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The regulator had been weighing whether to introduce stricter debt-service coverage limits

Canada’s banking regulator has revealed its decision on initial public consultation regarding its B-20 guidelines, indicating in a statement yesterday that it will not tighten regulatory limits on debt-service coverage.

“We appreciate the breadth of feedback we received from a diverse range of stakeholders, from the financial, mortgage brokering and real estate sectors to members of the general public,” the Office of the Superintendent of Financial Institutions (OSFI) said in a release.

Decision follows months of deliberation

Last January, OSFI made a consultative document detailing the public consultation it had on guideline B-20’s debt serviceability measures. It aimed to gather feedback for the following proposed further measures:

• Loan-to-income (LTI) and debt-to-income (DTI) restrictions
• Debt service coverage restrictions
• Interest rate affordability stress tests

From the gathered response, OSFI indicated that a majority of stakeholders were not supportive of the additional debt serviceability measures it had presented despite their agreement that risks to lenders that come from high household indebtedness were important.

“A key concern raised was the disproportionate impact that new, industry-wide measures could have on smaller institutions with unique business models,” OSFI said.

Respondents have said that with regards to the proposed LTI and DTI restrictions, the measures would be duplicative of the existing tools, insensitive to relevant debt service factors, disproportionately impactful on smaller lenders, addressed trends that had already materialized and shifted, and weakly associated with default risk.

OSFI said that the mentioned debt service ratios were focused on debt affordability and did not limit exposure to high indebtedness. It said it would take targeted supervisory actions that will limit FRFI’s individual exposures to high household indebtedness.

“These actions will take into account the size, nature, complexity, and risk profile of each FRFI, balancing sound risk management against the need for FRFIs to compete effectively and take reasonable risks,” OSFI said.

It considered that the DTI (total indebtedness) restriction would be too complex to implement for the time being and that the proportional implementation would be well suited for the differences in business models used by FRFIs.

For debt service coverage restrictions, respondents had supported a qualifying amortization limit while majority opposed the regulatory limits and alignment with insured mortgage criteria. They also wanted to preserve lender-determined, risk-based limits and criteria for debt service coverage.

The office said it will continue to evaluate the explicit, qualifying amortization limit and would not pursue the regulatory limits on debt service coverage.

For interest rate affordability stress tests, respondents did not support the proposed Minimum Qualifying Rate (MQR) adaptations and similar tests of affordability because of the negative impacts on other public policy objectives as well as unintended consequences.

OSFI said that the Minimum Qualifying Rate (MQR) had helped in managing risks concerning debt serviceability as mortgage interest rates had taken a sharp upturn. It asserted that additional measures were needed in order to mitigate the underlying vulnerability of a buildup in highly indebted borrowers.

The office will continue to review the expectations set with regards to real estate secured lending through 2023 to 2024.

Source: Canadian Mortgage Professional