Brokers disagree fee-based compensation will lead to better underwriting

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Canadian brokers don’t buy the premise that a move from an up-front commission-based structure to a fee-based model will result in better loan quality.

“The argument that trailer fee models would enhance underwriting standards is a hard argument to make here in Canada,” Ron Butler of Verico Butler Mortgage said on “Underwriting standards are so high here now if they got any higher, lenders would be asking for drone surveillance and genetic testing on applicants.”

The suggestion to move to a fee-based structure came from Australia’s regulatory body.

“Experience has shown that commissions paid upfront tend to encourage less rigorous attention to loan application quality,” concludes a recent guideline paper from the Australian Prudential Regulation Authority, the Down Under equivalent of FSCO.

The assertion – brokers are more likely to withhold key client information under the tradition system of remuneration than the trailer model – was echoed by several Australian lenders in August as part of a broad regulatory inquiry process meant to better protect the country’s broker channel.

But Canadian brokers aren’t sold.

“I agree with Ron Butler that underwriting standards are already very high here,” Layth Matthews of RateMiser wrote. “Putting brokers under more pressure to do the underwriting negates the way that most lenders see brokers in the first place - sales forces.”

Still, that doesn’t detract from the potential benefits of a fee-based model, according to Matthews, who laid out some positive points about the structure.

“I like trailers because I think they increase objective communication between the client, the lender, and the broker,” Matthews wrote. “If more lenders offered trailer comp, I think clients and the economy would benefit from longer-term thinking.”
  • Daryl French on 2014-09-04 11:47:09 AM

    If we as an industry want to be true partners with our lenders then we need to share in both the risk and reward. The trailer model allows us to work in partnership with our lenders and motivates mortgage brokers to have a longer term view of the market.

  • M. Robertson on 2014-09-04 12:05:02 PM

    Brokers should be paid trailer fees. Too many brokers in Canada "Churn" their books soliciting clients to refinance to get a lower rate, take money out, etc. Sure, lots of broker would argue that they are doing it for the benefit of their customers, but we all know that you do it to get paid more money. If you didn't you would submit it back to the exact same lender, and not get paid because there would be no advance on the balance. Instead you send it to a new lender so that you can get paid your upfront commission again.

    Considering that the average broker mortgage has a lifespan with a lender of less than 3 years, paying based on the length of time the deal stays with the same lender makes sense.

    At lease it would stop the fools that convince their customers to refinance every 2 years.

  • Ron Butler on 2014-09-04 12:27:08 PM

    I agree completely that broker churn is a problem but that is a totally separate issue from so-called "improved underwriting" as a reason for trailer fees.

  • Dave on 2014-09-04 12:42:39 PM

    Ron nailed it. We are tight enough as is. Like we really need tighter rules? Already have to explain every little deposit in a clients bank statement because of AML rules. Ridiculous. How many mortgages are actually money laundering?? Maybe .0000001% ?

  • M. Robertson on 2014-09-04 1:40:37 PM

    This is not about making underwriting rules tighter, this is about giving brokers a reason to have a long term vested interest in the quality of the deals that they are sending to lenders. Also to have a long term vested interest in the relationship with the client, instead of it being transaction based.

  • Ron Butler on 2014-09-04 1:53:27 PM

    But the article was based on Australian banks telling their equivalent of OSFI that they want to enforce a trailer model on mortgage brokers because it will lead brokers to have a vested interest in more truthful underwriting and full disclosure to lenders. That was the whole point of the original article.

  • M. Robertson on 2014-09-04 4:32:30 PM

    It was yes, but it was NOT about making the rules for underwriting tighter. It was about making mortgage brokers more accountable for the business that they do. Since when is being accountable a bad thing?

    Brokers have been looking for ways to strengthen their relationship with both the consumer and lenders - this is a viable option to do just that.

  • Daniel McKay on 2014-09-04 5:45:29 PM

    The biggest problem with implementing a trailer model in our industry is the fact that all the ones I've come across pay the BROKER, not the associate the trails. As an associate you have to trust your broker to pay you those trails as they are not paid directly to you. Many brokers use this to hold associates hostage within the brokerage, and do not keep paying the trails to the associate if they leave the brokerage. I was burned by this as an associate in the first brokerage I worked in, and refuse to implement a trailer model into the brokerage that I now run unless the industry does something to prevent the stealing of trails from associates.

