Disclosure rule could lead to undercutting

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The industry could see a major change next year when it comes to disclosing income to clients, and one broker is arguing the ramifications could be dire.

“There will be no protection from under cutters, and you will see flat rate brokers who offer cash back to steal broker business,” Dustan Woodhouse, a broker with Dominion Lending Centres Canadian Mortgage Experts, told MortgageBrokerNews.ca. “Clients will bring in approvals to these companies, let the brokers do the planning, and they will take any approved deal.”

According to Woodhouse, FICOM’s proposed disclosure rule implementation – which will clearly indicate on mortgage applications what brokers make – will result in a number of companies popping up that will offer commissions back to the client.

He uses the example of a fictional company called 999Mortgage.com, which would hypothetically charge a flat fee of $999 and offer the rest of the broker commission back to clients. After the client has worked with a mortgage broker – who has done the work -- and received an approval, of course.

And one lender verified the model would work.

“The lender will go with the client the broker wants,” the anonymous professional, who works with a large channel lender, told MortgageBrokerNews.ca.  

The channel is keeping a keen eye on the proposed rule implementation, which could go into effect in British Columbia next year. However, industry players say the change could have far-reaching implications for the industry as a whole.
 
  • Ron Butler on 2015-11-18 10:10:04 AM

    Thanks Dustin, I have just acquired the domain 999mortgage.com with GoDaddy.

  • Dustan Woodhouse on 2015-11-18 11:42:36 AM

    For the record 999mortgage.com was registered by a Broker this morning (he sent me a thank you email), I did not bother myself as the name is a red herring.

    I await emails from the next 900 or so Brokers who register 998mortgage.com all the way down.

    Hopefully this thought exercise of drilling the mortgage business down to the sandwich artist franchise model with mortgages being processed by 18yr old kids for minimum wage while a single licensed manager overseeing the operation will resonate with Brokers, lenders and regulators alike.

    Our industry does not need bucket shops. Our industry needs the opposite. It needs skilled Brokers that can differentiate between 30 different lenders selection of a dozen or more mortgage products. It needs Brokers that earn enough to be able to educate themselves.

    And while many consumers may choose fast food for lunch we all know how smart that is in the long run.

    For the discount houses running on a full buydown model they are already at 999 or less on mortgages of 200K or so and below. This would be a step up for some of them in certain regions.

    When I am traveling I do not eat 99cent hashbrowns from a chain, I look for the artisanal hashbrown maker who knows there stuff and I pay triple. Debate away as to weather I am throwing my money away.

    No doubt the debate on this topic will be spirited for some time.

    Footnote: Hey Brokers, did you know that your lenders, and your regulators are reading the comments as well? Keep it classy folks, type comments like they are the first words you are speaking to your future in-laws.

  • Evan W on 2015-11-18 12:26:37 PM

    Regulators need to understand how brokering works. The lack of understanding lead them to misdirect regulations. This kills legitimate business. The misdirection is damaging mortgage brokering. Without mortgage brokers, many borrowers will be left at the mercy of their lender because they will not understand the marketplace and options. In the end, the consumer pays.

  • Ron Butler on 2015-11-18 1:45:06 PM

    Hey Dustan, did you know consumers that allow us to all have jobs are reading the comments as well ?

    Millions of hard working, home owning Canadians eat hash browns every day at fast food restaurants, maybe they cannot afford the time and expense of locating artisanal hash brown makers (does that even exist?) like you clearly believe they should.

    I am the broker who registered that domain this morning and I will continue to get fatter eating plain old fast food hash browns on Saturday mornings and I will keep on delivering value to Canadians who want lower mortgage rates.

    I believe their is a broker model for everyone, there is a place for those brokers who need to provide massive help on complicated multi-part refinance and special purpose purchase scenarios and brokers who are just trying to deliver ultra low rates and fast, efficient internet service to plain vanilla purchases and renewal clients who just want a great deal.

    My mature, salaried, highly paid, fully licensed and well trained staff do not even take offense to being called unlicensed, 18 year old, minimum wage, drones anymore, they have heard it a hundred times before from other brokers. Everyday they keep on taking calls and helping non-artisanal hash brown eaters who just want a better deal.

  • LanceH on 2015-11-18 1:48:26 PM

    Regulators are reading this huh? Great!
    1) Why?? Does the banker have to tell clients his salary? Is there a true benefit here to consumers here? As Dustan points out, it's not so black and white as simply "lower cost". They've upped our responsibilities and now want us to get paid less? Hey regulators - how bout you do the same??
    2) This is a great example of our society becoming over-regulated. Trying to perfect society. Just read an article that Canada has dropped sharply on the list of "countries to do business with". One thing cited, was the sharp increase in paperwork (Gov regulations).

  • $795 on 2015-11-18 4:41:02 PM

    795mortgage.com does it for less.

  • Ron Butler on 2015-11-18 5:25:21 PM

    795 just does not have the same cachet as 999. It may be cheaper but 999 has style.

  • Walid Hammami on 2015-11-18 10:57:17 PM

    Which brings up the penalty fee to the front.

    Lawyers charge per hour, we don't even charge the client at all. At least the penalty will even things up.

    Look professional.

  • Bruce J on 2015-11-19 10:27:26 AM

    Ron has a solid point.

    In the investment world we have discount brokerages that will trade a stock for 1cent (with additional hidden fees) but you get the point. On the hand if your accredited you can invest in a hedge fund with a high water mark as high as 50% of the profit to borrow the brain of hopefully an investment genius. Every investor is different just like every borrower.

