Mortgage Broker

MORTGAGEBROKER mbabc.ca fall 2015 | 23 indecentdisclosure with compensation information relating to the mortgage broker, only 49 per cent of the test subjects were able to identify that both loans cost the same amount. is is a startling figure, which demonstrates that compensation disclosure does not equip mortgage borrowers with essential information to enable them to make sound and informed mortgage borrowing decisions. In fact, it shows that mortgage broker compensation disclosure causes approximately half of mortgage borrowers to make mortgage loan decisions incorrectly. e knowledge of the amount of compensation received by the mortgage broker clearly causes bias amongst consumers. The FTC made strong and emphatic conclusions: . the findings of this study indicate that broker compensation disclosures are likely to harm rather than help consumers and competition in the mortgage market; . the disclosures are likely to lead a significant proportion of borrowers to choose more expensive loans by mistake; . the disclosures are likely to cause a substantial bias against broker loans that may reduce competition and increase the cost of all mortgages; and . all three versions of the compensation disclosure tested in the study resulted in significant consumer confusion about loan costs and a substantial bias against broker loans. is included versions that moved the disclosure to a second page of the cost information. e mistaken loan choices induced by the compensation disclosures could impose significant costs on consumers, both individually and as a whole. If the disclosure requirement has an impact similar to the magnitude found in one of the hypothetical loan cost scenarios examined in the study, the disclosures would lead mortgage customers to incur additional costs of hundreds of millions of dollars per year. We are not aware of any other comprehensive study of mortgage broker fee disclosure and believe the findings of the FTC study to be valuable and applicable in Canadian jurisdictions. So if knowing mortgage broker compensation harms consumers and interferes with their ability to choose sound mortgage options, what kind of mortgage loan information would be helpful? We suggest that a more helpful tool, perhaps even the single most valuable tool for mortgage borrowers to use in evaluating the costliness of various mortgage loan options, is the annual percentage rate or APR. e APR is a singular number, which in theory incorporates the totality of all mortgage borrowing costs, fees, interest charges, mortgage amortizations and terms. Every mortgage loan, whether brokered by a mortgage broker or not, has an APR. e APR, once calculated, can be used by the borrower to evaluate the cost of one mortgage over another. It eliminates any misperceptions which might be created by mortgage broker compensation disclosure that brokered mortgages are more expensive than lender direct mortgages. In addition, market forces will ensure that mortgage brokers provide mortgage options for borrowers with the most competitive APRs. Disclosing broker compensation can confuse consumers into selecting more expensive mortgage loans by mistake. FORM 10

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