Purpose of Consultation:

Residential mortgage lending is the most significant activity of Ontario credit unions. The activity comprises the largest asset portfolio on credit unions’ balance sheets. The health of this portfolio is instrumental to the financial well-being of credit unions and the credit union sector, the protection of its depositors and the ongoing ability of credit unions to serve their members. Residential lending is a major financial relationship between the credit union and its members. This relationship requires a careful balancing between:

  • providing members with sufficient financial accommodation so they can purchase a residence to meet their needs;
  • earning a return for other members; and
  • ensuring the credit union, its depositors and members, and the mortgagor member, are not put at unnecessary risk due to such credit granting.

This guidance provides FSRA’s:

  • Interpretation of the requirements for the management of residential mortgage lending for Ontario credit unions as required by Section 189 (2) of the Credit Unions and Caisses Populaires Act, 1994 (the “Act”); and
  • Approach to determine whether, as FSRA interprets the requirements under Section 189(2) of the Act, a credit union has “policies, standards and procedures that a reasonable and prudent person would apply“ to the underwriting of a “residential mortgage loan” as defined in the Act and Ontario Regulation 237/09 (the “Regulation”).

FSRA has received 6 submissions on the proposed Guidance during the time period of September 9, 2020 to November 11, 2020. The submissions and comments are available below.

Our Response

FSRA would like to thank all commenters for the views expressed. FSRA is carefully considering all comments received before finalizing and issuing the Guidance.

List of Contributors: The following stakeholders took the time to share their perspectives with FSRA:

No.

Organization

Commenter

1

Libro Credit Union

Stephen Bolton

2

Meridian

Michael Ras

3

DUCA Financial Credit Union

Jonathan Goodman

4

Canadian Credit Union Association

Nick Best

5

Kawartha Credit Union

Robert Wellstood

6

Desjardins Group

Bernard Brun

No.

Subject

Summarized Comments

Response

1

Libro Credit Union

 

Stephen Bolton

There was general support for the consultation draft. However, there are some concerns related to ambiguous language on credit union culture and strategy requirements, financial and administrative burden associated with life cycle monitoring requirements, timelines for implementation and the continued existence of 2018 Guidance Note on Lending. It was suggested that more prescriptive detail be provided.

 

There was acknowledgement that if the content of the Approach guidance is not prescribed requirements and are indeed simply considerations then they may not be interpreting the content accordingly.

The Interpretation Guidance sets out principles that FSRA requires Ontario credit union to adhere to in their residential mortgage lending activities. The Approach Guidance describes FSRA's internal principles, processes and practices for supervisory action.  A key aspect of FSRA's supervisory framework is the Board and senior management's responsibility to ensure that the credit union's residential mortgage activities are adhering to the principles described in the Interpretation Guidance.

 

FSRA recognizes that there will be a variety of policies, procedures and practices used to demonstrate adherence to the principles.  During the supervisory process, FSRA relationship managers and examiners will have discussions with the credit union's Board, senior management and other staff to understand how and whether the principles are being adhered to.

 

FSRA has reviewed the content of the 2018 Guidance Note on Lending and, since the note has general applicability to all lending activities and not just residential mortgages, has determined that the document in its entirety should not be removed at this time. However, the content that specifically relates to residential mortgage lending in the 2018 Guidance Note will be replaced by the new Guidance.  The 2018 Guidance Note may be removed at a later date, as further FSRA guidance is developed to address other types of lending activities.

2

Meridian

 

Michael Ras

There was support for the process that was followed to develop the draft guidance and for the principles-based approach.

 

There was concern that FSRA may revise the guidance to include more prescriptive language as a result of comments from some stakeholders who may not comfortable with the apparent ambiguity in using principles-based guidance. Meridian urged FSRA to resist tightening the language in the guidance.

 

The inclusion of some guidance for "Auto-adjudication Models" was appreciated. A suggestion was made that this guidance should be regularly reviewed and updated, if necessary, because of the quickly developing advances in artificial intelligence and "credit science".

