Has your real estate agent or financial adviser ever suggested that you go to a specific bank or broker for your mortgage? If they did, and they got paid for it, there's potential for conflict of interest.
Most mortgage referrals are made in good faith. Your adviser recommends a banker or broker because they believe you'll get a good deal, a fast approval and competent service.
But some advisers pocket incentives when you close a mortgage with the person they recommend. That remuneration can take the form of cash referral fees or in gathering "points," like the ones in these referral programs from RBC and TD Canada Trust.
Direct or indirect compensation can alter the motives behind a referral. How substantial is this compensation? Some real estate brokerages get paid up to 50 basis points – for example, $2,000 on a $400,000 mortgage – for referring clients to a bank.
In a 2011 conference call, National Bank's CEO Louis Vachon said his bank is trying to do "more business with real estate agents because it's less costly."
"I'd rather get my origination from the cheapest source for mortgages…" he added. "That's why we've been expanding the number of people doing business with real estate agents outside Quebec…"
And who can blame banks for wanting to pay realtors? It's often less costly than paying an internal sales rep or broker, and consumers referred by trusted advisers tend to be more "sticky" and less rate sensitive. But as a consumer, you have to be sure that the person you're being referred to is really working in your best interests.
The truth is, no single lender has the best rates, terms and policies all the time. So how can a referrer recommend one institution all the time, and expect you to get the right mortgage?
And if their recommendation is made in exchange for compensation, customers can potentially hold that realtor responsible if things go wrong.
What could go wrong with a referral?
For one thing, the institution you're referred to may not have the optimal lending guidelines or flexibility for your circumstances. Moreover , if your application requires lender exceptions (due to your credit, debt ratio or income/employment type), the mortgage specialist at the lender you're referred to may not have the experience to properly build your case for the underwriter. Both these scenarios can potentially get your application declined, costing you time, aggravation and even missed deadlines for the removal of financing conditions. Worse yet, if a botched application is turned down by mortgage default insurers, it hurts your chances of approval with all mainstream lenders.
If your realtor is getting paid to route you to a lender or broker, you're probably better off doing your own independent research. Take the time to explore rates online and contact different lenders and brokers to compare the fine print. Call only experienced mortgage professionals and ask questions like:
· What are the penalties for breaking my mortgage early? Are they based on discounted rates or more expensive posted rates?
· How much and how often can I make extra payments without penalty?
· Can I extend my mortgage term before maturity at the best rates with no penalty? (This is handy for locking in a lower rate midway through your mortgage, or reducing rate risk in a rising rate environment.)
· How much time do I have to port my mortgage if I move?
· Can I add money to my mortgage at best rates with no penalty
· Will I get the best rate you offer if I convert my variable mortgage to a fixed?
If you want to know whether your trusted adviser is getting paid for sending you someplace, don't be shy. Just ask.
Or if you don't want confrontation, check your agreement with them. Realtors, for example, must generally disclose when they're getting paid for recommending a lender or broker to a client. Albeit, they're not always required to make this disclosure before you agree to do business with them.
And potential conflicts are not limited to real estate agents and financial advisers. Mortgage brokers and lender reps also get paid for referring financial services, especially creditor life insurance where referral fees can reach $500 to $1,000 or more per deal. In some cases, this insurance might not be in the client's best interests – and brokers and lender reps who are not licensed insurance agents are not qualified to determine if it is.
If those in a position of trust are going to be paid for directing consumers to a single financial provider, it better be the right provider. And those referrers better know how to judge that.
Normally, people who provide mortgage advice for payment must be licensed. There's an exemption for "simple mortgage referrals" (i.e., forwarding just a name and contact info). But referrals are seldom "simple." The person making them generally does so with a recommendation, implied or explicit. And consumers rely on that recommendation.
"The ability to receive unlimited referral fees has created a niche for many individuals to carry on providing advice and guidance to the consumer as unlicensed operators," says Joe Rosati, Executive Director of the Independent Mortgage Brokers Association of Ontario. IMBA calls this activity "one of the greatest threats to consumer protection in the mortgage industry" and is pushing regulators for a cap on "simple referral" fees.
It's practically impossible to police referral advice as a regulator. If you combine that with the fact that consumers are not best served by the same lender all the time, it's a strong case for stricter regulation of mortgage referral payments.