OTTAWA LEANS ON BANKS TO TIGHTEN LENDING
Ottawa Leans on Banks to Tighten Lending
Jeremy Torobin AND Grant Robertson
OTTAWA AND TORONTO— From Friday's Globe and Mail
Published Thursday, Feb. 02, 2012 1:13PM EST
Last updated Friday, Feb. 03, 2012 7:15PM EST
Ottawa is becoming increasingly uncomfortable with record-low mortgage rates being offered by some Canadian banks and the ease with which some institutions are advancing lines of credit.
Finance Department officials raised concerns with bankers in recent weeks about historically low mortgage rates as well as lending standards, industry sources said Thursday. After warning for several months about the debt levels of Canadian households, government officials were upset that banks continued to reduce rates and make a bigger push on home loans.
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For example, Bank of Montreal (BMO-T58.47-0.28-0.48%) last month introduced a 2.99-per-cent five-year variable rate, prompting rival banks to lower rates.
The government has also raised issue with lighter standards on some home-equity lines of credit, or HELOCs, at some banks. Credit lines offered by Toronto-Dominion Bank, (TD-T78.980.150.19%) for example, allowed existing customers to take out additional credit against their homes with lighter approval standards. That provoked concern at Finance, sources said. TD would not comment Thursday.
Documents from the Office of the Superintendent of Financial Institutions, made public by Bloomberg News Monday, show the regulator began to worry in August some banks are relaxing their standards on HELOCs and mortgages to attract business. In the documents, OSFI flagged mortgages issued to borrowers who haven’t had to prove their income, which it said bear a resemblance to “non-prime loans in the U.S. retail lending market.”
On a conference call from Tel Aviv Thursday, Finance Minister Jim Flaherty told reporters he shares those concerns, while suggesting the issue is not widespread and is under control.
“OSFI’s concern arises out of some work that OSFI has done as part of the of the ordinary course of its business to look at some of the loans being made by financial institutions,” Mr. Flaherty said. “I was informed of what their assessment showed with respect to a few financial institutions, which is a matter of concern that is being corrected.”
Canadian Imperial Bank of Commerce (CM-T76.400.050.07%) stopped some forms of mortgage lending this week “in an effort to mitigate risks and meet changing regulatory requirements,” the bank said in a company memo. CIBC told brokers it is no longer accepting so-called “stated income” applications, where the lender does not verify the borrower’s income through pay stubs or tax returns, usually because they have significant other assets in their portfolio and make larger down payments. Such lending, often used by new immigrants looking to buy homes, is among the type of loans OSFI is concerned about.
OSFI, headed by Julie Dickson, also is looking at stepping up its scrutiny of the housing sector, concerned about speculators in Toronto and Vancouver, in addition to riskier lending practices and how those could hurt banks in the event of another downturn.
Gord Nixon, chief executive officer of Royal Bank of Canada, (RY-T53.470.140.26%) rejected the notion that some banks may be engaging in subprime lending. “The impression that banks are being more aggressive and lowering their standards is just not the case,” Mr. Nixon said in an interview.
“Lending standards are higher today than they were a number of years ago. It’s a very competitive market and lending standards remain very appropriate, and if anything more conservative.”
Similarly, a spokesman for Bank of Montreal said in a statement that the bank has maintained its standards. “We take a prudent and disciplined approach to adjudication, and apply those standards consistently throughout the cycle, which is reflected in the performance of our mortgage portfolio,” BMO said.
Nonetheless, OSFI has told the banks it will now monitor on a quarterly basis what steps lenders are taking to avoid problems in the HELOC market. Leonie Roux, a spokeswoman for OSFI, said the regulator is mostly focused on ensuring that institutions are solvent rather than micromanaging what sort of documentation they demand from borrowers before issuing a loan or line of credit.
At the same time, she said, “when we identify concerns at a financial institution, we work with the institution to see that any deficiencies are addressed.”
The Canadian Bankers Association, an industry lobby group, has no set standards or guidelines for loan applications for its members to follow. Spokeswoman Maura Drew-Lytle noted that mortgages in arrears – meaning a payment has not been made for three or more months – are an “incredibly low” 0.38 per cent of banks’ total outstanding home loans, demonstrating that banks are “prudent lenders.”
Vancouver mortgage planner Robert McLister, editor of the Canadian Mortgage Trends blog, said any relaxing of lending standards is likely in the past.
“There was, I would say, perhaps somewhat looser lending on HELOCs in 2011 – particularly in maybe the first two thirds of the year – but things have noticeably tightened up,” he said. “And I’m speaking as somebody that does a lot of line-of-credit deals and sees what the lenders approve.”