Lawsuits Against Customers?

We shook our heads after reading this one…

Lawsuits-Against-Rate-Shoppers BrokerNews says Greenberg Paralegal has a new service that helps brokers sue clients who take the broker’s mortgage approval and shop it around to other lenders.

Jeff Greenberg, owner and paralegal, says: "Brokers don’t want to sue their clients and it’s not good business, but the fact is that it’s not good business for a client to negotiate in bad faith and to take advantage of someone who relies on their commissions to live.”

In our view, it’s hard to imagine how any mortgage professional would contemplate this seriously.

If a broker provides excellent rates, helpful advice, and quick service, and the customer takes the broker’s rate elsewhere, the customer clearly doesn’t value the relationship (and they probably never did).  How this is grounds for a lawsuit, however, is beyond us…unless, perhaps, the customer signed a retainer up front.

For the top mortgage planners, these thoughts almost never come up. The best in the business seldom lose clients due to rate. Instead, their clients rely on them as experts and fiduciaries. The clients know they’ll receive highly competitive rates, and more importantly, they tend to understand the difference between rate and value.

Rate is what people pay. Value is what they get.  Successful mortgage planners get successful because they can communicate the difference between the two.  Top planners don’t spend their limited time in 0.01% bidding wars with competitors. The return on their time is far greater when they invest it in improving service and advice—advice on things like term selection, risk minimization, penalty avoidance, prepayments, liquidity planning, and deal structuring. Proper guidance in these areas often equates to long-term value that’s worth far more than a few basis points.

There will always be a small percentage of customers who intentionally take advantage of planners who work hard on the client’s behalf, but suing them isn’t the answer.

  1. There is at least one very well known brokerage in the Toronto area that makes it a policy to have clients sign an exclusivity agreement together with their application and consent forms. In effect, they reserve the right to sue a client for lost commissions if an approval is produced and the client does not take the deal.

  2. Under this premise, can lenders sue the brokers or claim for origination costs for every file committed to but not funded? Where does it stop.

  3. Interesting question Kerby.
    I can confirm there have been discussions within certain F.I.’s centered around charging back broker commissions if a mortgage does not go to term, for reasons other than a bone fida sale. This is one method lenders are entertaining to increase retention rates and reduce “churning”.

  4. T Davino,
    Would you mind passing along the name of that brokerage in Toronto that has such an agreement? I have a small operation and I’ve thought about implementing such a thing and was wondering whether or not it would work and what’s required. I wouldn’t mind getting in touch with them.

  5. Great article.
    I can’t imagine suing a client for “shopping” a deal, or for looking for better interest rates, etc.
    As a mortgage broker who specialises in “hard money” private loans and hard to place small business loans, an enormous amount of work goes into many deals before we are in a position to make an offer of a mortgage.
    This doesn’t mean that we would sue because we are turned down. If we get to thirds of the way through the process of closing, and have incurred out of pocket expenses to the lawyers, we would expect the client to pay those expenses, although I think we’d be unlikely to sue for recovery.
    Generally, mortgage brokers need to be adding significant value rather than just selling the cheapest rates. I don’t remember the last time we lost a deal to a bank or another broker due to a rate or other detail on the terms.
    We pride ourselves on providing clients with top quality service.

  6. This drives me crazy.
    If brokers/lenders decoupled the rate hold from the rate advice (i.e., what they could get you), I’d have no problem with lenders being more aggressive with potential borrowers who jump ship.
    But the fact is, currently, it is impossible for potential borrowers to even know what sort of rate, terms, etc. they qualify for without applying formally.
    How else is a borrower supposed to shop around for the best rate than to apply somewhere and then see what else they can get, when the only way to find out what they can get is to apply somewhere?
    Again, if lenders were to decouple the rate advice from the rate hold, and make the rate hold a contract it would be a different story. But currently, the two are the same thing — you can’t find out what you can get without getting a rate hold. And, I’m sorry, but an application is not a contract.

  7. I think it should work both ways. If a customer shop around and finds better deal then he should have the right to sue the original broker for not offering the better deal. Secondly, how will the customer know that broker is offering a good deal unless he shop around?

  8. Bob that is not true.
    I’ve been brokering for years and I always quote firm rates without a full application and credit check.
    Quotes are based on the information the client provides me, lender approval, and lender rate changes (which I cannot control). Those are the only caveats.
    I think a lot of brokers work this way. Not sure about the banks.

  9. If, as you say, quotes are based at least partly on lender approval, then how can you quote firm rates without an application or credit check . . . ?

