The Office of the Superintendent of Financial Institutions (OSFI) issued its quarterly release of regulatory changes on November 21, 2024, covering an exemption to the Minimum Qualifying Rate (MQR) for some mortgage renewals, a notice on culture risk management and updated capital and liquidity guidelines.
Overall, the release reflects current issues that are being closely followed in the financial sector. An MQR exemption for straight switch renewals anticipates challenges facing individual mortgagors in 2025, allowing leveraged borrowers to be taken on by institutions with lower overall portfolio credit risk. With heightened attention on culture risk, OSFI is looking to senior management to focus on risk indicators. Lastly, as the calendar year ends, OSFI concluded several workstreams on capital and liquidity guidelines and also announced plans to rescinded several guidelines.
Minimum Qualifying Rate Eliminated for Some Renewals
Effective as of November 21, 2024, OSFI has eliminated the MQR for some uninsured mortgagors switching to a new institution at renewal. Commonly referred to as a “straight switch”, this change applies to mortgages being renewed at another institution provided there are no increases in the remaining amortization period or the loan amount. OSFI still expects institutions to assess the loan like any other new origination, including the principles of sound residential mortgage underwriting set out in Guideline B-20.
OSFI linked the MQR renewal exemption to its introduction of loan-to-income (LTI) limits on uninsured mortgage portfolios announced in March 2024, indicating it will “consider the continued need for a Superintendent-prescribed MQR for uninsured mortgage originations following the full and successful implementation of the LTI limit framework”. The LTI limit is roughly a 4.5x loan to income multiple, applicable to the overall portfolio not individual borrowers, with some permitted variations. Institutions are expected to adhere to LTI limits beginning in their fiscal Q1 2025.
The Canada Mortgage and Housing Corporation estimated in a report issued on November 4, 2024, that there will be over 1.2 million fixed-rate mortgages up for renewal in 2025. The vast majority of these households initiated or renewed their mortgages when the Bank of Canada’s policy rate was at or below one per cent.
Culture Risk
Capital and Liquidity Guideline Changes
OSFI finalized updates to the following Guidelines impacting banks and insurance companies:
The updated LAR Guideline will take effect on April 1, 2025, and reflects key revisions for monitoring tools used to address intraday liquidity risk and updates the treatment of Bankers' Acceptances. It was published with corresponding revisions to the Small and Medium-Sized Deposit-Taking Institutions (SMSB) Capital and Liquidity Requirements Guideline.
The updated LICAT Guideline comes into effect on January 1, 2025. Key revisions include a new framework to determine capital requirements for segregated fund guarantee business. The Own Risk and Solvency Assessment (ORSA) Key Metrics Report form and instructions, as well as Guideline A-4 Regulatory Capital and Internal Capital Targets and OSFI’s Solo Capital Framework for Federally Regulated Life Insurers received minor consequential updates as a result of the changes made to the LICAT Guideline.
The updated MICAT Guideline will also take effect on January 1, 2025. It reflects changes made to ensure that a mortgage insurer has adequate capital levels to mitigate risks in the business of multi-unit residential mortgage insurance.
Other Updates
OSFI reiterated its concern about the current level of risk in commercial real estate (CRE) in a Revised Regulatory Notice on Commercial Real Estate Lending. The updated Notice focusses on the implications of forbearance on credit risk, including the impact on provisioning and capital.
A final International Financial Reporting Standards 17 (IFRS 17) Guideline was published to replace the OSFI IFRS Advisory issued to support the transition to the new IFRS accounting standard in Canada. All federally regulated insurers are subject to the Guideline immediately.
OSFI also provided a list of twenty Guidelines and Advisories that will be rescinded as of April 1, 2025, including several relating to public disclosures required by FRFIs.
Looking Forward
OSFI will hold an Industry Day on December 5, 2024, to give stakeholders further insight on the Quarterly Release items and the opportunity to ask related questions. Interested stakeholders are asked by OSFI to register in advance.
