A client called us this week upset that his broker charged him a $5000 broker fee. So we asked where the broker got him approved. Much to our amazement, it was at a major “A”-lender. More surprisingly, the client’s credit was excellent.
To us, this is almost criminal. There was no reason in the world this client should have paid this broker that kind of fee. The lender was already paying the broker a finder’s fee. He didn’t need to gouge the client for more.
This type of thing drives us batty. Our industry works hard to educate people about the benefits and integrity of professional mortgage planners. Every profession–doctors, police officers, even priests–have bad apples, but this behaviour hits close to home.
You might wonder why we’re bringing this up in front of thousands of readers. The goal here is to warn consumers (and other planners) about what we consider rogue brokers. This is far from typical practice in our industry and people need to know that.
When is a broker fee warranted? Here are sample cases where such fees may apply (this list is not exhaustive):
- Commercial Mortgages: Unlike residential lenders, commercial lenders often don’t pay finder’s fees. So there is no other way to compensate planners for the value they add in arranging hard-to-place commercial financing. Moreover, commercial deals take a huge amount of time and often never close for various reasons. In many cases, a planner can do 10 residential mortgages (and be compensated for them) in the time it takes to do one commercial deal.
- Private Mortgages: When normal lenders won’t approve a client, private (“hard money”) lenders are often the last hope. Like commercial lenders, private lenders don’t usually pay finders fees. In these cases, broker fees compensate the planner for his/her time and for use of their private lending network. (Building a good network of private lenders is very difficult. We’ll do a story on that sometime.)
- Small Loans: A small deal (e.g. a $30,000 second mortgage) takes up just as much time–and often more–than a large deal. Really small mortgages also divert the planner’s attention from other clients who deserve equal service. Because the finder’s fee on these deals is tiny, planners sometimes charge a small and reasonable broker fee.
Remember, in Ontario a broker is not allowed to ask for any fees up front on residential mortgages under $200,000. For mortgages over $200,000, borrowers should get it in writing that any advance fees will be refunded if suitable financing is not provided.
In BC, it’s illegal for a broker to ask for fees up front on a residential mortgage.
Generally speaking, advance broker fees on most residential mortgages should be a big red flag. (Click here for a related story). We know of no reputable mortgage planners that charge them, except in the aforementioned circumstances.
Even if it’s a subprime (bad credit) client, lenders pay brokers well enough that extra fees shouldn’t come up–apart from the cases above.