The Office of the Superintendent of Financial Institutions has been getting a lot of press lately. It was just last month that they proposed lowering the minimum loan-to-value of uninsured home equity lines of credit in Canada to 65% from its current 80%, along with a few other proposed new rules. While those rules are still being reviewed by banks and Ottawa, and will be until May 1, the OSFI has once again turned its eye towards banking (and more importantly, lending) practices in Canada. This time, they’re saying that banks are simply not following the rules.
It was Julie Dickson, head of the OSFI, that said in Toronto yesterday that some lenders simply weren’t following the rules, either by approving Canadian and Toronto mortgages that don’t have enough documentation to support the loan; or simply giving loans to people who can’t afford them. This second one is especially disconcerting, seeing as how that was one of the major reasons for the downfall in the U.S. – too many mortgages to people who simply couldn’t pay back the debt. During her speech, Dickinson said, “What we’re saying is that in Canada’s market today with historically low interest rates and historically high debt-to-income levels, you want those practices buttoned down.”
Dickson also pointed to the fact that the OSFI’s new corporate governance guidelines will be out this summer, and that those rules that are currently not being followed by some lenders are sure to be addressed. One guideline that banks will see in the summer is that they will need to start providing documentation and declarations to the OSFI, indicating that all mortgage rules are being followed.
The biggest concern with these slack lending policies is that they’re just the kind of the thing the U.S. saw before the bottom fell out of their housing market, one huge reason why their economy crashed. And while Canada has been very good about avoiding a similar scenario in this country, it’s mostly due to much more vigilant lending practices and stricter guidelines. But those guidelines obviously need to be followed in order to be effective.
During the meeting Dickson also briefly mentioned a lawsuit that a small group of RBC employees are currently involved in, in which they are being accused of allowing subsidiaries of the bank to buy and sell stocks without actually taking a position in the market. While RBC has denied any such goings-on, Dickson said on Thursday, “This is a security regulator issue, so it’s not one that’s within our area of expertise.”
