Renewed interest in cancellation fee rules

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Under current regulations, many mortgage brokers are prohibited from charging cancellation fees on deals. However, that could soon change.
 
“The opportunity to seek legislative change on the subject of permitted fees that can be charged by mortgage brokers will arise when the government proceeds with its review of the Mortgage Brokers Act,” says Samantha Gale, CEO of the Mortgage Brokers Association of British Columbia. “In December, we received advice that the review was likely to commence sometime in early 2016.”
 
Brokers in British Columbia are prohibited from charging advance fees, including cancellation fees. As the discussion – and debate – around cancellation fees has grown, the MBABC has renewed its effort to lobby the provincial government to update its policy on these and other advance fees.
 
“The MBABC is continuing its efforts to seek legislative change to an outdated mortgage broker licensing statute in BC [that prohibits advance fees],” Gale told CMP late last year. “The Mortgage Brokers Act is still on the BC legislative agenda.”
 
The association also shared with CMP a letter previously sent to the Financial and Corporate Sector Policy Branch of the Ministry of Finance, arguing in favour of reforming Section 5 of the Business Practices and Consumer Protection Act, which prohibits the use of advance fees.
 
In it, the MBABC argues that brokers could be reluctant to take on difficult residential mortgage clients when their fee is contingent on the application actually being approved and funded.
 
“Often mortgage files require many hours of preparation, document management and negotiation,” the association writes. “Sometimes mortgage commitments are obtained by mortgage brokers after they have invested significant amounts of time into the file, but the client will eventually opt for alternative financing or decline the offered financing – this can happen even at the last minute, just prior to closing.”
 
Under the current legislation, the MBABC argues, brokers have no way of collecting compensation for work already done.
 
But, of course, there are two sides to the debate. Many brokers refuse to charge cancellation fees because they believe in acting in the client’s best interest, which is something many players point to the fee-free model currently in use throughout the country as evidence of – clients should be free to choose the broker or lending specialist of their choice.
 
However, there are many who agree with the MBABC that cancellation fees are a way to ensure that brokers receive payment for work they’ve already done – even if a mortgage isn’t originated.
 
“Imagine a prospect who shops around and calls you on weekends and nights – because he works during the day – and you give him all the best advice in the world,” says Walid Hammami, a broker with Dominion Lending Centres in Quebec. “This prospect takes most of your time and detracts you from certain activities that could benefit your business and health, like business development activities, going to the gym, etc. He calls you after you got his deal approved and thanks you for your efforts but says that unfortunately, he had to go with another broker/bank because they gave him a $50 gift card with the same rate. Multiply that by another 30 to 40 prospects, and then tell me how you feel about charging a penalty.”
 
The debate around cancellation fees also has garnered mainstream coverage lately. A large Toronto-based broker was featured in a Toronto Star article for levying a hefty cancellation fee in late 2015.
 
The article claimed a Toronto couple was charged a $10,000 fee for choosing to stay with their existing lender once they learned they would be hit with an even more sizable prepayment penalty of $43,000.
 
However, the broker told CMP at the time that the penalty amount wasn’t properly reported and that the practice of charging a cancellation fee was explained to the client.
 
These penalties can often come as a surprise to clients who – as is shown in this example – aren’t afraid to turn to the media to plead their case. That could lead to negative publicity – however unfair – that could put the entire industry in a bad light. Still, many brokers argue the fees are necessary.
 
“After a few clients [flee], the broker will have a bad taste in his mouth and will not act to his best when he meets a client, because he is fearful of the outcome,” Hammami says. “But once he knows he is protected, he will do his best and will definitely help better his clients.”
 
  • Lakshmi Lewis on 2016-04-04 10:46:03 AM

    I agree that the client should be charged a cancellation fee.

  • Layth Matthews on 2016-04-04 12:12:32 PM

    On the one hand, the case for cancellation fees is made stronger by the fact that brokers endure increasing real costs for credit checks and other documentation required by lenders associated with completing an application. Also, in recent years, lenders have begun tracking application to funding ratios, which has real economic consequences for brokers who lose deals after submission for underwriting. So losing a deal can serve to reduce a broker's access to lenders, favorable rates, and terms that we are able to offer subsequent clients. Plus the opportunity cost of wrestling with a deal for weeks vs. focusing on business building is probably most significant. The most frustrating situation is when a client takes all the documentation and strategy you have coached them through and uses it to enable shopping and negotiation with competing offers!

    On the other hand, the industry compensation is structured to make up for a certain amount of false starts.

    I think brokers should be free to charge a fee within limits, if clearly disclosed in advance, i.e. more like symbolic speed bump for clients than an alternative compensation stream. I would not want to suffer the consequence of potential borrowers hesitating to contact a mortgage broker for fear of hidden and unpredictable fees. It would be better if it was called a documentation or application fee rather than a can cancellation too! Keep the punitive innuendo out of it.

    One solution might be to facilitate client payments for credit bureaus and other hard costs, like appraisals are set up now. Then the broker can at least avoid eating the hard costs if a prospect goes away. And the client gets at least a little economic feedback on their actions instead of a total free ride. The broker could then offer to reimburse these costs to clients from finder's fee proceeds after the deal funds on a case by case basis.

  • Warren Ross on 2016-04-04 3:04:51 PM

    I think both banks and brokers should have the requirement to charge fees.
    If brokers charge a fee, and banks don’t, guess where the clients would be going?
    In fairness to the client, I think all clients should be allowed a free consultation. However, once you ask someone to move forward to get you a mortgage and do the work from A-Z, there should be financial consequences if the client backs out.
    That being said, not all deals are created equally, and there should be tired pricing on our services.
    For example, a fee should be charged if we do a preapproval, and client doesn’t purchase within the rate guaranteed period. This could be a nominal fee like a couple hundred dollars.
    If a client purchases a home, and we get them an approval, and they back out because of problems with the property, we should be compensated for our work. The home inspector gets paid whether or not it’s a good inspection, so should we. I would suggest a fee of $500.00 since it is more work than a preapproval.
    If a client purchases a home, and chooses to go to another lender or broker within our mandated period to close a purchase, I believe we should be compensated for our full commission.
    On a refinance, we often work with clients on best case scenarios. Often times we do all the work, and the deal is killed because the client was imagining a pie in the sky valuation. On a refinance file, simply for working on it, we should be guaranteed $500 to $1000.00. If the client goes to another lender, we should be guaranteed our commission as long as client takes a new mortgage within the mandate period.
    To protect the client’s, we should have comments in our mandate that say what we are trying to achieve, what is the likelihood of achieving the desired outcome, and what the risks are. For example, if the risks to a deal is the appraisal, we should mention that. If the client agrees and asks us to go forward anyways, I don’t see why we shouldn’t be compensated if the client doesn’t get the desired appraisal.
    Since mandates would increase 100 times, perhaps we could set up an adjudication board to mediate any conflicts in regards to mandates.
    In closing, none of us should work for free, and we can still look out after the publics best interests.

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