It may take until late next year for Toronto-based Home Capital Group Inc. (TSX:HCG) to finish reviewing all of the loans arranged by 45 brokers it suspended for allegedly falsifying income information, the company said Thursday as it released new details about its investigation.
The mortgage lender announced in July that it had suspended the brokers between September 2014 and March 2015 after a tip from an external source prompted an investigation that allegedly uncovered fraudulent practices.
Home Capital president Martin Reid says a dedicated team is now combing through all of the mortgage loans originated by the suspended brokers to confirm the borrowers' income information. So far, the team is about a quarter of the way through the process, Reid said.
"It just takes time to do it properly," he said during a conference call to discuss the company's third-quarter earnings results.
The review process is tedious because it involves making phone calls to each borrower's employer, and it can take some time to track down the people able to verify the information, said Reid.
"It is a very manual process, and it is on every file, so it does take a long time to go through that."
When Home Capital first revealed the allegations in July, it said the suspended brokers had generated $960.4 million of loans in 2014 — or 5.3% of the $17.96 billion of outstanding loans on the lender's balance sheet.
In its third-quarter earnings report, issued after markets closed on Wednesday, Home Capital said the total value of outstanding loans generated by those same brokers — which extends beyond those loans initiated in 2014 — was $1.72 billion as of Sept. 30. That represents 9.5% of the company's $18.17 billion of outstanding mortgage loans as of that date.
Home Capital says it is continuing to actively monitor the mortgages.
"These mortgages are performing very well — in line with or better than our broader mortgage portfolio," said Home Capital CEO Gerald Soloway. "I emphasize that there have been no unusual credit issues."
More than 90% of the mortgage files that the lender has reviewed so far could be eligible for renewal when their terms come to an end, said Soloway.
Those borrowers who are unable to provide sufficient income verification will not be able to renew their mortgages with Home Capital, he added.
"But there exists a very large non-regulated market out there that is happy to do them," said Soloway. "Probably at a premium to what we were charging, but they're not going to be thrown out in the cold."
The lender says it has taken a number of steps to prevent similar issues in the future, including creating separate teams to handle the sales and underwriting functions.
"As we start to put this issue in the rear-view mirror, the key is to remain vigilant, to keep in mind the lessons we learned and to keep improving the way we do business," Soloway said.