  10. “Quotes are based on the information the client provides me”
    Bob, this is Donna’s out. If the clients gives incorrect info and this if found out AFTER the firm quote, its then the clients fault the rate is different and not the broker.
    I use retainers on my B deals all the time. They basically say that once I get an approval on one of three possible options (rate, term, and amount), the fee is earned regardless of whether the deal is accepted.
    As Donald pointed out, B deals usually involve a lot of work and $$ outlay on the brokers part, and consequently I don’t use this for A deals, as the lender would pay the commission and not the borrower, and it costs me next to nothing to get an approval.

  11. I *love* this idea. I had a soft year. Now I can go back and sue a few clients and mebbe pick up another $15 or $20K. Sweet.

  12. LOL. I have a few lenders I’d like to sue. The way I figure it, the fact that their rates were not .0001% lower caused me to lose my deals.

  13. Is it me or does this seem insane? Wouldn’t this turn away clients. I wouldn’t leave a broker for the rate. However service is another story. My 2 cents.

  14. The service quality is essential. Me as a customer ready to pay a little extra if the service is great. But an idea of being sued definitely will turn me away from the broker.

  15. As a customer, I can safely say that the minute I find out a broker has sued a client, I’d be avoiding that broker and recommending the same to anyone shopping for a mortgage. Just like in many businesses, sometimes you swallow the loss to keep your reputation intact. The amount of money gained from the lawsuit would more than likely pale in comparison to the amount lost from future referrals.

  16. I notice that the person offering this service is a paralegal – not a lawyer. Could be that he’s very innovative, or that no lawyer would touch this with a 10 foot pole.
    If a client has signed a contract, that’s one thing, but if not, them’s the breaks. Unless I had a tricky situation that required a lot of work on the part of the broker, I’d be very hesitant to sign an exclusivity agreement.
    Al R

  17. In response to Kumar’s comment:
    It is everyone’s prerogative to shop around. There is absolutely nothing wrong with that.
    I think the problem is when:
    1 – The client engages the broker, gets helpful advice from the broker, and sends an application
    2 – The broker provides good service and quotes a competitive rate and product
    3 – The client tells the broker that they are happy with the rate & product the broker has recommended
    4 – The client instructs the broker to submit their application to the lender for approval
    5 – The lender underwrites the application and the broker gets the approval
    6 – The client then cancels their commitment and goes elsewhere for a similar rate.
    The damage is not only the loss of the broker’s time (which is a limited resource), but the clients cancellation harms the brokers relationship with the lender. That could impact the broker’s ability to work with that lender on future deals. That in turn impacts the broker’s livelihood, and this is serious issue.
    The worst is when customers ask the bank for their best quote, the broker beats it hands down, and then the customer shops that rate right back to the bank.
    For brokers who provide good service, this is completely unfair. The client penalizes the broker (who was up-front) and rewards the bank (who intentionally withheld their best offer, hoping the customer would take their initial one.)
    That kind of thing is just unacceptable.

  18. “6 – The client then cancels their commitment and goes elsewhere for a similar rate.”
    If client gets a better rate which the broker could not match ,I suppoose the client should have the right to move out ?

  19. Unbelievable, why would mortgage brokers think its unfair for a client to shop around and go with the best deal? This is how a fair open market works. Think about shopping for a car or anything else. People need to shop around for everything these days to find the best deal/product for them. Don’t kid yourself, brokers are sales people on commission.
    [Edited – Please refrain from disparaging generalizations portrayed as fact and not opinion.]

  20. I think it is very easy to solve.
    For example when I go to CanadianTire or other Auto mechanic for fixing the problem in the car, they charge a fee to diagnose and that fee is waived if they fix the problem. But I have the right to just pay the diagnosis fee and get my car fixed from another mechanic.
    Broker’s business should work like that.

  21. What Kumar proposes is reasonable. Unfortunately, I think the regulators make it impossible for brokers to charge any kind of up front fee, even if refundable.
    Maybe someone can correct me if I’m wrong.

  22. Every broker in the country should require a retainer agreement that states that customers can shop arround freely. BUT if the customer submits an application to a lender, there WILL BE a cost to cancel. This cost should not be out of line with the cost of the underwriters, agents, and support staffs time and expense in arranging the financing.
    Also, FSCO should allow consultation fees without restriction. These fees should be refunded in full when the customer closes.
    Doing the above is a solution that addresses the concerns of all parties fairly.

  23. this is nuts. Canada is going the way of the US it seems. Everyone sues everyone out of sheer GREED. How about relying on a hard days work and building relationships with customers, rather than going crying to a lawyer when you can’t get a deal done. This is disgraceful and if I ever heard of a Broker suing a customer I’d make it my business to not only avoid that Broker but to tell absolutely everyone I know to do the same. Maybe one day these greedy people will learn. There is no shortcut to being professional in the Business world.

