Broker clarifies cancellation fee controversy

Broker clarifies cancellation fee controversy

Broker clarifies cancellation fee controversy The broker featured in a Toronto Star article for levying a hefty cancellation fee is alleging inaccuracies in that report.

The article, published last week, claims 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 from their existing lender.

The brokerage, Monster Mortgage, tried defending itself in the original Toronto Star article.
“We’ve been doing it for at least 15 to 20 years. It’s always been our practice,” Vince Gaetano, president of Monster Mortgage, told the Star. “Our clients are fully explained, what their obligation is. If you’re not happy with the service, don’t sign anything.”

However, Gaetano told MortgageBrokerNews.ca that the article contained incorrect information and that the writer showed little interest in accuracy.

“It’s not a $10,000 penalty, that’s not accurate,” Gaetano said. “It’s 1% of the mortgage amount … I really don’t want to get into the particulars because it’s before the courts.”

Gaetano also said it was a mortgage for a single client and not a couple.

The client signed a contract that stipulated the fee would be charged in the event the mortgage process was cancelled after the client had signed off on a commitment, according to Gaetano. He said the penalty is aimed at helping the brokerage recoup lost commission on the cancelled deal.

Many brokers argue cancellation fees are necessary in today’s mortgage market where rate shopping is the norm.

In a poll hosted by MortgageBrokerNews.ca last year, 68% of industry players said they would consider implementing cancellation fees of some sort in a bid to deter flighty rate shoppers.

“I use cancellation fees, of course; I put them in the contract,” Walid Hammami, a broker with Dominion Lending Centres in Montreal, told MortgageBrokerNews.ca. “If I feel like I’m dealing with a rate shopper, I make sure to put it in; I call it the ‘keep you honest’ clause.”

However, while many are supportive of the practice, some argue the penalty should be a token cost that doesn’t charge the entire potential commission amount.

Still, these penalties may become even more prevalent with brokers doing whatever they can to protect the ever-important efficiency ratios.

After all, as Dan Eisner of True North Mortgage pointed out in the original Star article, lenders sometimes punish brokers whose deals fall apart.

“When we submit a deal, there’s a cost to the lender to underwrite it and they hold it against us if the deal doesn’t close,” he said. “They pay us less (and) give us worse rates going forward.”

Still, industry players point to the importance of properly explaining cancellation fees and prepayment penalties.

“Clients don’t always understand what they are signing,” Mike Maguire, a broker with Mortgage Wise Financial, told MortgageBrokerNews.ca.

Gaetano told MortgageBrokerNews.ca he assumes the agent responsible for the file explained the penalty ramifications to the client.
31 Comments
  • Jim T, Advent Mortgage 2015-09-24 9:49:18 AM
    The problem here is that often times agents do not fully explain the ramifications of these cancellation clauses to the client and they don’t because it is not in the mortgage agents interest to do so. It is the agents goal to get the signature on this clause asap and trap the client, the goal to prevent the client from going elsewhere. I suspect that if the client was fully informed of the ramification of these clauses, 9 out of 10 clients would run for the door (as they should)!

    I understand that the business has changed dramatically and rate shoppers will waste your time. However, these cancellation clauses are not right. You cannot force someone to deal with you. If someone wants to go elsewhere, then tough luck to you mortgage agent. This is now the nature of the business and you better adjust your business process to take this into account. We have adjusted our business for this and I can say that of the 900 or so deals I will fund this year, my funding ratios are over 90%. It can be done.
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  • Mortgage Delivery Guy 2015-09-24 9:51:49 AM
    I like the idea of commitment cancellation fees. It happens frequently in today's market.
    In my practice I notice when clients are informed about the difference in rate & real impact on their mortgage payments, they stop rate shopping.

    Despite of explaining there will be some who will abandon your commitment & for them should be commitment penalty fee.
    Didn't you work for that commitment?
    Why wouldn't you not get paid for your time?
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  • Dave 2015-09-24 9:55:48 AM
    This is nothing compared to the IRD penalties banks have slapped on clients for years. Or the collateral charge mortgages they never explained at the branch.
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