Here are the odds that two of the country’s biggest lenders have inadvertently given home loans to risky borrowers who may have lied about incomes in order to qualify for a mortgage: nil, they said.
Facing questions about their home-lending procedures, Royal Bank of Canada and Bank of Montreal said their internal checks are strong enough to weed out so-called “liar loans,” or applications that contain falsified information such as inflated income.
The questions, posed by industry analysts on a pair of conference calls, came in the wake of revelations last month from Home Capital, another big lender, that a small number of independent brokers it worked with lied about customer incomes to secure loans.
“When there’s an element in the market place of what I will call fraud … we take steps even further to see if we’ve noticed anything. And we haven’t,” Surjit Raipal, BMO’s chief risk officer, said on a conference call.
“We have good processes,” Jennifer Tory, RBC’s head of personal and commercial banking, said on a separate call Wednesday. “To add to that, we have ongoing fraud monitoring of our application process to detect and protect against mortgage fraud.”
Home Capital, the biggest non-bank lender in the country, said last month it learned that a very small number of third-party mortgage brokers in Ontario had lied about clients’ income statements.
RBC says it only generates mortgage business from within its own branch network, while BMO takes a small amount of business from third-party brokers.
The Home Capital episode comes as home values spike in the biggest and already most expensive markets in Canada – Vancouver and Toronto. Prices for existing homes surged in each city last month the most since 2010 – spikes that are forcing buyers to take on increasingly larger loans compared to their incomes.
If certain mortgage customers attained home loans under false income claims, their ability to pay the bank back may be compromised, especially if they run into financial difficulty such as a job loss or declining income.
The Bank of Canada has cited high household debt (including mortgage debt) as the biggest domestic risk to the national economy.
On the two conference calls, analysts wanted to know if RBC and BMO took the additional step of calling an applicant’s employer to ensure income was accurately stated.
RBC’s Tory said the bank’s branch associates did so. BMO’s Raipal said he was confident BMO did, as well.
“The quality assurance program and the checks that we do, I’m sure encompass some calling. But I can’t tell you for sure right now,” Raipal said. “I’m sure we do, but I can’t tell you for certain.”