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Regulator calls on bank boards to tighten lending policies

Julie Dickson, head of the Office of the Superintendent of Financial Institutions (OSFI), is calling on bank boards to ensure lending practices and policies are upheld.

Chris Wattie/Reuters/Chris Wattie/Reuters

Canada's bank regulator wants boards to get tougher in the financial sector, after discovering cases where banks have ignored policies put in place by their directors and have engaged in riskier lending.

The Office of the Superintendent of Financial Institutions (OSFI) has called on bank boards to tighten their oversight of lending policies, including keeping a close eye on the standards banks set when offering mortgages.

"When we went in and looked at all the practices, we were seeing some things that troubled us," OSFI superintendent Julie Dickson said Thursday, referring to a recent review of lending standards in the financial sector.

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In particular, Ms. Dickson said the regulator had found lenders who were allowing homeowners to borrow as much as 80 per cent of their home's value through an uninsured home equity line of credit, known as a HELOC, and were not asking enough questions about the borrower's ability to repay.

"We do know some HELOCs were being offered at 80-per-cent loan-to-value, and we don't think that's appropriate," Ms. Dickson said after a speech in Toronto where she called on bank boards to bolster their scrutiny over lending.

OSFI moved to quell that type of lending last month, introducing plans to restrict HELOC borrowing to 65 per cent of a home's value. But Ms. Dickson said the directors of banks should also ensure lenders are adhering to policy by requiring a "declaration to the board" from bank executives.

Though OSFI didn't name which bank was ignoring directions from its board on lending, she said the regulator would like directors to update their policies for the current lending market, which is dramatically different from only a few years ago. Amid historically low interest rates, put in place by the Bank of Canada to spur economic growth and business borrowing, OSFI is concerned about homeowners binging on debt.

That means tightening lending standards within each bank.

"I think that boards should look at the policies that they've already developed and when were those policies developed," Ms. Dickson said. "Were they developed in a very different time? Because currently we've got a very different mortgage market."

Canada's banks have engaged in an aggressive mortgage price war this year, with several banks offering deep discounts to lure borrowers from rivals, and to compensate for slimming margins.

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Mortgage lending and HELOCs represent roughly 42 per cent of bank assets in Canada, the largest of any asset class. With that in mind, the regulator is also looking to bolster qualifying tests for borrowers.

"So when individuals are being offered a very low rate, the bank has to consider whether the individual could handle a different rate," just in case interest rates were to suddenly jump, Ms. Dickson said.

Boards should watch more closely over the bank's lending behaviour, she said. The regulator would also like to see more directors on boards who have banking experience, but the roster should be a mix of people inside the financial sector and those from other industries.

OSFI's concerns come as bank executives said this week they believe it is up to the sector itself to keep a lid on lending, and said government intervention is not the solution. The heads of two large banks believe the onus is on lenders.

Rick Waugh, chief executive officer of Bank of Nova Scotia, and Louis Vachon, CEO of National Bank of Canada, both said banks share responsibility for the mortgage market and should lend accordingly, without putting too much risk on their books.

Ms. Dickson said she hopes bank directors hear OSFI's call. "I would hope boards are taking it seriously."

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