Gerald Soloway, former CEO of Home Capital is seen in his Toronto office in this file photo.JENNIFER ROBERTS/The Globe and Mail
Shares in Home Capital Group Inc., the country's largest alternative mortgage lender, tumbled again as the company sidelined its chief financial officer and major banks continued to restrict sales of the firm's deposit products.
The company said CFO Robert Morton will step aside next month for a role doing "special projects outside the financial reporting group" and that founder Gerald Soloway will leave the board once a replacement can be found. Both men are part of a case brought by the Ontario Securities Commission that alleges the company failed to properly disclose flaws in its mortgage underwriting process to investors.
The OSC case is focused on an six-month internal investigation by the company in 2014 and early 2015 into the actions of a number of mortgage brokers who allegedly used fraudulent income documentation in loan applications. As a result of the probe, the company terminated a number of underwriters and 30 brokers, but did not disclose the problems to shareholders for several months, even though they had a material impact on its business, the commission alleges.
For subscribers: Time for a housecleaning at Home Capital: Soloway and Morton must go
The OSC's allegations of securities-law violations have not been proven, and Home Capital has said they are "without merit."
After a 9-per-cent drop on Monday, Home Capital shares closed at their lowest level since the end of the financial crisis in 2009. They have lost 21.5 per cent since the commission set out its case last Wednesday, representing more than $300-million in lost market capitalization.
Home Capital relies on selling guaranteed investment certificates (GICs) and other deposit products to help fund its mortgages. A number of big banks have brought in new limits on distributing those products, which analysts say could hurt the company's growth prospects over time.
Last week, Bank of Nova Scotia said it would stop selling GICs offered by company subsidiary Home Trust to its clients. The bank reversed that decision on Monday, but with a new limit in place of $100,000 per client – the amount that is covered by federal deposit insurance. A Scotiabank spokesperson declined to comment on why the bank had changed its policy over the weekend.
Canadian Imperial Bank of Commerce brought in a $100,000 per-client cap on Home Trust GICs effective March 28, a spokesperson confirmed to The Globe.
That date was after the OSC indicated that it was pursuing a case against Home Capital and some of its current and former executives, but before last week's specific statement of allegations.
A spokesperson with Royal Bank of Canada said that "several weeks ago" the bank brought in a $100,000 per client limit for investors who purchase Home Trust GICS through a full service broker. RBC clients who use the firm's discount brokerage are not subject to any limit.
Bank of Montreal's brokerage unit confirmed it also has $100,000 limits on Home Trust GICs, but would not say when those limits went into force.
"We'll have to wait a few months to a couple of quarters, or get anecdotal evidence from advisers about what the impact is [and] "whether they are actually shying away from putting money into Home Trust GICs," said Jaeme Gloyn, an analyst with National Bank Financial.
Home Capital would not disclose what proportion of its GICs come through bank-owned sales channels when asked on Monday.
The company said it may offer clients of some brokerages the right to transfer balances in excess of $100,000 to its banking subsidiary, where they could get additional CDIC coverage.
"Home is pleased that its deposit products remain widely available across Canada and we will continue to work with our partners to ensure that remains the case," Home Capital chairman Kevin Smith said in an e-mailed statement to The Globe. "While we don't disclose specific deposit breakdowns by broker, our ability to fund mortgages is not expected to be significantly impacted should there be caps at some institutions."
Mr. Morton will be replaced by formerly retired CFO Robert Blowes on an interim basis after the first-quarter results are filed on May 3.
"These are important steps in rebuilding confidence and putting the focus back on our profitable underlying business and its solid performance," Mr. Smith said. "We know that we have not met the full expectations of some of our valued stakeholders, which we deeply regret."
The impending changes mean that Home Capital is searching for both a permanent CEO and a CFO. Home Capital fired its previous CEO Martin Reid in March; he is also named as a respondent in the OSC case.
Director Bonita Then has taken over the top job on an interim basis.