MONTREAL – Laurentian Bank’s chief executive says the problems discovered with some of its mortgage portfolios sold to unidentified purchasers largely involved loans which were “misflagged” and it has not found any evidence of wilful wrongdoing.
Chief executive Francois Desjardins told the Business News Network on Wednesday said the “misflagged” loans were not the type that the purchaser wanted and due to a problem with the bank’s process.
He added that for a “small percentage” of the portfolio, the issues involved a failure to obtain or properly store documentation such as proof of income needed to adjudicate the loan.
And “to a lesser extent,” he said Laurentian found “client misrepresentation” which involved embellishing their assets or revenue.
Desjardins said it is the bank’s job to confirm that the information is correct, but because no wilful wrongdoing such as internal fraud was found, no employees will be dismissed.
“Of course, through performance management, some people are going to own this. Including me,” he told BNN. “You know, the buck stops with me, and this happened under my watch… Going forward, we’ve already put in place some quality control measures to improve all that.”
Desjardins’ comments came a day after the Montreal-based bank (TSX:LB) revealed the issues in its annual report and said it planned to repurchase as much as $304 million of problematic mortgages.
Laurentian shares fell on the news, which came hours after it reported a dividend hike and better than expected fiscal fourth-quarter profits of $58.6 million, up from $18.4 million a year ago.
The bank noted in its annual report Tuesday that “no employees were implicated in any misrepresentations and the documentation issues appear to have been unintentional.”
Once audits are complete and purchasers are consulted, Laurentian will buy back at least $89 million of affected mortgages discovered through an audit of $655 million in B2B Bank mortgages that were sold to one unnamed third party, it said.
Laurentian added that as of Nov. 1, it has enhanced its quality control functions and underwriting procedures, “including introducing new internal monitoring processes and reorganizing employees who deal with mortgage intake and processing.”
The news comes after alternative mortgage lender Home Capital Group Inc. earlier this year faced accusations of misleading disclosure to investors about the impact of severing ties with some affiliated brokers accused of fraud, allegations which have since been settled.
Desjardins told BNN Wednesday that it did not come forward with its discovery sooner because the $304 million in problematic loans it may buy back represents less than half a per cent of the total mortgage book of the bank, and is not material to investors.
All the mortgages to be repurchased are “performing in line” with the bank’s overall mortgage portfolio, he added.
CIBC World Markets analyst Robert Sedran said one of its concerns about Laurentian’s pace of transformation recently “has been the associated operational risk that comes with this much change this quickly.”
He added that it is unclear that the transformation plan and “errors and misstatements” in the bank’s mortgage book are in any way linked, but the “operational risk on display is troublesome nonetheless.”
“At this time, we have no reason to believe there is a credit problem that will stem from these issues, but we take little comfort in that statement considering the importance of these risks,” Sedran told clients in a research note Tuesday.