The Ontario Securities Commission has issued enforcement notices to “several” current and former officers and directors of Home Capital Group Inc.

The mortgage lender on Tuesday said the notices were related to the firm’s disclosure of the impact of falsified income information that appeared on some loan applications, and its subsequent steps to remedy the situation, including the suspension of mortgage brokers and brokerages.

In addition, Home Capital said in a statement issued late Tuesday afternoon that a statement of claim and notice of action has been filed with the Ontario Superior Court of Justice against the company and three of its officers and former officers regarding a proposed class action lawsuit for “alleged misrepresentations” in the company’s public disclosures in 2014 and 2015.

“The Company believes the claim is unfounded and intends to vigorously defend the claim,” the lender said in the statement. “The Company believes that its disclosure satisfied applicable disclosure requirements.”

Tuesday’s statement comes about a month after the OSC served an enforcement notice to Home Capital itself, saying it had reached the “preliminary conclusion” that the company had “failed to meet its continuous disclosure obligations” in 2014 and 2015.

The enforcement notices announced Tuesday were related to that disclosure “and, in some instances, trades in the Company’s shares,” Home Capital added in the statement.

An enforcement notice from the regulator can lead to formal allegations, but not all reach that level.

The individuals who have received notices have the opportunity to respond before OSC staff determines whether to commence proceedings, Home Capital said.

In 2014, Home Capital began an internal investigation after it was alerted of possible discrepancies in income verification information submitted by certain mortgage brokers.

As a result, 45 brokers were suspended between September 2014 and March 2015.

By mid-2015, the publicly traded company said it had cut ties with the brokers after discovering that there was falsification of borrower incomes on mortgage loan applications.

Home Capital announced a drop in originations in July of that year, after those brokers were suspended.

National Bank analyst Jaeme Gloyn said in a research note last month that any financial impact from OSC sanctions are “likely manageable” based on enforcement activity by the regulator in 2014 and 2015, where total financial sanctions amounted to an average of $800,000.

However, disclosure failures have led to class-action lawsuits in the past, Gloyn told clients. For example, in July 2009, Manulife Financial Corp. was named as a defendant in a $1-billion class-action lawsuit, which was settled in January for $69-million.

“In our view, this suggests that the severity of the situation could increase materially in the event a class-action lawsuit against HCG is brought forth,” Gloyn wrote in the Feb. 12 note.

Financial Post

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