House Standing Committee on Finance (May 31, 2024)
ISSUE: OSFI’s and FCAC’s respective Guidelines and positions on extended amortization

Key points

• OSFI and FCAC are aligned in their respective approaches mortgage relief measures, including extended amortizations.
• When developing its Guideline, FCAC consulted industry, stakeholders, members of the public and its regulatory partners, including OSFI, to benefit from a wide range of perspectives.

Additional points on FCAC’s vs. OSFI’s mandates and roles

• In Canada, oversight of federally regulated financial institutions is separated into two independent regulators. This is in recognition of the fact consumer protection and prudential regulation are two distinct but interconnected aspects of the broader regulatory framework.
• FCAC and OSFI serve different purposes and address different issues within the industry, but their work is complementary and both help maintain stability in the financial sector.

Qs & As

1. Some of FCAC’s expectations could lead to mortgage refinancing, such as extended amortizations. Will that require borrowers to undergo OSFI’s stress test to prove they can make their monthly payments on a modified loan? How will that work?

• The Guideline builds on existing guidelines and market conduct obligations set out in federal legislation and regulations and would not override existing guidelines from FCAC or other regulatory bodies.
• With respect to extended amortizations, FCAC’s Guideline states that the extension should be for the shortest period possible, taking into consideration the ability for the consumer at risk to restore the amortization to the original period.
• Such temporary measures provide the consumer the time to fully assess their options and work towards the most appropriate long-term solution.

If pressed on Guideline B-20…

• If a financial institution extends the amortization of a consumer’s loan, they must ensure it is in keeping with prudential expectations for the management of their mortgage portfolios, as set out by OSFI.

Points from the joint OSFI / FCAC letter to FINA (see Annex C):

• With an extended amortization temporary relief measure, the original contract remains unchanged, so re-application of OSFI’s Guideline B-20 including the Minimum Qualifying Rate (MQR) would not be required.
• OSFI does not hold the view that all amortization extensions require re-application of the minimum qualifying rate. Applying the minimum qualifying rate will occur for those amortization extensions that occur due to permanent contract changes that, thereby, require a refinance.

2. What amortization period is too long, from FCAC’s perspective? OSFI has warned against amortizations as long as 60 or 70 years. Is this too long?

• FCAC does not recommend any specific mortgage relief measures.
• However, lengthy amortization periods are not in the long-term interest of consumers.
• When it comes to extended amortizations, they should be for the shortest period possible.
• In addition, financial institutions are expected to develop a plan with consumers to return amortization to its original term in the shortest period possible.

Additional points:

• FCAC expects that the long-term financial well-being of consumers will be a primary consideration when determining relief measures, such as extending amortization.

3. Is there a risk that relief measures, such as extended amortizations, would have a financial impact on banks?

• Supporting consumers to avoid going into default is a sound practice that benefits all parties.
• It helps consumers remain in good financial standing and maintain their ability to borrow from lenders.

4. Can you clarify what “reasonable time frame” means when extending amortization?

• FCAC expects financial institutions to develop a plan with consumers to restore amortization to its original period. The plan must be developed within a reasonable timeframe. The plan must also ensure the total amortization period is reasonable.
• FCAC expects that the long-term financial well-being of consumers to be a primary consideration when determining relief measures, such as extending amortization.
• Financial institutions are in the best position to determine a reasonable time frame based on a consumer's circumstances, including their financial needs.