Home Capital Group has been in the news lately after the Ontario Securities Commission (OSC) accused the company and three of its current and former executives of breaching securities laws. The alternative mortgage lender has also seen depositors withdraw a substantial portion of their money as a result.
It’s important to note that deposits made with Home Capital Group are insured by the federal government up to $100,000.
Here’s an overview of what’s happened and how it could affect your money if it’s held with Home Trust, Home Bank, or Oaken Financial:
Q. What is Home Capital Group?
A. Home Capital Group is the parent company of Home Trust and Home Bank. Home Trust offers residential mortgages, consumer lending, and credit card services. Home Bank offers high-interest savings accounts and GICs through its consumer brand, Oaken Financial.
Q. What is the OSC and what is its role?
The OSC is a regulatory body whose role is to protect investors by making and monitoring compliance with rules governing the securities industry in Ontario. It monitors individuals and companies for compliance with the law, and investigates alleged breaches of Ontario securities law.
Q. What are some important events that happened recently?
On Feb. 10, 2017, Home Capital said it received an enforcement notice from the OSC “relating to the company’s disclosure in 2014 and 2015 regarding the impact of the company’s findings that income information submitted on some loan applications had been falsified, and the subsequent remedial steps taken by the company, including the suspension of mortgage brokers and brokerages.”
On March 14, Home Capital said the OSC issued enforcement notices to several current and former officers and directors of the company, relating to that disclosure and, in some instances, trades in the company’s shares.
On March 27, Home Capital said it terminated the employment of president and CEO Martin Reid and removed him from the boards of directors of the company’s subsidiaries, including Home Trust. The company didn’t say why he was terminated. However, the chair of the board of directors, Kevin P.D. Smith, said: “Home Capital requires leadership that can bring to bear a renewed operational discipline, emphasis on risk management and controls, and focus on improving performance.”
On April 19, the OSC alleged that Home Capital Group, former CEOs Gerald Soloway and Martin Reid, and current chief financial officer Robert Morton breached provincial securities laws and “acted in a manner contrary to public interest. The OSC also claims that statements made by officers of Home Capital on behalf of the company during a quarterly earnings call in May 2015 “were misleading and therefore contrary to the public interest.”
On the same day, the company said: “Home Capital Group has always carefully considered its disclosure obligations. The company believes that its disclosure satisfied applicable disclosure requirements, and the allegations are without merit. The allegations will be vigorously defended.”
On April 24, Home Capital announced that Gerald Soloway will step down from the board of directors when a replacement is found. The company also announced its former chief financial officer Robert Blowes will return on an interim basis when the company reports its first-quarter results on May 3 and its current CFO, Robert Morton, will “assume responsibilities for special projects outside the financial reporting group.”
On April 26, Home Capital said it reached a non-binding agreement in principle with a major institutional investor for a $2-billion credit line. The company also noted that high-interest savings account (HISA) balances fell by $591 million in the period from March 28 to April 24 to about $1.4 billion.
On April 27, Home Capital said it secured a firm commitment for a $2-billion credit line was from HOOPP, a large Canadian pension fund. The company also announced it retained RBC Capital Markets and BMO Capital Markets to advise on further financing and strategic options. HOOPP president and CEO Jim Keohane resigned from Home Capital’s board of directors “given the potential conflicts that might arise from the new relationship.”
On April 28, Home Capital said HISA withdrawals were $290 million on April 27. The day before, there were $472 million in withdrawals.
On May 1, Home Capital said the balance of its HISA deposits is expected to be about $391 million—down from about $521 million on Friday. And its Home Trust unit expects to draw down half of its $2-billion credit line.
Q. Why are Home Capital Group investors concerned?
A. The company said depositors have withdrawn a significant amount of money from their high-interest savings accounts in the past month. The balances of its high-interest savings account deposits is expected to be about $391 million on May 1, down from about $1.4 billion on April 24 and about $2 billion in late March. Those deposits are used to help fund its mortgage lending. Although it received a $2-billion credit line from HOOPP, the terms of the loan aren’t very favourable for Home Trust as the interest rate is 10%.
There’s also a concern about the approximate $13 billion in total GIC deposits Home Capital has. Analysts expect about half will mature next year. “With many of Canada’s big banks now limiting sales of such instruments to their clients, the risk is that Home Capital sees a significant drop-off in GIC deposits that puts further pressure on the company’s ability to fund itself,” reports The Globe and Mail.
Home Capital Group’s stock has fallen about 68.5% over the past two weeks.
Q. What’s HOOPP?
A. The Healthcare of Ontario Pension Plan (HOOPP) is one of the country’s largest pension plans, with more than $70 billion in assets. The organization, along with other lenders, has provided a $2-billion line of credit to Home Trust.
Q. What is the CDIC?
A. The Canada Deposit and Insurance Company (CDIC) is a Crown corporation that protects depositors against the loss of their savings if their bank or trust company fails or goes bankrupt. It insures eligible deposits up to a limit of $100,000 (principal and interest combined) at each CDIC member financial institution.
Q. What are eligible deposits?
A. Eligible deposits include savings accounts, chequing accounts, and GICs with original terms to maturity of five years or less. The CDIC doesn’t insure foreign currency deposits (for example, U.S. dollar accounts) and term deposits or GICs with a term of more than five years.
Q. Are Home Bank and Home Trust members of the CDIC?
A. Yes, Home Bank and Home Trust are members of the CDIC. Their high-interest savings accounts and GICs are insured up to $100,000.
Q. What happens if I have an individual and a joint account?
A. Joint deposits are insured separately from individual accounts. For example, the CDIC provides coverage of up to $100,000 for each of the following: Your savings/chequing account, a joint account with a spouse, and a joint account with a parent.
Q. Are there any circumstances that revoke CDIC insurance?
A. It’s very hard, if not impossible to lose CDIC status. The institution would have to voluntarily opt out of the service, which there doesn’t appear to be a precedent for.