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Signage for Home Trust Co., a subsidiary of Home Capital Group Inc., stands outside the company's headquarters in Toronto, on Thursday, May 4, 2017.

Cole Burston/Bloomberg

A regulator says it disciplined two mortgage brokers who funneled business to Home Capital Group Inc., marking the first disclosure of action taken against dealers who submitted fraudulent loan applications to the beleaguered mortgage lender.

The Financial Services Commission of Ontario conducted its own review into Home Capital in relation to the company severing ties in 2015 with 45 brokers who used falsified client income on applications. The agency found that broker Gagandeep Duggal and agent Zaheer Mohammad weren't complying with the rules, according to a spokesman. Home Capital and the regulator hadn't disclosed the names of any dealers sanctioned until now.

"FSCO takes allegations of fraud very seriously, and is committed to protecting consumers in the mortgage brokering sector," spokesman Malon Edwards said in an email Thursday. He said that most of the brokers and agents that were part of its Home Capital review continue to be licensed. The level of proof is higher for a regulator to discipline a broker than for a company to cut ties with mortgage dealers, he said.

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A Home Capital spokesman declined to comment. Duggal didn't respond to messages left with his firm, Mortgage Alliance, or to a voicemail message left on a phone number associated with his name. John Gabriel, director of compliance at the brokerage, said he "had no knowledge" of Duggal being charged by FSCO and that Duggal, who still works at the brokerage, was hired on Feb. 22, after the investigation took place. FSCO doesn't provide the industry with historical employment of brokers, he said.

Broker terminated

Mohammad was terminated from brokerage Mortgage Architects after FSCO released its findings last year, according to president Dong Lee. Management didn't provide his contact details and he didn't respond to a Linkedin message.

"We take fraud very seriously," Lee said in an email. "At the conclusion of the investigation, FSCO found no fault of Mortgage Architects."

Home Capital's stock has plunged by almost 60 per cent and it lost more than $3.5-billion in deposits after the Ontario Securities Commission last month accused the bank of misleading investors about its probe of the 45 outside brokers. The cash crunch has forced the company to take out an emergency credit line with a pension fund, and concerns about contagion from the lender have contributed to a slowdown in Toronto's housing market.

The enforcement underscores the difficulty regulators face in keeping fraud out of the mortgage market, and prosecuting individuals who break regulations. Despite having one of the world's hottest housing markets and $1.45-trillion in mortgage debt, the system of rooting out industry fraud isn't keeping up, experts say. Principal brokers – those who've hired individuals to work at their brokerage – have a responsibility to monitor broker and agent compliance, according to FSCO.

The Toronto-based regulator accused Mohammad of providing false employment and income documents to Home Capital six times between June and August 2014 for loans that the lender approved. He didn't respond to FSCO's charges or report to court, and had his license revoked in May of last year. FSCO accused Duggal in November of providing false and deceptive information and fined him C$5,000, bypassing a court hearing. He remains on FSCO's online mortgage database.

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In Canada, the mortgage industry is overseen by each province, with the ministry of finance creating the regulation that FSCO enforces in Ontario. Companies have their own risk measures, maintaining an internal list of brokers who have submitted fudged applications, referring to them as "unlucky." According to Equifax, mortgage fraud jumped 52 per cent last year from 2011, showing the issue may only be growing.

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