Time to end upfront comp?

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The very suggestion will rile Canadian brokers, but a growing number of their global counterparts are facing calls for a ban on upfront commissions – a way of better protecting loan quality.

“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 traditional 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.

Still, the idea of shelving traditional compensation models as a way of holding brokers more accountable is also garnering interest in other global markets, including the U.K. and the States, as supporters of trailer fees press their case for reform.

The call for a similar paradigm shift in Canada has been more muted, although a growing number of brokers voluntarily increased their proportion of trailer fee deals as a hedge against any future originations slowdown.

But the majority of players in this country continue to opt for the traditional compensation structure. Several have balked at the suggestion that disclosure to lenders would be improved under that newer model.

The reaction to another proposal before Australia’s Financial System Inquiry is also raising broker eyebrows both there and in this market.

Financial services firm EY asked the inquiry last week to consider the introduction of a fee-for-service requirement to mitigate conflicted remuneration in mortgage brokering. That model would see borrowers pay brokers directly – even for A deals.

“A fee-for-service requirement, whereby payments are made directly from the customer to the broker, as opposed from the product manufacturer, would largely mitigate this conflict,” writes EY in its submission.
  • Ron Butler on 2014-09-02 10:48:12 AM

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

    As far as charging customers brokerage fees on "A" deals; that might happen but in a different way: broker buys down the rate to zero comp and negotiates the fee with the client for services rendered.

  • Deborah on 2014-09-02 12:05:38 PM

    once again, the advantage is to the corporation. I want to be paid when I do the work, not over 5 yrs. I'm not a finance company..

  • Cory on 2014-09-02 12:46:02 PM

    A very interesting perspective considering the financial planner industry is under pressure to rid their practices of trailer lending, where they would only get paid for doing work, instead of in perpetuity.

  • kac on 2014-09-02 3:55:55 PM

    over the past few years there have been a number of monolines and small credit unions who did the hard sell on the annualized trailers and commissions on renewals and then dropped off the face of the planet or did an about turn on paying on renewal unless some conditions were met at renewal that weren't told to the broker up front. Who see's to it that these companies stand by their words?

  • Victor Simone on 2014-09-02 4:38:16 PM

    What happens to the earned and unpaid commissions, if a lender decides they no longer want to have a broker, or brokerage in year 2 of 5 ?

  • Angela Wong-Liao - Invis Inc on 2014-09-02 5:23:48 PM

    I agree with Victor Simone, what happened if the lender decided to close their business, what happened and protection to our hard earned commissions? I do not believe in trailer fee because we are not in control of our earnings, the lenders does.

  • Kuldip S Panesar Homeland Mortgage Corp. on 2014-09-02 6:03:57 PM

    Broker is to be paid when the deal is closed because he has done his job. Why shall he wait for five years?
    What happen if Lender closes his broker channel ? This is not upfront this is after completion of the work.
    If it is paid by the clients for A deals , closing costs will go up and Lenders will be benefited at the costs of the clients.

  • jim on 2014-09-03 12:06:32 AM

    Risky! lots of brokers lost their commissions when Abode( its called Canadiana now) shut down and didn't pay the brokers!

  • Deborah on 2014-09-03 1:14:17 AM

    you also lose your trailer fees if the sub broker leaves the brokerage they were working for. I worked for a brokerage that encouraged trailer fees, and when I left I never saw a penny of the trailers. That could amount to thousands of dollars that the brokerage gets off the back of the sub broker.
    As for charging the clients on A deals, good luck, the banks would love to hear that, they already try to convince clients that we build our fees into the price.

  • Paul on 2014-09-03 12:08:44 PM

    Guilty before innocent. It is assumed that because you get paid on commission that is largely paid up front that you are inclined to push through or not provide relavent info? I am not saying it doesn't happen, but it isn't the plague this would make it out to be. This would favour the banks and not the broker industry. I wonder who might be pushing it...enough said.

  • Layth Matthews on 2014-09-03 12:49:42 PM

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

    I actually think the way trailer comp is playing out in Canada now is perfect. We just need more lenders to participate and we need to standardize the agreements - i.e. not holding it over the broker to maintain miniscule default ratios - everybody loses on a default with trailer model already! Also, such clauses give the lender way too much influence over brokers with increasingly significant trailer fee income.

    Aside from this, here are the good points about trailer comp.

    1. Yes, you have to put your faith in the lender, but not too much as you break even on the deal vs. up front comp after only a few years of trailers.

    2. With trailers you have an interest in higher quality loans already because you have a financial interest in the ongoing mortgage!

    3. The broker is in a more objective space to advise the client in the interim and at renewal because you get paid something either way.
    With upfront only comp there is an incentive to refinance every chance you get. Not that any of us would succumb to such pressures :).

    Regarding the lenders commitment to paying the trailers, there could be some actuarial standards regarding trailers in trust.

    In sum, I like trailers because I think they increase objective communication between the client, the lender, and the broker. If more lenders offered trailer comp, I think clients and the economy would benefit from longer-term thinking. I think brokers would benefit from long-term stability - less industry turnover, and the lighter up front comp introduces a challenge/incentive to make longer term commitments to the business. Finally, I think lenders would benefit from longer servicing of the same loans as brokers would not have to trade to be paid.

  • Arbitrage on 2014-09-03 1:35:54 PM

    Trailers as they exist today in Canada seem pretty much like a no brainer to me. Lenders bragging about 85%+ retention rates was all I needed to hear. Combine this with the fact that there are a few trailer lenders that don't require you to take a haircut up front and I'm baffled as to why anyone wouldn't send at least 50% of their biz this way. Even if your worst case scenario happens and somehow your trailers disappear (aren't these usually honored anyway when a company sells their book or restructures?) what did you lose if you got full comp up front as well? In the face of apparent 85-90% retention rates...you probably didn't lose anything. Seems almost like free insurance to me...

    It's obviously better for the lenders if someone like me isn't always trying to shuffle the deck at renewal or before. The trailers the lender pays me are probably cheaper than what a top notch retention team might cost. They are essentially employing me as a member of the retention team.

    Like anyone else, I will churn the book a little but only when it results in client savings...otherwise partnering with and supporting a lender that has agreed to pay you trailers (via contract) seems like good long term planning for both the broker and the lender.

    My 2 cents.

  • John Van Driel on 2014-09-08 11:05:16 AM

    Those of you in favour of trailer compensation, what happens if your lender does a bankruptcy, or a pull our of Canada trick, or a Firstline manouver with brutal retention tactics offering not-to-be matched rates??

    Pay me now, or I might not get it later!!

    I do agree that trailers may improve communications with clients, but let's learn how to do that properly, anyway.

    Pay me now, or I might not get it later!!

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