At the Global Risk Institute summit on Wednesday, Routledge said he was concerned that lenders’ demand to conduct the “OSFI stress test” would make Canadians feel the regulator was too directly involved of their affairs.
“If I were that person, I would feel regulated by OSFI. And that’s what we hear from Canadians. And I don’t think that was ever part of his intention.”
Concerns contributed to OSFI announcing last week that starting Nov. 21, stress testing will not be required for uninsured mortgages when borrowers switch directly between lenders, meaning they modify things like their repayment or loan amount don’t change.
Only between 2% and 6% of borrowers make such a switch. Although Routledge had previously claimed that this was a part of sound underwriting practice, the agency not deemed the price worthwhile.
“The regulatory risk was not great enough to justify this appearance of unfairness,” he said.
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Why OSFI decided to vary the stress test
The elimination of the stress testing requirement comes because the regulator also considers a broader shift away from the B-20 stress test for individual borrowers and toward a system that may regulate mortgage risk on the bank portfolio level.
The regulator will next 12 months test the choice system, which sets limits on how much of a bank’s loan book might be drawn upon by borrowers with high loan-to-income ratios. The regulator will then determine whether so as to add it to the present mortgage rules or replace the prevailing stress test.
While the brand new system would similarly limit risk concentration, and even do it somewhat higher, it might even have the advantage of appearing to be applied less directly at the person borrower level, Routledge said.
