Toronto-based DBRS Ltd. has revised its long-term rating outlook on Montreal-based Laurentian Bank from stable to negative, the rating agency announced on Monday.

DBRS affirmed its existing ratings on Laurentian at A (low), but revising the long-term rating trend to negative from stable, citing its, “concern with the quality of LBC’s control functions and underwriting procedures at a sensitive time in the housing cycle and the potential impact of recent events on the bank’s reputation and funding.”

Last week, the bank revealed certain residential mortgages that it had sold to third parties “had documentation and client misrepresentation issues,” DBRS says in a news release.The bank also disclosed that it identified “some mortgage loans in these portfolios that were insured, but were not eligible for insurance as a result of their low loan-to-value ratio.”

As a result, the bank is repurchasing $180 million of mortgage loans, and may buy back more once the rest of the loans in the portfolio are audited, DBRS says.

The affected mortgages are all performing in line with the rest of the portfolio; that the issues discovered so far “do not appear to be significant,” DBRS says, and the bank has since strengthened its underwriting procedures.

Nevertheless, the bank’s more recent expansion exposes it to higher levels of operational and credit risk, DBRS says. “Given recent events, DBRS is also concerned that risk management processes and policies have not evolved at a pace commensurate with the bank’s growth,” the rating agency says. Moreover, if these issues persist, it says that this could end up impacting the bank’s funding and liquidity position.

“If the ongoing audits of the mortgage portfolio remain in line with current management expectations and the costs and sources of funding are not materially impacted, the ratings could be revised back to stable,” DBRS says. “However, if further issues are discovered beyond the scope currently disclosed, or if funding costs were to materially increase, or if funding sources were to be significantly curtailed, the ratings could be downgraded.”

Laurentian issued a statement on Monday stressing that it does not believe the mortgage issues are material to its business, capital, operations and funding. “The affected mortgages are performing in line with the bank’s overall residential mortgage portfolio, no employees were implicated in any misrepresentations, nor did the bank find any significant concentration of mortgages with misrepresentations with any single broker,” the bank says in a news release.

The bank adds that the estimated value of the mortgages that may be repurchased represent approximately 1.6% of the bank’s total residential mortgage portfolio, and less than 1% of its total loan portfolio. “The bank has available liquidity on hand to repurchase the affected mortgages and the bank’s funding sources are diversified,” it says.