It is FSRA's mission is to be a dynamic, principles-based and outcomes-focused regulator and supervisor.  All FSRA guidance will continue to be developed to help achieve this mission.

 

FSRA monitors developments in financial sectors. As topics such as "Auto-adjudication Models" develop, FSRA will consider whether any of its rules or guidance need to be updated. All FSRA guidance documents have mandatory review periods.  FSRA will consider these comments when determining the mandatory review period for this guidance. The review process includes consultations and discussion with the relevant regulated sector.

3

DUCA Financial Credit Union

 

Jonathan Goodman

The draft Guidance documents were generally supported for following a consistent, principle-based approach.

 

Some specific sections were mentioned for clarification, correction or adjustment. These were:

  • Debt Servicing Ratios Methodology and Stress Testing
  • Use of Key Risk Indicators and EW section
  • Watch-list

FSRA will review the specific sections mentioned and incorporate changes as, and if, necessary.  There may appear to be some duplication and FSRA will consider whether this can be removed without detracting from the clarity of FSRA's practices and procedures for each topic.

 

It is important to keep in mind that the Approach guidance does not create specific compliance obligations.  The discussion between FSRA staff and the credit union will focus on whether the principles in the Interpretation Guidance are being adhered to by the current policies, procedures and practices for residential mortgage lending.

4

Canadian Credit Union Association

 

Nick Best

There was general support for the proposed guidance and recognition that it is principles-based and supportive of a competitive residential mortgage product.

 

Suggestions were provided as to how FSRA should apply the proposed guidance in the supervision of credit unions.  Specifically, this includes distinguishing between the application of principles versus prescriptive standards.

 

There was concern expressed with ongoing monitoring requirement: a) the burden of it to the credit union could lead to loss of members b) the data- infrastructures may not support this.

The proposed guidance states that:

  • Interpretation guidance sets out FSRA's view of requirements under its legislative mandate (i.e. legislation, regulations and rules) so that non-compliance can lead to enforcement or supervisory action.
  • Approach guidance describes FSRA's internal principles, processes and practices for supervisory work, action and application of CEO discretion.

 

The Interpretation guidance is a set of principles.  Enforcement or supervisory action would result from findings from supervisory work that indicated that the credit union is not in compliance with one or more principles.

 

FSRA's new Risk-Based Supervisory Framework that is currently under development will apply the Interpretation and Approach Guidance based on the risk profile of the credit union and the risks of its residential mortgage lending activities.  It is expected that credit unions with different risk profiles and risks in its residential mortgage lending activities will have different ways of assuring adherence to the principles.   

5

Kawartha Credit Union

 

Robert Wellstood

There was support for the proposed guidance being principles-based. There was agreement with the four principles articulated in the proposed guidance.

 

It was stressed that the application of the guidance should align all principles to the size, complexity and risk profile of each credit union and a collaborative approach be used to implement the expectations in practice.

The proposed guidance states that:

FSRA considers proportionality in the application of this Interpretation and Approach guidance. Proportionality includes the nature, size, complexity and risk profile of a credit union, and the potential consequences of the credit union's failure, including systemic impact.

 

This proportionality will be used in the application of the guidance by FSRA staff.

6

Desjardins Group

 

Bernard Brun

There was support for FSRA's direction and objectives to adopting a principles-based guidance approach for residential mortgage lending.

 

There was a suggestion that FSRA ensure coordination with other Canadian jurisdictions and regulators while meeting the specific needs of the Ontario credit union sector.

 

There was a request that the compliance expectations of FSRA pertaining to overall risk management controls and oversight, including residential mortgage lending, include consideration of the structure of integrated financial groups such as Desjardins.

FSRA maintains regular contact with other Canadian financial services regulators and supervisors.  FSRA also looks to regulatory and supervisory guidance and practices of other international financial institution regulators and supervisors when developing FSRA Guidance.

 

FSRA includes consideration of the conglomerate or integrated structure of financial groups in developing and applying guidance in its regulation and supervision of Ontario credit unions.