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Streetwise Home Capital settles with OSC, will pay $10-million penalty

Signage outside the Home Capital Group Inc. headquarters office in Toronto, Ontario, Canada, on Thursday, May 4, 2017.

Cole Burston/Bloomberg

Home Capital Group Inc. has reached agreements to settle an enforcement case with Ontario's securities regulator as well as a class action lawsuit launched over allegations of misleading disclosure.

Under a pair of linked agreements, Home Capital and three former senior executives will pay a total of $12-million in penalties to the Ontario Securities Commission and accept responsibility for misleading disclosures to investors about mortgage underwriting problems in 2014 and 2015. About $11-million of those funds will go toward a $29.5-million payment to settle the class action suit.

Under the terms of the OSC deal, company founder Gerald Soloway will be reprimanded and banned from acting as a director or officer of a public company for four years. He'll pay a $1-million administrative penalty. Former chief executive officer Martin Reid, who was terminated in late March, and former chief financial officer Robert Morton, who remains at the company in a reduced role, will each face two-year bans and pay penalties of $500,000 each.

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Feature: Mayday at Home Capital

Read more: Catalyst Capital joins line of Home Capital suitors

Also: Home Capital unit under scrutiny over anti-money-laundering controls

"Home Capital will accept full responsibility for failing to meet its disclosure obligations to the marketplace and appreciates the importance of the serious concerns raised by the Commission with respect to continuous and timely disclosure," said Brenda Eprile, chair of Home Capital's board of directors, in a statement.

"The Company also acknowledges that the Commission is not to blame for the events of recent months involving its liquidity position," Ms. Eprile's statement said.

The settlements are conditional and still need approval from the Ontario Securities Commission and provincial courts. But if finalized at a hearing in August, the arrangement would resolve a regulatory threat that has weighed on the beleaguered mortgage lender for weeks.

The move to clean up the OSC case comes as Home Capital fields offers for some of its smaller lines of business and tries to negotiate new credit lines with a number of potential lenders, in an attempt to restore a sense of financial stability.

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Home Capital experienced a run on the bank in April that almost led to the company's collapse, and announced it was considering asset sales and working on replacing a $2-billion line of credit with onerous interest rates that it obtained during that funding crisis.

Toronto-based Home Capital recently turned down offers from rival financial companies for its consumer retail lending division, according to sources familiar with the process, because the board and financial advisers believed the bids were opportunistic and did not reflect the value of a profitable, although small, business. The division has about $394-million extended to homeowners to finance purchases of water heaters and other big-ticket home improvement items.

Analysts say the company could pull in up to $2-billion from asset sales by parting with units that include its credit card division, which has $384-million of assets, and its $2.2-billion commercial mortgage portfolio.

In April, Home Capital secured a line of credit from the Healthcare of Ontario Pension Plan (HOOPP) and a group of global banks that came with a $100-million upfront fee and 10 per cent annual interest rates.

Home Capital has borrowed $1.65-billion on the HOOPP line and is in talks with a number of potential lenders, including the six largest Canadian banks, about a new credit line and other forms of financing that could replace the HOOPP loan.

Home Capital is targeting a new financial backstop with a lower interest rate and a longer term than the two-year line of credit that rival mortgage lender Equitable Group Inc. obtained in May, according to sources familiar with the process. The Equitable credit facility, backed by all six major Canadian banks, carries an interest rate that is 1.25 percentage points above the banks' cost of funds, which is relatively inexpensive financing for an alternative mortgage lender.

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The main business at Home Capital is a $18-billion portfolio of mortgages to home buyers who cannot borrow from the major banks, including immigrants, the self-employed and those with a poor credit history.

The home loans are backed by deposits in Home Capital high interest rate savings accounts and GICs, and the unexpected withdrawals from the savings accounts in April triggered the funding problem for the company. Clients pulled their money after the Ontario Securities Commission alleged that Home Capital failed to disclose problems in its mortgage business in 2015.

In recent weeks, deposits have stabilized, and Home Capital announced on Wednesday that deposits in high-interest savings accounts and at subsidiary Oaken Financial are nearly $250-million, virtually unchanged since late May.

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