  • M. Robertson on 2014-09-05 12:34:43 PM

    Daniel - it is called an agents agreement. The agents are independent contractors and they have a responsibility to ensure that the contract they sign protects their interests. If they do not, you can hardly call it "stealing commissions". This whole thing, calling it theft of commissions, is just plain stupid. Since when did people not become accountable for the choices they make? Agents choose to join a brokerage, they choose to sign the agents agreement. You don't like the agreement... then don't sign it for petes sake.

  • Ron Butler on 2014-09-05 1:31:53 PM

    Respectfully M. Robertson, that's not always how this works, not everyone who starts in the mortgage business is a fully formed commission based business person who has the savvy to seek out and review 6 contract offers and conduct due diligence and negotiate with all of them. Some people who join this business are young or inexperienced, it is their first commission job, their first self-employed experience and are RECRUITED into the work. They sign an onerous agreement just for those reasons. To say they a stupid and deserve what happens to them is really just silly.

  • Daniel McKay on 2014-09-05 1:38:18 PM

    @M. Robertson The associate agreement I signed did not have any provision or disclosure whatsoever that any trails paid on my deals would not be paid to me if I left. The agreement for the trailer model was only signed by the broker and lender, the fine details of which were not disclosed to associates. So under no circumstances did I ever agree to the fact that I would not be entitled to be paid trails on my deals, nor was it disclosed that that would be the case if I left. Trails in other areas of financial services are paid to the writing agent not the firm for that specific reason. So don't assume I agreed to something that I did not. So again I will warn all associates, be very weary of the trailer model, only agree to be part of it only if your trails are guaranteed to be paid to you in writing.

  • M. Robertson on 2014-09-09 1:29:48 PM

    @Ron I never said once that the person signing the contracts was stupid, I said that making the claim people were stealing commissions was. Don’t put words in my mouth – if you are going to quote someone do it properly or don’t do it at all. As for new agents being “recruited” into a role… that does not negate a person’s responsibility to make an informed decision. People are recruited into jobs all the time, and it is that persons CHOICE about whether to accept the role offered. You make it sound like these new agents are forced into taking the job/contract. We live in Canada, where we have the autonomy to make decisions. Sometimes we make good ones, sometimes we make bad ones – it is simply called life and it is how we learn. If someone blindly signs an agreement without fully understanding the terms and what they mean – that is their own fault.

    @Daniel – You did have a choice, you could have asked questions. In my opinion you should have. It is no one’s responsibility but your own to look out for your interests – period. If you, or any other person, makes a decision without making at least a summary effort to be informed you have no one to blame but yourself. If your brokerage started to deal with a lender that offered trailer fees, and you made the choice to send deals to that lender without fully understanding what happened to those fees if and when you left that firm, that is on your shoulders. Should your broker have discussed it with you? Yes, they should have. That does not mean that you are not responsible for asking the questions necessary. No matter what your reason for not asking the question might be, it was your choice to not ask.

    We live in a society where personal accountability is degrading to such an extent where people have this misguided illusion that everyone out there is on our side. We see lawsuits happen every day because someone made a decision and it turned bad for them, but it was their decision to make. Should there be better information presented, sure. But at what point do we take accountability for ensuring that we have the proper information and have done our own research to effectively make a decision that protects our own interests? To claim that someone is “new” or “young” doesn’t hold water these days… not when we have the greatest information resource available in the history of mankind.

    One of the greatest gifts we have as human beings is choice. That gift also comes with the acceptance of taking full accountability for the choices that we make. Be it a choice to sign a contract or not, to ask questions or not. We make those choices and we have an obligation to ensure that the choices we make are informed ones. If we do not, then we are the only ones to blame when our choices do not turn out the way we want them too.

  • Kevin on 2014-09-09 1:39:24 PM

    @M. Robertson

    HERE HERE!! I am tired of reading the commentary on this site and listening to brokers continually playing the blame game. We ask that government, lenders, and consumers take us seriously but then we degrade to small children when things do not go our way. "It wasn't my fault" "It's not fair" and other sentiments of that ilk are all too common on this site.

    Folks, we are not children here, we are adults. It is high time we started behaving like it.

  • Ron Butler on 2014-09-09 2:01:33 PM

    @M. Robertson, you can try to walk this one back as fast as you want. You are simply wrong, people coming into an industry they know zero about are vulnerable, your story about doing research is a crock, how would someone know to Google "mortgage trailer fees" if they don't even know what that is. "it was your choice not to ask" what kind of pretzel logic is that? Your choice not to ask something you know nothing about because your broker owner signed up for trailer fees for the brokerage AFTER you joined the brokerage?

