B.C. mortgage brokers have eight months to prepare for one of the biggest procedural changes ever to hit their industry. The province’s regulator, FICOM, has released its controversial broker compensation disclosure guidelines, and they take effect June 30, 2017.
The new rules make brokers list all monetary interests and benefits they receive when arranging a mortgage. “Any interest which has a monetary value must be expressed as a dollar amount” to consumers, the regulator states.
“…We are disappointed by this announcement,” said Paul Taylor, President and CEO of Mortgage Professionals Canada, in a statement Tuesday. “From the onset, we have encouraged open consultation and dialogue with the regulator and undertook extensive efforts to ensure our collective voice was heard. It is clear that the industry’s concerns and directional evidence on the negative implications were not taken into account.”
FICOM, for its part, believes that broker interests (compensation and incentives) create potential conflicts, albeit it hasn’t received any specific complaints of such conflicts from consumers (that we’re aware of). In a letter Tuesday, the regulator said, “The guidelines encourage industry to think about conflicts, identify conflicts, and describe conflicts in a way that is easy for consumers to understand.”
According to FICOM, a broker’s direct interests in a mortgage include, but are not limited to:
- Base commissions
- Known volume or efficiency bonuses
- Loyalty or rewards points
- Broker fees.
FICOM says typical indirect interests include:
- Expected trailer fees, if the borrower renews the mortgage with the lender at maturity
- Expected trailer fees or other compensation payable during the term of the mortgage
- Potential volume or efficiency-based bonuses
- The amount of volume-based compensation paid by a lender to the mortgage brokerage (firm)
- Lender compensation paid to the corporate head of any network or franchise entity to which the mortgage broker is related or associated, based on aggregated volume for the network
- Fees paid by a lender to a network, franchise or mortgage broker for any purpose related to mortgage transactions being directed by that firm or associate or related party to that lender (including but not limited to access fees and fees paid by a lender to be identified as a preferred lender)
- Reduced desk, franchise or network fees, or similar, payable by mortgage brokers based on achieving certain targets, such as volume, with a preferred lender of the firm
- The ability to offer preferential pricing to borrowers in future mortgage transactions based on volume or efficiency-based targets being met
- Any benefit arising from achieving a certain status or designation with a lender
- Beneficial ownership interests in the lender or the borrower
Other notable points:
- Commission splits between sub-mortgage brokers and brokerage firms must now be disclosed
- Fees paid by technology providers, like D+H, to broker networks do not have to be disclosed
- Sub-mortgage broker salary (paid by the brokerage) does not have to be disclosed
We’ve talked about the pros and cons of these changes before, but in a nutshell we expect:
- Savvy consumers will use this new information to negotiate better deals (i.e., ask for some of the broker’s now fully disclosed compensation, by way of rate buydowns or cash rebates)
- Many consumers will be confused by the disclosure since there are limited benchmarks to compare a broker’s interests to what is “normal”
- Some borrowers will choose the wrong provider based largely on a broker’s compensation, and not the broker’s service, advice and product recommendation (U.S. research supports this)
- Some deep discount brokers will invite consumers to contrast their compensation to that of “full-service” brokers—and use that as a competitive edge
- Lenders may not be thrilled as their confidential brokerage compensation agreements (which predate these new rules) become industry knowledge
- Lenders will find it harder to keep preferential broker compensation and rate deals secret from other brokers
- Broker networks may be under increased pressure to share the newly disclosed incentives that lenders pay them with agents.
I’ve spoken with superbroker bosses who feel these guidelines could ultimately harm the broker industry, and consumers, by shrinking margins to a point where it’s unfeasible to provide in-depth advice and service to consumers. Other brokers brush it off, maintaining that most consumers won’t see the disclosures until right before they sign, and/or know how to interpret them.
With respect to timing, FICOM says the “Form 10” (which contains these disclosures) must be given to borrowers “at the earliest opportune time before they sign:
- the mortgage; or
- any ancillary agreement with the mortgage broker or lender, including but not limited to an agency agreement with the mortgage broker, that commits the borrower to the mortgage transaction.”