Tougher new mortgage rules imposed on Canadian banks have been a mixed blessing for Canada’s credit union industry.
Credit unions, which are overseen by provincial regulators and not covered by the new federal rules that took effect Jan. 1, have seen an increase in mortgage applicants across the country from homebuyers who don’t meet the so-called “stress tests” at the banks. The Office of the Superintendent of Financial Institutions (OFSI), which regulates federally registered banks and insurers, put the stricter rules in place for borrowers to ensure they can withstand higher interest rates. Known as Guideline B-20, the regulations stipulate that prospective buyers, even those with a down payment of more than 20 percent, have to undergo a stress test before a loan can be issued. Previously, the tests only applied to borrowers with a down payment of less than 20 percent.
At the beginning of April, The Globe and Mail reported that alternative mortgage lenders such as credit unions were not getting the anticipated boost to business from introduction of tougher mortgage qualification rules. This was due in part to slow real estate sales and cooling mortgage demand in the first three months of 2018, especially in major markets like Vancouver and Toronto.
At the same time, credit unions are fighting what they say is a misconception that they are an alternative lender willing to take on riskier clients the banks now aren’t allowed to finance. “Just because you come knocking doesn’t necessarily mean that you walk away with a mortgage,” says Martha Durdin, CEO of the Canadian Credit Union Association (CCUA). “We are still being careful about who we lend to because we need to manage the risk,” Durdin says.
“We are still being careful about who we lend to because we need to manage the risk.” – Martha Durdin
Fighting this loose-lender stereotype has become a priority for the credit union industry this year. Some have launched campaigns to better educate consumers about the risks of taking on too much debt, in hopes of fending off any claims that it’s easier to get a mortgage at financial cooperatives. There’s also a misunderstanding that credit unions are unregulated, says Durdin. “We have been very strongly responding to and pre-empting this and making sure that stakeholders and other associations make the point that credit unions are regulated provincially and should not be in the unregulated category,” she says. “Our purpose is to serve our members, it’s not necessarily to grow. We don’t have the same drivers as other financial institutions, like banks.”
Durdin adds that credit unions have a strong lending track record. “We have a good story to tell in terms of our mortgages,” with 90-day mortgage arrears that are “consistently lower” than the banks. “We are prudent lenders and we are regulated appropriately for the size and risk of the organizations.”
Alternative, in a different way
Credit unions are quick to differentiate themselves from private lenders who source private capital from high net worth investors and issue mortgages to consumers, often at higher rates. “That is not the credit union business model,” says Bill Maurin, CEO of Meridian Credit Union (309,700 members, $14.7 billion in assets). In a letter to members published on the credit union’s website, Maurin notes that credit unions are highly regulated by provincial regulators and operate as financial cooperatives, run by locally elected boards. “Unlike banks, we are not traded on the public market. Rather, capital comes from the returns we generate and from the shares that are held by members. Profits return to member-owners — our customers,” Maurin wrote.
To drive home this message, Meridian has taken to traditional and social media to try to dispel myths about their cooperative model and to “ensure that we’re seen as a prudent and responsible lender,” says Scott Windsor, Meridian’s vice-president of corporate communications. “We’re leveraging the difference in regulatory environment to call out the difference in credit unions. Credit unions are alternative lenders but in a different way,” says Windsor, pointing out that credit unions have been leaders in offering new online and mobile banking products.
While Meridian’s Maurin told BNN it was “business as usual” at his credit union, he did express some concern over how the rules will impact the industry and the economy as a whole. “A gradual approach is key,” Maurin told the business news channel earlier this year. Meridian is currently seeking a full-service online retail bank license to compete with Canada’s Big Five and Maurin said it’s “full-speed ahead” for those plans, despite the new, tougher mortgage rules for banks.
Taking advantage of OFSI’s “gift”
Credit unions would be foolish not to take advantage of the opportunity for new business as a result of the stricter mortgage rules, says Robert McLister a mortgage planner at intelli-Mortgage and founder of the mortgage-rate comparison website RateSpy.com. “Credit unions are now in a position to earn outstanding risk-adjusted returns from the OSFI’s ‘gift’ to them and should be permitted to capitalize on it,” McLister says.
Borrowers turned away by the banks under the new stress tests may be “slightly riskier but they are absolutely not risky borrowers,” McLister says. “In fact, in many cases, the risk to these borrowers — and to the economy as a whole — would actually increase if credit unions weren’t there to refinance and renew them at better rates.”
“Meridian has taken to traditional and social media to try to dispel myths about their cooperative model and to ‘ensure that we’re seen as a prudent and responsible lender.'” – Scott Windsor
Credit unions “aren’t charities,” McLister adds, and many are taking advantage of the new deal flow by offering premium rates on mortgages from buyers turned down by the big banks. “On a risk-adjusted basis, most of these bank ‘turn-downs’ are safer than near-prime customers and present a new profit opportunity for credit unions,” he says.
“If you’re a credit union that wants to instantly grow your mortgage volumes, all you need to do is open up your broker channel to high-volume brokers with high-efficiency ratios.”
Provincial regulators to follow suit?
