People walk through the Commerce court in Toronto's financial district on Sept. 1, 2022.Adetona omokanye/The Globe and Mail
Canadian Imperial Bank of Commerce CM-T has been under remediation orders from Canada’s banking regulator for more than a year after an audit of its mortgage portfolio uncovered breaches of rules that limit how indebted borrowers can be, sources say.
The problems surfaced last year in a routine regulatory audit of the bank’s mortgage portfolio conducted by the Office of the Superintendent of Financial Institutions (OSFI), which regulates large banks in Canada, according to two sources with direct knowledge of the issue.
The Globe and Mail is not identifying the sources because they are not permitted to discuss confidential regulatory matters involving the bank.
The issues involve thousands of clients, many of whom had lines of credit that were secured against their homes. When these lines were combined with a CIBC mortgage, the total credit available exceeded allowed regulatory ratios.
The problems discovered did not involve fraud, the sources said.
As an example, a client seeking a mortgage with CIBC might already have balances outstanding on home-equity loans or other lines of credit – either with CIBC or another lender – that could push them above acceptable thresholds for total debt obligations relative to their home’s value or their income.
As a result, some clients were told they had to close other credit lines or other products as a condition of getting a CIBC mortgage. But sometimes the bank performed no follow-up to ensure the clients did, even after the mortgages were issued.
The initial discovery of some problem cases alarmed OSFI, the sources said. CIBC hired consultants from Deloitte to help comb through mortgages dating back decades, and to retool the bank’s systems to prevent the problems from recurring.
In some of these cases, CIBC has been able to make quick changes to a client’s loan profile to bring them into compliance with regulatory requirements. For instance, the allowed debt ratio might only have been breached if the client’s entire credit line was used, but it was not, so the maximum amount the client could borrow was simply lowered.
Yet CIBC continues to find new batches of problematic mortgages on its books, even in recent months, the sources said, and what started with the bank’s retail clients has expanded to include clients in the bank’s Simplii financial brand – CIBC’s digital-only banking subsidiary.
The bank still doesn’t know the full extent of the issue, and has already spent tens of millions of dollars screening for problems and creating remedies, according to one of the sources. Internal estimates suggest it could take as much as two more years to fully solve the problems, the source said. However, the cases are not expected to result in noticeably higher losses on loans or have any material financial impact on the bank.
CIBC acknowledged receipt of detailed questions sent by The Globe, but did not provide comment.
OSFI declined a request for comment, citing a legal obligation that requires it to keep confidential any regulatory dealings with the banks it oversees.
The drawn-out process to fix the issue has increased the regulator’s frustration and created significant stress for CIBC’s senior leadership, including chief executive officer Victor Dodig, as well as its board of directors, the sources said.
Canada’s banks are highly regulated, and it is considered serious when the regulator compels a bank to take remedial action to clean up problems. The regulator expects banks’ senior management teams, with oversight from boards of directors, to identify risks and to ensure loan underwriting for residential mortgages is sound.
While the issues CIBC and OSFI uncovered affect only a small part of the bank’s $266-billion Canadian mortgage book, and are largely administrative in nature, stemming from back-office oversights and flaws in IT systems, their discovery has created more turbulence in one of CIBC’s core businesses. The issue also came to light at a moment when OSFI has voiced concerns about Canada’s competitive housing market amid higher interest rates.
In April, Tolga Yalkin, an assistant superintendent at OSFI, said at an event that extending mortgage amortization periods to help borrowers afford higher borrowing costs threatens to keep Canadians in debt for longer and threatens the stability of the financial system.
The following week, OSFI identified the potential for a housing market downturn as the most pressing of nine key risks to the financial sector it is tracking. The regulator said that financial institutions must be quick to recognize and address credit risks, while helping borrowers who are struggling to manage their debt during times of stress.
“Prudent risk identification and sound decision making in residential mortgage lending practices are expected to be reinforced by senior management, with oversight from the board, to ensure alignment to a [financial institution’s] risk appetite,” OSFI said in its annual risk outlook.
CIBC has a higher proportional exposure to Canada’s mortgage market than any of its rival Big Six banks, with mortgages and other loans secured against real estate making up about 55 per cent of its loan book.
OSFI takes small step to limit home-equity borrowing
The revelation that CIBC’s mortgage unit has continuing oversight issues also reopens an old wound that has stung investors before.
From 2017 to 2019, CIBC’s mortgage book was in a state of flux as the bank swung from being a front-runner for adding new mortgages to a laggard trailing its peers only two years later. Around this time, OSFI increased its scrutiny of bank mortgage portfolios and CIBC caught the regulator’s attention as mortgages made up more than half of its loan book. CIBC was also a major player in making large home loans in Toronto and Vancouver, where housing activity was most feverish.
After provincial governments in British Columbia and Ontario passed new taxes on home purchases by foreign buyers and OSFI tightened its rules for mortgage underwriting, CIBC found itself overexposed to the exact segments of the market that regulators and political leaders were trying to cool.
In 2019, Mr. Dodig acknowledged that, under pressure to curb its risks, the bank “put the brakes on too hard,” stifling its mortgage business’s growth prospects.
The following year, CIBC started a substantial revamp of the leadership, technology and approvals process in its mortgage business. As a result, the bank’s rate of growth in mortgages became competitive with its peers again, and it appeared to have finally shrugged off investors’ concerns about the health of its mortgage book that had persistently weighed on its stock price.