    Your comments clearly reflect a broker owner who is in the business of taking advantage of his or her agents. Man up and give us your full real name so we can all Google YOU and new agents can know who to avoid. I don't hire commission agents so it does not matter to me but I sure as heck recognise someone peddling a line of guff about "personal accountability" and "done your own research" as an excuse for "if you sign my contract I gotcha". Seriously, you may have deluded yourself into thinking you are a paragon of neocon self-reliance but it is painfully obvious what you are really up to.

  • M. Robertson on 2014-09-09 3:30:20 PM

    @Ron Butler - AH yes Mr. Butler, once again you jump to a vast array of conclusions and personal attacks when someone challenges your viewpoint.

    First. I am not a broker owner. I never claimed to be one, and you are more the fool for jumping to that conclusion and then also making a disparaging comment about what my business practices might be if I were one. In fact I never even said that I was a broker. You, as you normally do, jump to conclusions and revert to personal attacks on character.

    Second. Line of Guff about personal accountability? Are you for real? Do you seriously believe that people have no personal accountability for the choices they make in life? Your rhetoric has about as much basis in logic as someone who believes that the tooth fairy is real. If you actually understood the English language you would see that I clearly stated that the broker should have provided more information, but that does NOT negate someone’s responsibility to ensure that they make an informed decision. This is not the dark ages where people are forced into slavery. We are in the information age sir, one where the average education of our society is the highest it has been in the history of our existence.

    Are you seriously going to tell me than an adult, who is educated, studied and wrote the brokers exam, does not have the ability to ask questions to better understand the industry into which they are seeking to make a career? Are you seriously suggesting that new agents do not have the capability to understand contracts? If you are then sir, you are painting a bleak picture of our industry, and as a self-proclaimed spokesperson and messiah of the broker industry the question is: What are you doing to educate new agents in the broker industry against these so called evil brokers?

    Third. Man up? You are sexist, elitist pig.

  • Ron Butler on 2014-09-09 3:35:24 PM

    @ M. Robertson, all this silliness and you don't even own a brokerage? Just random verbiage on a topic you are not really even involved with? Now I am bored. Signing off.

  • M. Robertson on 2014-09-09 3:39:18 PM

    Wow, now you truly show your colours. I do not own a brokerage, so I do not have an opinion that counts.

    I feel sorry for the 13,000 + licensed agents in Canada if you are a "leader" in the industry.

  • Ron Butler on 2014-09-09 3:54:12 PM

    I am past my expiry date for Freedom 55 Mary and I think discussions of mortgage brokerage commission contract issues should reside with folks who actually are mortgage agents and brokers.

  • M. Robertson on 2014-09-09 4:07:13 PM

    I never said I was a broker or agent, but I also never said I was not one.

    You do like to jump to conclusions Mr. Butler.

  • Arbitrage on 2014-09-09 4:08:36 PM

    @M.Robertson...Calling someone a "Pig"...really? There are definitely people who take advantage of a new agent's lack of knowledge at contract time. I knew 3% of what I needed to know about this business after finishing up my Mortgage Agent Course. A brand new agent entering the business without a senior agent guiding them can be a prime target for an unscrupulous brokerage owner.

    Of course you have a responsibility to do as much research as possible but how could one possibly know all the questions to ask? A contract is a contract and it should of course stand...however, people that take advantage of others should be exposed so that others can avoid hitching themselves to a predator.

    If a broker uses a gap in knowledge to take advantage of a co-worker or employee I shudder to think of what he/she does with the knowledge gap between him/herself and the client...yikes!

  • Ron Butler on 2014-09-09 4:16:13 PM

    Tracked you down Mary. It was not hard, although you are not actually in the mortgage business you love to comment on it all over the place.

  • M. Robertson on 2014-09-09 4:20:13 PM

    Ummm. My name is not Mary... you are once again playing a fools game Mr. Butler.

    I never told you my gender.

  • Keith on 2014-09-09 4:21:27 PM

    With all due respect to both Ron and M. Robertson... enough is enough.

    You both need to grow up.

  • Ron Butler on 2014-09-09 4:21:40 PM

    Found you Mary.

  • Ron Butler on 2014-09-09 4:22:57 PM

    I am old Keith and huge mileage too.

  • M. Robertson on 2014-09-09 4:25:24 PM

    Ron, my name is not Mary - never has been and never will be. In fact, I cannot think of one single person in my family that has ever had the name Mary.

    OH and for the record... I AM a part of the industry.

  • Keith on 2014-09-09 4:26:21 PM

    Ron, if you are old and have a lot of mileage, then with all due respect you should really know better.

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