    In the leverage and debt world there is certainly in this current market a demand for low wage cogs to support borrowers who want to race to the bottom and get the cheapest rate. They differ from those advisors who support complex strategies where the borrower feels there is value in paying an additional 10-20 bps is totally justified and happy to do it. The trick is knowing your client and niche.

    Now more than ever it's important to differentiate who exactly you are and what you do better than anyone else.

    As for high disclosure and transparency this can only be a bad thing if you CANT justify your value. Ron's model is taking advantage of the information age which is driving the inefficient COSTS out of everything. Thats a modern fact of doing business in 2015 an economists would call that driving towards efficiency because CMHC insured debt is effectively a commodity. If you want to charge a premium on a commodity you must be adding value. If value (perceivably) is not being added in this market by brokers they will simple lose market share y/y. Change (disruption) is certainly uncomfortable but it's here and the trend is not going away.

  • ClaytonCarby on 2015-11-19 12:52:46 PM

    I have been in this business for the past 16 years.I offer my clients a service that they do not have to pay for out of their pockets. Unless the lenders are willing to lower the interest rates because they do not have to pay a commission to me for doing my job and bring them business, I don't believe my clients are going to care how much I am paid either way. Non of my clients would expect me to work for them, doing what I do, for nothing.
    Having said that I do not see any advantage to the public in knowing how much I make on a mortgage unless they are able to compare it to what a Bank employee would make on the same deal.

  • Paul Therien - CENTUM on 2015-11-19 1:57:04 PM

    I have read, and re-read several of the articles in several publications regarding this topic. I have spoken with FICOM and my contacts in the provincial government, all in an attempt to better understand the “why” behind this change to disclosure. I don’t agree with the proposed change, and for me – as a national brand leader - to better be able to combat this and address the regulators concerns it is important that we look at the reasoning behind it.

    The issue at hand is ultimately to protect the consumer and have transparency in the process of working with a mortgage broker. That is the key statement: Transparency in the process of working with a mortgage broker.

    FICOM’s issue stems from a long standing claim from mortgage brokers that “We work for you, not the banks.” A claim made by all - and one that is used to demonstrate to the consumer that we are here to provide them with unbiased, professional advice. It is the unbiased term that also has the registrar taking umbrage with the claims made. Why? Let’s take a closer look.

    First, to claim that we work for the consumer and not the lender is not strictly true. We “contract” with a lender and agree to source mortgage clients for them and are compensated for doing this, by the lender. Technically, as contractors, we actually work for the party that pays us – at least if we follow the letter of the law. We act as an intermediator between the lending institution and the consumer – but ultimately our income – comes from the lender. This is not a new model of business, we are not the only industry that operates in such a way. So by that logic we should be OK… Yes? Well… maybe. If we as an industry no longer claimed to work for the consumers interest only, or first, then yes. If we continue to make that claim, it becomes a grey area. This is only one small measure of the issue that the regulator has.

    Now, our value proposition to the consumer is that we work to represent their interests in the transaction, can get them a lower rate, and the best product. These are also true statements for most brokers. Brokers work hard to find the consumer a mortgage and as we all know, often have to jump through significant hoops to get them approved. We have access to a greater suite of products because there are several lenders who only source their business via mortgage brokers, and as such can offer the consumer greater product choice. This should in theory translate to greater value to the consumer.

    The concern starts to arise in that brokers are incented to send volume to specific lenders. We have the commissions, volume bonuses, and even reward points. All in an attempt to drive more volume from the broker community. The problem with this is that it gives the appearance of volume being directed to specific lenders for reasons other than we claim: we work for the customer and not the lender. At issue – the regulators have the perception that many brokers do just that – send volume to lenders based on compensation – and there are some who do that, but they are a very small percentage of the industry. There is also the issue of those few brokers that charge additional fees to the consumer.

    The issue with amending the disclosure document is that it will not achieve what the regulator is attempting to achieve, namely that consumers will have a better understanding of WHY they deal was sent to one lender as opposed to another. They are trying to ensure that the mortgage is not being sent to one lender over another because of compensation. That is a fundamental flaw in the regulators thinking, and it tells me that they have a limited understanding of how the average mortgage broker conducts their business. Most brokers will review the customers application and based on that will determine which lender will approve the mortgage.

    In recent years the differentiator between product line has become smaller, as have the requirements to qualify for a mortgage. With that in mind we (including the regulator) have to consider the following: If the client qualifies at two different lenders who have identical lending products, with the same rate and terms – and the only difference is compensation between the two… there is zero negative impact on the consumer if the broker sends the deal to the lender that pays more.

    I do not think in the grand scheme of things that most consumers will care about the compensation the lender pays the broker. Most consumers today research their mortgage online before talking to a broker, they know what rates are available, and they typically have a rudimentary understanding of the different products available. The consumer already knows that the lender pays the broker, and there are very few brokers that also charge an additional fee – those that do charge a fee will find that they are challenged with this change more than those who do not.

    Threatening legal action and the beating of chests will win this regulator, or any of them, over. At the end of the day, we as an industry need to be able to give the regulator comfort knowing that we are in fact working in the best interest of the consumer, while still representing the interests of our lender partners. That there is no duality involved. When we do that, we will have won – because if on April 1st this comes into play, legal action or not… and even if we win the case and it is repealed… Pandora’s box will be opened.

  • Tim on 2015-11-24 2:52:05 PM

    Never be afraid of opening Pandora's box if the price to not open it is to tolerate wrongs. Anyway, an honest exchange of differing ideas and views should not cause any good regulator to reach for Pandora's box.

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