Mortgage Broker

8 | fall 2015 mbabc.ca MORTGAGEBROKER report from the president THE REGISTRAR OF MORTGAGE BROKERS (Registrar) wants mortgage brokers (MBs) to disclose to all borrowers the amount of compensation they will receive from a lender for every mortgage that is arranged. Currently this is only required when a borrower pays the MB for their service. is requirement will alter the value proposition of the mortgage broker industry. It has the potential to permanently change the business model which the industry has so diligently fought for and the tens of thousands of people across Canada who rely on it for employment. More significantly it could also unjustly create the perception that the MB's services are uncompetitive. e industry has spent years marketing most of our services as all-inclusive. "We get paid by the lenders". e new requirement will shi the perception to a fee-based service even though the "fee" is being paid by the lender. Most lenders also have service contracts with MBs. e focus on the fee a broker is earning could now confuse the borrower into thinking they are somehow paying this fee despite attempts to explain otherwise. e need for this change in disclosure has not been completely explained. e Registrar appears to be telling us that we are being unduly influenced by how much we get paid by the lender when choosing what mortgage rate we offer borrowers and that the lender's fee actually determines the rate. In their mind, borrowers will therefore benefit by knowing how much compensation brokers are receiving. Compensation disclosure will help borrowers make an informed decision about the mortgage the MB arranged for them (never mind the total cost of borrowing, interest rate, features and benefits of the mortgage!). Since the Registrar appears to be saying that brokers have a fiduciary responsibility to the borrower, the borrower must, in effect, approve broker compensation. is will effectively make the "Improved Form 10" the broker's invoice for service, even though the compensation agreement is with the lender and not the borrower. e industry already provides very effective disclosure of compensation with the current Form 10 and 11. e question is, what is the need, motivation, effectiveness and legality of this disclosure? e ramifications for the entire mortgage industry are significant. Ultimately borrowers may suffer the most. Here is what could happen. If compensation is being disclosed borrowers will think they are paying "extra" for the mortgage. is will mean that the compensation amount will be under threat. Soon borrowers will think there is actually a "floor rate" – the rate they would get if you used all your compensation to "buy down" the rate. And so you will have to negotiate your compensation from the lender with the borrower. is will transform itself into a fee for service – the floor rate plus a fixed amount. is will invariably mean another mortgage broker will do it for less. Some lenders will say they won't allow complete buy downs to the floor rate … but others will. It will become the norm. Reduced compensation won't make it worthwhile for many brokers to remain in the industry. Fewer brokers will be providing mortgage applications to lenders. ose lenders will have a strain on their own business models – especially those that rely solely on mortgage brokers to fuel their growth. If the lenders start to disappear there will be less lender choice. Well, so what? e banks and credit unions will swoop in and clean up, right? Not so fast. Remember the floor rate? ese "brick and mortar" lenders will still have to compete with the "floor rate" that those surviving brokers will continue to advertise. So they will suffer as well with reduced margins. en interest rates go up. Borrowers have a harder time qualifying for a mortgage. Mortgage brokers have fewer lenders to go to, since many didn't survive. ere is less competition because there are fewer mortgage brokers and lenders. Deep interest rate discounting stops (something the mortgage broker industry created by offering choice). Borrowers yearn for solutions. Alternative lenders could fill the void but are nervous that higher interest rates will reduce values and tighten lending policies. Borrowers pay more. Fewer mortgage brokers leads to the emergance of online "super brokers" who start cornering the mortgage market. ey become lenders as well so they don't have to disclose their compensation. Borrowers are confused. ey don't know if they are dealing with a mortgage broker or a lender. Some thrive. Fewer benefit. So, I ask you: is this really about protecting borrowers? Ajay Soni President ajaysoni@mbabc.ca "Improved Form 10": necessary disclosure or a move to alter the broker business model? FORM 10 Invoice for Ser vice Floor Rate

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