Canadian banks allow foreign clients with no credit history, including students, to qualify for uninsured mortgages without proving the sources of their income – a practice that exempts non-Canadians who have money in the bank from the scrutiny domestic borrowers face when buying a home or an investment property.
Those exceptions to the regular rules are outlined in internal documents from Scotiabank and the Bank of Montreal reviewed by The Globe and Mail. Scotiabank's guidelines specify that loans officers do not need to verify foreign clients' sources of income if they make down payments of 50 per cent. At BMO, such clients need only 35 per cent down to qualify for mortgages up to $2-million. The criteria from both banks show income verification is also not required for new immigrants who have been in Canada less than five years if they put 35 per cent down.
BMO's guidelines also require clients, including "foreign students with a valid study permit," to have the equivalent of one year's mortgage payments on hand at the time the loan is issued.
The exemptions appear to be designed to attract citizens of foreign countries and newcomers to Canada as clients by making it less onerous for them to obtain and build credit here. Canadian applicants must still prove their sources of income. Critics say that puts locals at an unfair disadvantage and inadvertently encourages real estate speculation by foreigners who have easier access to credit.
The federal regulator chastised the banks in July for inadequate foreign income verification because they can be exposed to more risk if they do not ensure these clients have the means to pay their mortgages in the long term. The regulator also pointed out that banks can be vulnerable to money laundering if they do not verify that a customer's money was obtained legitimately. The Globe discovered income verification in such cases is still not mandatory at both banks, two months after all lenders were warned to be more diligent.
The revelation stems from a Globe and Mail investigation that showed Vancouver real estate speculator Kenny Gu was able to buy and flip several single-family homes – while prices in the area skyrocketed – using credit from Canadian financial institutions. The case demonstrates how property ownership has become complex and shrouded in secrecy as a network of speculators – local and foreign – park money in Canadian real estate. Ownership and earnings are obscured in private contracts, while the players treat properties as commodities, not homes.
Documents provided to The Globe showed that Mr. Gu's speculative real estate deals were bankrolled with down payments from his clients – Chinese citizens who come and go from Canada – and mortgages issued to some of those clients by Canadian lenders without income verification. The records show that Mr. Gu had a stake in some of the properties, and his deals relied heavily on bank financing.
In a statement, BMO said it assesses "every customer's circumstances individually and considers multiple factors." However, the statement gave no specifics about income verification criteria for newcomers and foreigners. The statement did not address the suggestion it treats people from abroad more favourably than Canadian citizens.
Scotiabank said in a statement that it employs heightened due diligence "in other areas" to compensate, such as full appraisals for all properties. It confirmed that this is an exception from its standard policy for income verification.
"It's very lenient," a loans officer from one of the major banks told The Globe. "The foreigners can just get a wire transfer to cover the year's payments [to qualify] or even borrow money from a friend or a relative to put money in the account temporarily."
The bank employee – himself an immigrant from China – fears he will be fired if he is named. He said lenders require all domestic mortgage applicants to produce one to two year's worth of Canadian income tax records and pay stubs. Because that is impossible for foreigners and newcomers, he said, his bank made the changes to attract those clients.
In Vancouver, speculators exploited that, he said, to buy properties they had no intention of living in, hold on to them as demand increased and prices rose and then flip them for a profit.
"I have seen many people doing this, many times. I have customers brag about it in my office – about how small money they put in and how much profit they got," he said. "I can say it is a very big share of the mortgage market … it's out of control."
The Globe surveyed the remaining three big banks, plus HSBC, asking exactly what terms foreigners and new immigrants must meet to qualify for their mortgages. RBC, TD Canada Trust, CIBC and HSBC sent general statements that indicated they are diligent in several areas when approving mortgages, but gave no specific terms for income verification for those applicants.
The federal regulator overseeing Canada's banks sent The Globe a statement, stressing that banks must attempt to confirm income sources – for all mortgages.
"Whether the borrower is foreign or domestic, OSFI expects that institutions will take reasonable steps to verify income," said a statement from the Office of the Superintendent of Financial Institutions.
In a strongly worded letter in July, OSFI told banks that rapid rises in the prices of houses in Vancouver and Toronto call for increased diligence because of the risk of defaults if and when "economic conditions deteriorate."
The regulator made it clear it knows income verification is lacking for non-Canadian clients and it urged lenders to be more thorough.
"Inadequate income verification can adversely affect the assessment of credit risk, anti-money laundering and counter terrorist-financing (AML/CTF) compliance," it said. "Borrowers relying on income from sources outside of Canada pose a particular challenge ... Income that cannot be verified by reliable well-documented sources should be treated cautiously."
New Democrat MP Kennedy Stewart, chair of his party's B.C. caucus, said if a lender does not know exactly how its customers earn their livings, some clients could be able to launder ill-gotten gains through their mortgage payments.
"If that income is being used to secure clean Canadian funds from the banks to pay for a house, it's a very clever way to clean foreign money. That is what this is," he said. "It's almost secret and unexposed – and this is so important."
Mr. Stewart, who is also an economist, is pushing Ottawa to examine every factor contributing to real estate price increases, including mortgage financing.
"If the banks are helping facilitate foreign demand, we should take action to curb it," he said. "If this is widespread, Canadians will be outraged."
Christine Duhaime, a legal expert in money laundering, said banks should be particularly worried about real estate purchases like the ones set up by Mr. Gu, in which the titles and mortgages are in the names of overseas clients but someone else also holds a stake.
"The bank doesn't understand what the risk is," Ms. Duhaime said. "If the bank were to start from scratch, the outcome might be different. They might not issue the mortgages."
The loans officer said his biggest frustration is telling Canadians they cannot qualify for a mortgage because of income requirements, while foreigners with the same down payments and money in the bank get approved.
"If local people – when they go to the bank – say 'I want to buy a property. I have 35 per cent to put down and enough to support one year of payment,' I have to say no. I have to verify income before I can say yes," he said.
"I don't think it is fair. And it pushed the market prices so much higher, because the people who are buying don't really care if they can afford it – they just want to get the property and flip it."