  24. Al,
    Same feelings here. Didn’t know you could read mind :-)
    This practice could potentially bring an end to broker business in the long run. Why would I go to a broker and take such a risk. I’d rather pay the bank the extra 0.1% and feel happy about it.
    I guess the ads from these brokers with proper disclosure would be:
    Come to us, and have banks compete for your business. No fee whatsoever for our services, but we don’t rule out a law suit though.

  25. Al,
    The same greed you speak of could be applied to customers who misuse the time of agents and lenders that worked hard to provide the customer the best deal.
    I don’t think customers should be unduly charged for anything. But, for God’s sake, do your shopping before you make people jump through hoops on your behalf.

  26. I am a broker and nothing annoys me more than clients who abuse my valuable time, my lenders time and then turnaround and take my rate and deal structure back to their bank. I now make all my clients sign a contract. I am not broker as a hobby.

  27. D,
    Good for you that you let your clients know up front that this is not a “free” service, and that they will have to pay for your time. I am perfectly fine with what you are doing.
    The trouble is most brokers I have seen advertise their services as “free” – I do have a problem when they complain that the client went elsewhere (because the deal was better elsewhere).
    Of course if there is a contract (i.e., a signed agreement specifying the terms), then is must be enforced. I don’t think anyone would object to that.

  28. If I am a customer and spend an hour with the Honda Sales Rep, then an hour with the Volvo Rep and then an hour with–you get the picture, but I then decide to buy a Ford, shall I expect a lawsuit from the sales reps of the other car manufacturers. Get real BROKERS wake up, yes time is valuable, but that is the luck of the draw, if you want the same type of contract situation like a realtor then let’s start legislating this industry like the realtor industry–like actually banning brokers from the industry to start with.

  29. It’s not about simply spending an hour. The issue is when people apply for a mortgage and use HOURS (plural) of lenders, support staff’s, and broker’s time….and then CANCEL because someone else matched the rate (or beat it by some tiny amount).
    Shopping around is mandatory in my opinion, unless you have a broker you really trust. (There are some very good ones out there. Find someone who does a lot of volume for one thing.)
    But most importantly, do your shopping BEFORE making people jump through hoops for you. I think that’s a reasonable request.

  30. Rick,
    The problem generally is that until the customer makes us jump through the hoops, they do not get a guaranteed best offer. Unless that changes you cannot blame the customers for jumping ship.
    At the end of the day, it doesn’t matter how many HOURS or DAYS a broker put in on a file. If the offer isn’t the best, then I am not getting my mortgage with the broker. Yeah I am sorry, I wasted his/her and my time. This should not be a shortcut for good competitive rates.
    And, if someone thinks they are a “great” broker then they sure can ask the customers to sign a contract up front (or decline to deal with the customer). Then the broker would know how much trust the customer has on his/her offer. That is a fair practice. but, not suing afterwards for lost time and profits.

  31. John, as a broker myself, I agree with you that suing is ludicrous.
    I disagree, however, that customers must jump through hoops to get the best offer. Mortgage customers (at least our customers) can and do routinely get quoted the best available offers without anything more than a simple consultation.
    If you are spending hours or days of another professional’s time, with no commitment on your part, then how can you expect that person to bend over backwards for you? We are all human beings here.

  32. I used a broker who offered a good rate and penalty clauses that suited me with Westminster Credit Union. I supplied correct information and received an approval and a commitment statement signed by the bank and myself stating what the rate was and that it was all in accordance with the attached terms which was a 5 yr fixed requiring 3 month penalty or IRD if greater for the first 3 yrs only and the remaining 2 yrs was 3 month penalty only. Now the bank says that this was not a contract and it was just a canned report they send out to everyone. I asked to see what they send out today and of course this statement has been removed from current canned reports that mean nothing. Does anyone think the bank should be held accountable to the documents I signed with the broker. They say these are not a contract – the contract is what I signed at the bank and of course the bank documents differ from the documents they supplied the broker. The bank documents is a ‘mortgage advice’ and states ‘unless otherwise agreed to the penalty is 3 months or IRD for the full 5 yrs. Any comments or suggestions? Is the committment document from the broker a contract?

  33. If you meet all the conditions in the commitment the lender provided, then the lender should be made to honour that commitment. Tell the lender you will get your lawyer involved if they do not honour the terms they commited to. Have the broker put pressure on them too.

