar and Canadians struggle under record debt loads.

Speaking in Toronto ahead of the release of new corporate governance guidelines this summer, Julie Dickson, head of the Office of the Superintendent of Financial Institutions (OSFI), said the regulator had noticed cases where board-approved policies were not being followed.

“What we’re saying is that in Canada’s market today with historically low interest rate and historically high debt to-income-levels, you want those practices buttoned down,” she told reporters after the speech on Thursday.

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

Dickson said in some cases her office had noticed shortcomings with the way boards oversaw practices related to borrower requirements. These include factors like the debt servicing capacity of borrowers or documentation required to issue a loan.

As such, the new board guidelines will require bank management to provide a declaration to the board that lending rules are being followed.

Her comments come just two weeks after OSFI set down new draft underwriting guidelines that require more disclosure from lenders, and tighter standards.

A key proposal in that guideline was to lower the minimum loan-to-value of uninsured home equity lines of credit (HELOC) to 65 percent from 80 percent, a nod to the increasing role HELOCs play in raising consumer debt loads.

“Institutions always have to be on the lookout for how products are morphing,” she said. “Maybe a particular product makes sense at some point in time but doesn’t make sense at another point in time.”

Dickson also addressed a civil lawsuit leveled at Canada’s largest bank, Royal Bank of Canada by the U.S. Commodity Futures Trading Commission.

The U.S. regulator said on Tuesday that a small group of senior RBC employees created and managed a “wash trading” strategy in which they improperly coordinated to allow subsidiaries of the bank to buy and sell stock futures without taking a position in the market. The bank has denied the allegations.

Canadian regulators have been largely silent on the issue, but Dickson said it had little to do with OSFI’s mandate.

“This is a security regulator issue, so it’s not one that’s within our area of expertise,” she said.

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