Brokers call for more oversight

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Brokers frustrated by high prepayment penalties for clients are calling for more government oversight.

“The federal government needs to step in and set a single formula that all lenders are mandated to follow, thus protecting all consumers,” Blair Goodman of Dominion Lending Centres National wrote on MortgageBrokerNews.ca

Several industry players were quick to agree with Goodman’s suggestion, citing excessive penalties doled to clients by certain lenders.

“The big banks have all reduced their posted rates below five year terms, thus creating a massive IRD day one after signing a five year fixed mortgage,” Peter Pasula of Domionion Lending Centres Coquitlam Mortgage Brokers wrote. “A recent … client with 2.79 fixed rate and 3.5 years remaining on the term was quoted +$50k for a penalty. Low rates like this should not have any IRD penalty.”

The discussion was sparked by an MBN article about the various prepayment penalty calculations used by different lenders.

“There are so many different ways lenders calculate penalties – certain lenders will use the posted rate and not the discounted rate that was offered to the client,” Narish Maharaj of Dominion Lending Centres Mortgage Mentors told MortgageBrokerNews.ca. “Others will subtract the client rate from the T BILL rate and subtract the client’s rate to determine the penalty.”

According to Mararaj, not only are certain lenders doing whatever they can to saddle clients with the largest possible penalty, it can become confusing when dealing with all the various rules.

“Trying to figure out the penalty is frustrating [from lender to lender] and many of them are creating much bigger spreads,” he said.
 
  • james on 2015-06-09 10:07:11 AM

    Get real. This scam has been going on since 2009 and nothing has been done about it but lip service.

    Why would the Banks care? Brokers still send them the business despite knowing clients may get screwed. Banks win no matter what.

    Why would the Gov't care? nothing in it for them.

    Why would the lawyers care? They are focused on the legal lingo. Banks do a great job with their nebulous disclosure.

    Clients? All they see is the "rate" and bitch about it later and pretend that they weren't told.

    There will still be a few good brokers out there who will give a crap. Kudos to them. If only ALL cared...then, this larceny may stop.

  • John Bargis on 2015-06-09 10:14:57 AM

    Making noise about the onerous penalty calculations of several lenders may some day get the regulators to act. But in the meantime, brokers need to do a much better job in understanding their clients' needs and long term intentions, before placing then in a mortgage product that will only lead to an unpleasant surprise on discharge.

    There are far too many brokers that do not take the time to properly explain, or even themselves understand the pros and cons of a product, especially when it comes to the more recently introduced deep discount products on the market based strictly on rate, which are highly restrictive and not the best for borrowers.

    A professional broker takes the time understand each product, so they can properly educate their clients. After all, an informed client is a happy and repeat client. Be smart by getting smarter - your clients will appreciate you more, and refer you more business so you can build a business.

  • Kevin on 2015-06-11 3:38:56 PM

    Maybe if fewer brokers churned their book of business so often this would be less of an issue. Mind you if that happened most brokers would starve.

  • John Bargis on 2015-06-11 5:19:52 PM

    Lenders generally boast about an 85%-93% retention rate - That's not much of a churn on the broker book.

  • Ron Butler on 2015-06-12 10:14:47 AM

    John, banks achieve 85% - 93% some monolines run slightly less but the important consideration is that these are percentages that only apply when the mortgage is maturing. Broker churn typically takes place at a point far in advance of maturity. Set aside the fact that people sell houses and refinance on their own prior to maturity without the influence of brokers.

  • John Bargis on 2015-06-12 10:54:39 AM

    Ron - although you are correct in stating that retention rates are measured on maturing mortgages, no lender, monoline or otherwise publishes their actual retention rates, so we'll never know the actual number.

    That said, I think we can both agree that lenders on any level wouldn't be engaging the broker market as aggressively as they have for years if it wasn't financially rewarding.

    We can slice and dice this in many ways, but the bottom line is, brokers need to move away from solely hunting and gathering, and more towards building a long term business with long term value.

  • Ron Butler on 2015-06-12 11:12:59 AM

    John, we can have a difference of opinion on that one, although brokers should and will take the direction of their own economic interest some lenders are waking up to the fact that that some mortgage brokers do not really generate many new customers, they recycle their existing book. It's not a policy altering issue yet but it is a fact that smart lenders are starting to comment on.

    It is true that broker lenders continue to grow but we should understand the whole new mortgage origination space grew 23% in the last 12 months, so if a broker's business is not up 23% they are going backwards. Brokers are really only doing a great job for their industry when they are producing brand new customers like first time homebuyers or taking renewal / refi business away from banks.

    Mortgage lending is profitable but we always need to remember the biggest player in the business simply quit and closed 4 years ago so it's not like this is Apple or Google.

  • John Bargis on 2015-06-12 12:20:44 PM

    Ron, like i said my friend, we can slice and dice this in many different ways. Ultimately, there is no way to substantiate your claim that "mortgage brokers do not really generate many new customers, they recycle their book," since you simply don't have access to the information necessary to make that statement.

    Our business has in fact traditionally been predicated on new business, and I simply don't buy claims that lenders have their "existing book recycled," rather than largely writing new broker business - It simply makes no business sense. So lets respectfully agree to disagree on how we see this.

  • Ron Butler on 2015-06-12 2:07:00 PM

    John, you are right, I do not have access to the data. I do have access to history and both Firstline's and BMO's stated reasons for closing down their broker mortgage business was simply this: "recycling of clients" Cut and dried.

  • John Bargis on 2015-06-12 6:10:05 PM

    Ron, I can say with absolute certainty that Firstline and BMO's reasons for exiting the broker market, were much more than about a churning book my friend.

    Firstline was essentially buying the business with it's lucrative rewards program and competitive rates, with no comprehensive plan in place to franchise the client. BMO was no different as far as its failure to franchise the client goes.

    If you have clear evidence to the contrary that substantiates that their reasons for exiting the broker market were "simply recycling of clients, cut and dried," I would appreciate it if you could share it with me.

  • Ron Butler on 2015-06-13 2:33:24 PM

    John, you are dead right, those two lenders complete failure to cross sell the client other banking products and envelop the clients into their branch banking system was their fatal flaw. However I have it from someone who was actually in the meeting that the final stake through the heart of the broker business at Firstline was a meeting where the current CEO of CIBC was told that 23% of all annual origination was the refinance of existing Firstline clients or a renewal which was turned into a refinance with $10K increase in the mortgage amount that was immediately followed by a $10K pre-payment the next month. He said words to the effect that "if we are paying full pop commissions and bonuses and incurring fresh underwriting overheads just to retain our own existing clients; just shut it down or sell it we are better off just retaining the book on an internal basis"

  • John Bargis on 2015-06-13 5:14:38 PM

    Ron, you and I have been industry for some time, and both have inside sources at our disposal who will disseminate information to serve their purposes. Your source told you the final nail was retention related, and mine told me it was the high cost of origination that closed the chapter on Firstline. The reality is that you, me and the masses will never really know the actual reason why FLM and BMO exited the broker market. Lets just call it poor management of an excellent opportunity.

    Regardless of the reason(s), the broker market is viable and profitable to lenders, whether it be a bank or monoline, and there are plenty of examples in our industry to substantiate this. Brokers just need to be smarter about choosing what's best for their long term business, which will make them more profitable and build value in their enterprise. "Eat what you kill" should only be one item on the compensation menu. Renewal Comp should be another.

Broker news forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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