  34. Its a question of the banks conducting unfair business practices.
    After the Approval. The banks representatives approaches our clients when they go for banks statement for proof of down payment or make arrangement for withdrawal of their RRSP for down payment.
    The reps offer the client low rates with out caring if the clients are B or C clients undercutting the deal the mortgage broker or agent has worked hard to put together. I have been told by clients that when they ask the rep why I could not get them the same rate? The response was that the banks have greater “flexability”
    Now we work with the guideline the banks provide to us. So we have to match the client with an FI that can service then. Now when the bank approve a client that is clearly a ‘B’ client, with “A’ client rates, then I think something is really wrong about that. It means the banks are NOT following their own guidelines.
    The very guidelines they hold us to.
    What so you think our clients would think of us in this case.
    So in my opinion.
    1. They are working hard at destroying our credability.
    2. They should be made to stick to the same guidelines and principles that we are held to and work very hard to up keep.
    There are so many upstanding, fairminded and caring people, whose comments I have read here. I know the banks get a lot of good business from them. So how about some fair play.
    3. Organisations like CAAMP or IMBA does not look after the interest of Mortgage Broker and Agents instead they are lender focus. Why do you think that there are lenders on both of these organisations.
    4. If there is a level playing field where the banks stick to the same guidelines they want us to keep then there would be no need for suing clients and indeed so many frustrated brokers and agents.
    5. How about an association that is strickly broker and agents focussed.

  35. Greg,
    I want to agree with what you are writing, but I can’t. The point that always gets missed about this type of situation as you described is that it is the bank’s money! Yes, they can force a third party (broker) to comply to more restrictive rules / guidelines than their own branches or specialists because…ITS THEIR MONEY. (Yes i know technically it’s the investors and the sort.) If I was an executive at a bank, you bet your tail feathers that I would be instructing all of my tellers and customer service people to inquire when a client is asking for a payout statement. That’s just good sales business by them.
    Without the major banks for the most part allowing you to access there products, under whatever guidelines THEY SET, then the brokerage industry would be a shell of what it is now. Think about if Scotia, CIBC (Firstline), TD, National, Laurentian, and any other bank that has branches for the clients cut off the broker channels? Just between Firstline and TD, do you know how much of the broker market they hold? Anyone who has their head around things knows that if the banks turned the tap off, the 34% approx broker share of the mortgage market would plunge dramatically to somewhere in the mid teens.
    Get over it, the banks rule the roost. They don’t have to make their systems operate under the same rules they give you. Brokers to most banks have become expendable. Think about it,how is RBC the biggest mortgage lender in Canada without using a broker channel?
    I have worked in finance for many years, in banking, as a broker, as a business development rep and in product development.I have seen it from both sides, and fully understand why the banks do what they do, it all comes down to what I said earlier, IT’S THEIR MONEY, NOT YOURS. So they can set the rules for access.

  36. Wasn’t RBC the biggest mortgage lender BEFORE the broker channel took hold? So their head start was more a factor than their decision to exclude brokers. If they had chosen to use brokers they would have a much bigger market share than they do.
    I would utterly disagree that brokers are not vital to the banks. CIBC and Scotia would disagree also. Look at how BMO’s share stagnated when they tried to reply on their internal salespeople.
    The younger generation is flocking to brokers and CAAMPs latest stats prove that. For good reason. Branch mortgage “specialists” are just too one-dimensional.

  37. Yes, maybe RBC was ahead ofthe game, but how does that explain thier widening of that margin since the broker channel “took hold”. If you really think that approx 35% of the mortgage market indcates taking hold…
    I didn’t say the brokers were or were not “vital”, (actually I said they are expendable) but why does Scotia and CIBC have their own specialists if they could solely depend on the broker market? Think about CIBC, they have the broker channel (Firstline), HLC, Presidents Choice, and branches, yet still can’t close the gap with a competitor that uses only their own people. Yes BMO flattened out, but they did not regress after exiting the broker market.
    As for CAAMP stats, of course, like any organization can do, they can spin the positive stats to read in their favor. How come they haven’t discussed where the losses in the markets are for the broker channel.
    I am all for unbiased independant reporting. Of course CAAMP is built to promote brokers and are going to spin the info in that favor.
    After recently returning to the industry, I think CAAMP needs to stay on the PR side, and let an independant group report the statistics, so the bias is removed, and Canadians get the entire picture. Keep in mind the broker share declined this past year, while the banks all grew.
    All just my opinion…

  38. Al talks about “GREED.”
    Greed is when someone cancels a deal for a 0.05% lower rate, after hours of work have been spent on their behalf. We all want customers to be happy and we work hard for them, but there are other people to consider.
    If someone finds a 2/10% better rate somewhere else, and their broker can’t come close, then by all means go elsewhere. But if a broker is helpful, trustworthy and gets you the best rate at the time of application, don’t penalize him/her when a competitor later undercuts the payment by a few dollars a month.

  39. This is in reply to mark2’s comment.
    Do you have a source of market share statistics to show that RBC has “widened its margin?” In what timeframe?
    If you are saying brokers are expendable then you are saying they are not vital. Why play a game of semantics here?
    It makes perfect sense for a bank to have its own sales force in addition to a broker channel. It helps the bank target different segments of borrowers. The point you make here proves nothing.
    No one in this industry is “closing any gaps,” regardless of whether they use brokers or their own sales force. The business is far too competitive to allow that.

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