While the new stress tests may represent an opportunity, some credit unions are cognizant that their provincial regulator may adopt the same measures, as they have already in Quebec, for example. “Federal regulators have tried to use moral suasion to push their overbearing stress test policy on provincial regulators,” says McLister. “Hopefully provincial regulators ignore that noise and remind the Department of Finance that credit unions underwrite judiciously.”
Still, some credit unions aren’t waiting to tighten their mortgage-lending policies. Desjardins Group (seven million members, $258 billion in assets) started applying new stress tests Jan. 1, even though the guideline on granting residential mortgages from its regulator, the Autorité des marchés financiers (AMF), didn’t take effect until March. The AMF reported that its stress tests match those in the federal B-20 rules. Desjardins spokeswoman Valerie Lamarre says the move helps to create consistency with regulations and was “an effective way to protect consumers against interest rates variations.”
Vancouver City Savings Credit Union (523,000 members, $21 billion in assets) has increased its mortgage stress tests but not to the same level as B-20 for federally regulated banks. Vancity wouldn’t say by how much but Rick Sielski, the credit union’s senior vice-president of risk, described it as a “hybrid model.”
Sielski says Vancity took into consideration the size of the credit union and its prominence in the high-priced Metro Vancouver housing market as well as “an appropriate, responsible view on the risk of our overall collective balance sheet — what’s good for a member and the membership as a whole.” He also said Vancity isn’t looking at it as an opportunity to “materially grow market share. We could potentially be somewhat overwhelmed with business volume that might exceed our strategic desire to grow” in relation to other business lines. “It could skew our strategic plan.”
Sielski believes the federal stress tests “have some good logic” in ensuring consumers don’t take on too much debt. (Vancity also has a wholly owned subsidiary, Vancity Community Investment Bank, formerly known as Citizens Bank of Canada, which is a Schedule A chartered bank).
Vancity made the change even though British Columbia’s regulator, the Financial Institutions Commission (FICOM), said it’s not currently considering changes to its residential mortgage underwriting guidelines for provincial credit unions. “But we have made it clear to BC credit unions that this position is subject to re-evaluation and alteration if conditions change in the months ahead,” Frank Chong, acting superintendent of financial institutions at FICOM in BC, said in an email. “More specifically, when regulatory changes are made at the federal level, FICOM undertakes an assessment of the potential impact on BC’s financial services sector before adopting any similar changes,” Chong said, adding that the collection of data and information “enables us to make evidence-based policy decisions that are time sensitive and appropriate for the BC credit union system.” FICOM also stays in touch with OFSI and other regulatory colleagues across Canada.
Guy Hubert, CEO of the Deposit Insurance Corporation of Ontario (DICO), which is the deposit insurer and regulator for credit unions in the province, says it’s currently reviewing its mortgage-lending guidance and is considering introducing a standardized stress test for its credit unions.
While credit unions in Manitoba aren’t mandated to follow similar B-20 rules, members looking for a mortgage will still go through a stringent process, says Ted Richert, vice-president of lending and compliance at Credit Union Central of Manitoba.“We tell credit unions to do what they’ve always done, which is to be active in their marketplace and to understand the communities that they lend into,” Richert says. “That’s one of the best metrics to determine a level of riskiness.” And while there may be an increase in business at some credit unions as a result of the new federal rules, Richert says it’s not a selling tool. “We aren’t here to attract riskier borrowers.” Instead, Richert says the credit union’s cooperative values may mean they look at loans and mortgages differently “but not at the expense of credit quality.”
Ted Pahl, general manager of Tignish Credit Union (8,000 members, $200 million in assets) and chair of the Credit Union Managers Association of Prince Edward Island, expects the mortgage business to pick up through the spring and summer in his region as a result of the federal changes. “This has the potential to be good for the credit union system,” Pahl says. Still, he agrees that not everyone will walk away with a mortgage. “Credit unions are here to make the right choice with the members,” says Pahl, “even if that means saying, ‘it’s not the right time for you to buy a house.’ Our end goal is to help someone find a house and have the ability to stay in that house for the long term.”
That protects not just the homebuyer but also the credit union and its members, Pahl adds. “In the end, if a credit union has an experience with a loss, that affects all members.” ◊
B-20 by the numbers
The Office of the Superintendent of Financial Institutions (OFSI), which regulates Canada’s banks and federal credit unions, imposed tougher new rules on mortgage lending this year. The move was intended to safeguard lenders and borrowers from risky loans amid fears of a housing bubble, especially in red-hot housing markets such as Toronto and Vancouver.
Known as Guideline B-20, Residential Mortgage Underwriting Practices and Procedures, the requirements demand that borrowers pass a minimum qualifying rate, or “stress test,” for uninsured mortgages, which are those with more than a 20 percent down payment. Before the new rules took effect on Jan. 1, the tests only applied to borrowers with insured mortgages, which were required for down payments of less than 20 percent of the home’s purchase price.
Under the new rules, borrowers at the banks must be able to handle a minimum qualifying rate, which is either the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate plus two percentage points — depending on which is greater. For example, a homebuyer looking to borrow at a 3.5 percent interest rate would have to be capable of carrying the mortgage if the rate rises to 5.5 percent.
OSFI rules don’t apply to most credit unions, given that they’re not federally regulated financial institutions. However, some credit unions — and their provincial regulators — are either changing or considering changing their policies to tighten mortgage lending to align more closely with the new federal rules.