Clients are entitled to know when they’re being charged a higher interest rate so brokers can bank the spread to pass it on to other customers, argues an industry veteran, calling on FSCO to mandate disclosure around that lender option.
“When we hear‘Disclosure! Disclosure! Disclosure!’ we don’t hear about the points that some lenders give brokers for specifically and intentionally offering one client a ceiling rate in order to hold onto to the basis points and then buy down the rate for a subsequent client – without having to give up any commission on that subsequent deal,” Paul Mangion, a broker with The Mortgage Centre in Mississauga, told MortgageBrokerNews.ca. “That amounts to charging the first client a fee because it saves the broker thousands of dollars in lost commission in buying down the rate for that subsequent deal.”
The practice is, in fact, shunned by many brokers, some even going so far as to call it “price discrimination.” But many others have stepped up their use of it in order to retain clients threatening to go with increasingly aggressive banks, even if they’re dangling a rate only one or two basis points lower than the broker’s.
Mangion, a high volume broker working both A and alternative deals, understands the temptation, although questions the ethics of mortgage professionals now taking advantage of formal lender points programs that effectively encourage the practice by offering it as an option.
Ethics aside, he said, clients trusting brokers to win them the lowest possible rate must be told when their mortgage professionals have offered them a ceiling rate instead of the floor Rate.
“When we, as brokers, receive an extra benefit in the form of points from a lender for offering the high end of our rate range to an unsuspecting client, that has to be disclosed,” he said.
Still, all lenders now offering those programs do so as an option, said another seasoned broker, suggesting that places responsibility on the broker’s shoulders, not the lender’s.
Either way, Mangion wants the Financial Services Commission of Ontario to take up the issue during its review of industry regulations early next year.
“Our industry’s reputation depends on transparency,” he told MortgageBrokerNews.ca.