Brokers: banks now eating penalties to retain clients

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There’s competition and then there’s competition with the Big Five, as a handful of Vancouver brokers point to banks and, even, credit unions now willing to eat their own substantial penalties in order to keep clients from going over to the broker channel.

“I had heard about this occurring back in the day – in the 80s or 90s – but it hadn’t ever encountered this until recently,” Jessi Johnson, president of Verico Jessi Johnson Mortgage Team, told “I’ve had about three or four recent cases where the banks were willing to eat the penalty in order to keep a refinancing client”

The scenario is similar to those of a handful of brokers working the increasingly competitive Vancouver market, as banks and large credit unions sharpen their elbows in order to grow and retain clients. That contest has been largely limited to rate wars. The newfound willingness of banks to assume responsibility for penalties attached to premature closing is a relatively new and disturbing addition to the battlefield, said Johnson. Other brokers suggest the tool is being applied at the branch level, and outside of any corporate-wide policy directive. The effects, regardless, are the same.

When it comes to a lender eating a penalty that is larger than the commission they’re paying brokers,” said Johnson, “we as brokers can’t compete. Thankfully, we’re seeing it used in a limited number of cases and it represents an unsustainable strategy for the banks.”

Banks, and other institutional lenders have traditionally used penalties , including an IRD – a rate equal to the difference between the original mortgage rate and the interest that the lender could charge today for the same mortgage-- to compensate themselves when a client opts to pay off a fixed-rate mortgage prior to maturity. That penalty has actually grown as lenders lower their rates to keep pace with falling bond yields. It makes the willingness of some lenders to now forfeit those charges all the more remarkable.

Todd Fralic, an industry veteran and partner at Quantus Mortgage Solutions in Calgary, has seen the approach before, although without the rate match that Johnson and others are pointing to.

“It happens,” he told “But usually, in our experience, the banks make it up on the back-end, with a slightly higher rate. Nothing surprises me with the banks offering deals that don’t seem to be good business.”

They’re not necessarily alone, with some brokers themselves offering to pay a prospective client’s penalty in order to get them to break an existing mortgage.

“Well I think having business is better than not having business, so in my opinion you should do whatever it takes to retain a client,” Jackson Cunningham, a broker with TMG The Mortgage Group in Vancouver, told MortgageBrokerNews. “Although I prefer to see something in writing from their bank before I will buy down a rate or pay for a penalty.” Still it's not necessarily an approach he's used, despite recently losing deals to banks that have, at least in one case, offered the eqivalent of prime minus 115 in order to retain a client.

Eating penalties may be even less sustainable for brokers than the banks, said Johnson, suggesting he’s done better by salvaging the client-broker relationship after the deal goes south…to the competition.

“I’ve lost the deal but not the client,” he told “I plan to actively maintain my relationship with the client in hopes of winning back their business in the future.”

  • Ontario Broker on 2011-06-22 1:13:38 AM

    Not sure how this is exactly "news". We have been battling this bank strategy for the last 10 years. It certainly isn't something "new". I am completely surprised that the brokers/agents in this piece haven't come across it before. We constantly battle the banks on retention. Some of the lenders won't release the discharge statement without speaking directly to the client giving them one last opportunity to steal the deal days before closing. (can you say Scotia!).
    All we can hope for is that this is not sustainable, but with the slower market and the branches needing to get through their budget of dollars for retention...expect this to continue.

  • Mike on 2011-06-22 1:17:14 AM

    Prime minus 115!!?? Are you kidding me? There's no way. No way a bank could ever be able to afford to offer lower than what it costs based on today's BA's (Bankers Acceptance Rates) and the already tight spreads.

  • Steve Holman on 2011-06-22 1:58:44 AM

    The race to the bottom continues...

