Big Banks defend mortgage scrutiny in wake of Home Capital fraud allegations
Some of Canada's biggest banks are defending their verification practices for mortgage applications in light of recent news that mortgage lender Home Capital Group Inc. cut ties with dozens of brokers over fraud allegations.
A number of mortgage brokers have called for tighter industry rules after Home Capital announced in July that it was suspending 45 brokers over allegations that they falsified client incomes on mortgage loan applications.
Some brokers have suggested that mortgage fraud is likely more widespread than the 45 brokers implicated by Home Capital.
However, executives at the Bank of Montreal, Royal Bank and TD Bank stood behind their mortgage verification practices when grilled about the topic by analysts during the banks' quarterly earnings conference calls this week.
TD's chief risk officer Mark Chauvin said the bank makes calls to employers to verify income, looks at automatic deposits into the accounts of existing TD customers and uses data analysis techniques to assess how reasonable a client's stated income is.
"In our underwriting standards, verification of income and the downpayment is very important and central to the process," Chauvin said. "We will do that through several means and we'll do it until we're satisfied that we have it right."
Surjit Rajpal, BMO's chief risk officer, said the bank's mortgage origination processes — both for those mortgages that are originated in house and those that come through third-party brokers — are "stringent" and "vigorous."
"We are quite comfortable with the suppliers of third-party mortgages to us, and the processes that we have in place," Rajpal said.
He added that BMO typically examines its mortgage applications closer whenever it hears about fraudulent practices in the industry.
"We tighten it up even further to see whether ... we've noticed anything, and we haven't," he said, referring to the recent news about Home Capital.
Jennifer Tory, RBC's head of personal and commercial banking, said the bank doesn't accept mortgage applications from third-party brokers.
"Our applications are only taken by branch lenders and our proprietary mortgage sales force," Tory said. "And for each application we verify income. We have various ways of doing that. And our policies require documents to be retained."
Tory added that RBC's underwriting professionals verify employment with employers in addition to reviewing documents.
"We have good processes on new clients," she said.
Edward Jones analyst Jim Shanahan said it's vital for banks to verify mortgage applications to ensure that their loan books can handle the stress of an economic downturn or a housing market crash, similar to the one that occurred in the United States during the global financial crisis.
"If they're not verifying income and they're not verifying assets, (the borrower) could be lying — which means the quality of the loan that they've underwritten isn't what they think," Shanahan said.