Brokers disagree fee-based compensation will lead to better underwriting

Brokers disagree fee-based compensation will lead to better underwriting

Brokers disagree fee-based compensation will lead to better underwriting 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 MortgageBrokerNews.ca. “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.”
 
27 Comments
  • Daryl French 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.
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  • M. Robertson 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.
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  • Ron Butler 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.
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