  • Yan on 2011-06-22 2:17:18 AM

    We have no one but ourselves to blame. This is nothing new, and it has been going on for years. The banks are also not the only ones who are 'prostituting' themselves, there are plenty of brokers who do the same, and we have seen examples of those in this article. In this day and age, there are many who do not take any pride in the work and the service they provide their clients with, and their time is not worth anything to them. Those are the same people who pay their clients penalties, legal fees, and appraisal costs, ending up with a couple of hundred dollars to show for hours and hours of work. All the fees that are being paid to CIMBL each year are also the biggest waste in the world. They organize conferences, meetings, votes, bla bla bla...however, almost nothing that they do is actually useful to the mortgage brokerage industry so far as to help and retain clients and grow market share. The whole AMP designation and the amount of effort that went into it was a huge waste, the whole ethics seminar routine was also a huge waste. Clients don’t care about AMP, and they don’t care about ethics, they only care about their bottom line, their rate and how much money they will put in their pockets. The sad thing about all this, is that those are the actual main strengths that we as brokers can bring to the table, and outdo our big 5 competitors every time. We are the ones who monitor our clients mortgages, we are the ones who let our clients know that its time to break the mortgage and refinance to a lower rate to save big, NOT the big 5. However, our clients don’t know that this is what we do and that all the banks care about is locking them in for as long as they can. If CIMBL had any usefulness, they would forfeit one year of seminars, meetings, golf tournaments, and all the other hot air, and put 90% of our fees towards the most aggressive marketing campaign ever to show the advantages of working with brokers as opposed to the big 5 lenders. Let the public know that when they go into their branch and are offered a rate upfront, it is never the lowest rate! They have to run around trying to beat that rate before their lender admits that they can do better. Lets get this done already. Wake Up CIMBL!!!! Oh Sorry…CAAMP. It was really important to change the name too. Really got us a lot of business. NOT!

  • A Banker on 2011-06-22 2:24:36 AM

    Prime minus 115 is quite possible. It can depend on the overall banking relationship. A deep discount on 1 product can well made up for and then some on other products a client has

  • Jake on 2011-06-22 2:57:32 AM

    I agree with Yan. Caamp is a total waste of money! Lets spend some money on promoting the Mortgage Broker Industry!

  • A broker - Barrie, Ont. on 2011-06-22 3:07:03 AM

    Yan, you have a lot of dead on points. Only issue is that CAAMP works with the banks and brokers. Time for brokers, big and small to stop working with CAAMP and their government/big bank agenda. Big banks want to put brokers out of business. Why are any of us in an organization with them?? So, wake up brokers and opt out of CAAMP. Put money into an organization that supports and works on behalf of brokers. We support IMBA and hope they don't start to follow the agenda of CAAMP in any way....

  • Frustrated on 2011-06-22 3:33:53 AM

    I have lost 20K plus in commissions this year that I am aware of. The retention dept's, and banks have been told to do whatever it takes to retain the client. First National has implemented this policy they have to confirm with the client(s) before issuing payout statement. I find it even worse with the "mortgage broker only lender's" that means that's the only product they have and will fight to retain that client by offering discounts off the pay out penalty, paying lawyer fees and matching rates to retain the client. At least with the banks they don't seem to care too much if they lose the mortgage to a non bank if they have everything else. Just my view on things.

  • John Dearin on 2011-06-22 3:49:20 AM

    The IRD has been a scam from the beginning, with the support of the government. I have approached the Gov't of NL about the IRD and not even a response. Now the banks are doing exactly what the original intent was, to lock up the market and push the brokers out. I called Scotia Bank and my IRD is over $20,000.00 Oh but I can renegotiate my mortgage with a reduced penalty.

  • John Dearin on 2011-06-22 3:52:23 AM

    One other comment, I have sent just a couple of deals to the bank this year and only because the "Independant lenders" could not do it. When the First Nationals, Street Capitals, Concentra's of this business DROP the IRD, they will receive all my business, and that is, in my humble opinion, the time for brokers to walk from the banks to the lenders with no IRD. THAT will shake the banks to their foundation. Any takers lenders?

  • Jeremy on 2011-06-22 5:48:09 AM

    I agree, this is not new and it's time our industry promotes value over rate. I also think it's time to STOP supporting CAAMP and its self-serving agenda. Lets ban together and support the "Mortgage Revolution".

  • broker11 on 2011-06-22 8:15:00 AM

    I have a friend who was offered 3.64% on a five year fixed, originally with penalties. to compete with 3.59% and legals covered on a refi, TD offered to waive the $3300 penalty. this is a very real occurrence!

  • Asif Latif on 2011-06-22 12:54:42 PM

    I think both casmp and imba both should work together.and should care themself.Because banks are competitors .so we should all unite and go together hand in hand.

  • Likes Yan on 2011-06-22 10:43:13 PM

    Well said Yan, why don't you run for board or something ? You have alot of validity in your words. Bottom line rates rates rates,,

  • Robin MacDonald on 2012-04-05 12:43:07 PM

    I am a licensed mortgage broker in the Vancouver area and I have seen a lot of people wanting to refinance their mortgage because the rates dropped drastically. This is not a long term thing. Its simply a result of a lot of people all wanting to refinance at the same time. Someone who works at a bank does not have a license and has not gone to UBC so they may not understand why the IRD is there in the first place.

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