Broker weighs in on investment referrals

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One leading mortgage broker has weighed in on the issue of investment referrals, and for him transparency is key.

“What mortgage brokering should be about is (this): I have a borrower who wants a private mortgage and I go to a separate brokerage who has a good deal on the private funds and then we both share in an agreed upon brokerage fee,” Ron Butler of Butler Mortgage wrote on MortgageBrokerNews.ca. “That's a very transparent transaction.”

The comment was in response to a story about an increased need for clarity in syndicated mortgage referrals,  following a FSCO warning about these types of deals.

“From what I can see it doesn’t look like there is any prohibition on a brokerage (accepting referrals from an unlicensed broker); there is a prohibition on the brokerage paying a referral fee to a company that should be licensed as a brokerage,” Joe White, president of the Association of Mortgage Investment Professionals (AMIPROS) told MortgageBrokerNews.ca. “That would be a contravention of the legislation. In that sense it would defeat the whole purpose of the company offering a referral. I wouldn’t call it a grey area; I would call it an area that needs more interpretation.”

While brokers are still waiting for more transparency on the issue, Butler believes the referring brokerage should have a more intimate hand in brokering the deal, and not to simply hand it off to the investment broker.

“If I simply deliver investors to a separate brokerage who then stick-handles the whole interaction between the borrower and the investor that I brought to that totally separate brokerage then what is going on is that the agent or broker is being paid a very large fee to be a "roper": a finder of investors with little or no intimate knowledge of the whole transaction,” Butler wrote. “That is not mortgage brokering as I understand it.”
  • Mike on 2014-12-04 1:43:52 PM

    Looks like another house of cards that is going to tumble. Really looks like the limited partnerships of years past on hotels, condos, bull sperm. Any investment that pays out 8% to the adviser has to be high risk. These things are being sold like they are GIC's and obviously by unlicensed individuals. They should not even fall under the Mortgage Brokerage Act. They should be governed by Ontario Securities Commission. Maybe CAAMP should setup up and give us courses to explain these products instead of another ethics course. Probably alot will disagree with this but I have seen alot of people investing with greed as the motive and most have lost.

  • Keith on 2014-12-04 3:59:58 PM

    So let me get this straight... There are those people who believe it is OK as a broker/brokerage to take in investors to do their own private lending, but it is unethical or not OK to refer the consumer to a third party and receive a referral fee?

    Using that logic, is it then not OK for a broker to refer a client to a lender to obtain GIC's, RRSP's, mutual funds, etc? The broker earns a referral fee, and if you look at the historical return on Mutual Funds - they are one of the worst investments you could ever make in your lifetime.

    Brokers often pay referral partners a fee for their referral, is that also unethical? Is it unethical for an insurance company to pay a broker a referral fee?

    If the following scenario is true:

    Broker to client: "I have a product that you may be interested in if you are looking for investments"

    Client: "OH, can you tell me more?"

    Broker: "Sure it is called syndicated mortgages. What that means is that you invest in a specific construction project and have your own individual charge on the title."

    Client: "That sounds interesting, can you tell me more?"

    Broker: "There are several companies that offer this type of investment product. Here is XYZ Company, would you like me to get them to give you a call?"

    How is this an issue? If the broker says, I heard about this product and I think it is interesting and then refers the client to a licensed agency to do the sale and manage the investment - the client still has personal accountability to ensure that they are comfortable with the risk associated with that investment.

    Investment brokers get paid referral fees ALL THE TIME for stock advice, etc. Should they not get paid?

  • Keith on 2014-12-04 4:00:21 PM

    Furthermore, a Mortgage Broker is paid a referral fee by the lender to bring them business... Do all mortgage brokers ensure that they have provided the client with a minimum of three products and lenders to choose from?

    In my career I have met hundreds of people that brokers have put into products without truly understanding the consumers needs. Consumers who pay huge penalties because the broker did not ask the right questions.

    What about the brokers that only sell rate? You know, the ones that deeply discount rates just to get business, and that is their primary offering? How is the broker providing sound advice to the customer if all they focus on is rate and payment?

    How about the brokers that solicit their existing clients to refinance when rates drop, and take the customer to a new lender so that they earn full commission on the deal when the client could have stayed with the same lender and not paid a penalty?

    Maybe we should cap the maximum amount that ANY broker can receive on ANY business... that way it doesn't matter where you send the deal, you get paid the same.

    I did a bit of a test, I called a broker that pushed low rates, did a fake application, etc. NOT ONE question relating to my future plans for the home. Was I planning to retire soon? Did I want to retire debt free?

    That brings up another topic... what about all those brokers that solicited their clients to do ETO's and use the equity in their home for investments? Some of those people ended up upside down in their mortgages in some cities after 2008.

    In fact I know for a fact that one broker who comments here that did that, I worked for a lender at the time that received applications from that person for exactly that.

    Isn't that unethical? Soliciting someone to go into debt so that they could earn a commission?

    People want referral fees and business practices to be examined for the ethical standards? OK let's open the door for ALL referral fees. Maybe that is a good letter that needs to be sent to all of the regulators and OSFI... maybe to the PMO and the Minister of Finance too... I am sure that there are consumer watch dogs who would be interested in this as well... Time to put the whole of the broker industry under a microscope.

  • Ron Butler on 2014-12-04 4:23:00 PM

    Keith with no name because you likely are someone who pays the referral fees for the mortgage investments.

    I dealt with you in the other post and cannot waste anymore key strokes on you.

  • Mike on 2014-12-04 4:53:12 PM

    Keith:

    I trust you disclose on your Borrower Disclosure that you that your are paying a fee to the person that referred the client to you? Do clients not question this relationship and whether you actually where working for their best interest? I think I would if my real estate agent who I am paying 5% to sell my house then earns another 2.5% on the house I buy is getting a referral fee from the mortgage agent he is sending me to I would start to be concerned. Is he getting a kick back from the lawyer referral? Maybe a little something from the Home Inspector? It is your business but seems unprofessional to me.

    Secondly - Mutual Funds might pay a financial planner 4% if they sell a back end loaded fund. You say they are horrible investments. Wander how good a syndicated mortgage will be paying 8% referral to the agent.

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