Canada Guaranty’s Special Deal With RBC

3911 rp R2 CG_SiteHow do you get Canada’s #1 lender to send you business when you’re the country’s smallest mortgage insurer?

One way is to offer outstanding service and an atypical $140 per closed mortgage.

In fact, that may have been the deal that Canada Guaranty (CG) pitched to RBC when it won its business in Q3 2012. The $140 per mortgage is especially interesting.

According to this disclosure, “RBC Royal Bank receives a one-time fee in the amount of $140 for each mortgage insurance application approved by Canada Guaranty, provided the mortgage to which the mortgage insurance relates is funded.” This is the only case we know of where a Canadian lender gets paid cash to route mortgage applications to an insurer.

Canada Guaranty President & Chief Executive Officer Andy Charles told CMT, “This is a commercial relationship between RBC and Canada Guaranty with no consumer impact on the service or cost of their mortgage insurance premiums.”

Insurer-IncentiveA casual observer might call it paying for business—not that there’s anything wrong with that. It may very well be smart business for CG…that is, unless all lenders start expecting cash inducements.

CG battles well-entrenched incumbents, so it’s forced to go the extra mile. Its top competitor, CMHC, commands an estimated 65-70% of the default insurance market, with Genworth taking most of the rest. CMHC also has a 100% federal guarantee, which reduces lenders’ theoretical risk compared to CG’s and Genworth’s 90% backstop.

CG is obviously hungry to rip business from both of these rivals. RBC, which it added as a customer in Q3 2012, is a huge win. (It’s unknown whether the $140 per closed deal was the carrot that enticed RBC into its fold.)

To be fair, we don’t know the details of what RBC is offering CG in return (besides deal flow). RBC says it provides Canada Guaranty with “services necessary for the effective credit adjudication/underwriting of mortgage insurance applications as well as services necessary for the ongoing administration of mortgage default insurance policies.” Thus, it’s unclear how much RBC is netting from this $140 in extra revenue.

Canada Guaranty seems to be setting a precedent among the current mortgage insurers. In speaking with CMHC, it confirms that it does not engage in similar cash payments in return for business. We’re fairly certain that Genworth doesn’t either.

In a way, this is potentially a smart customer retention strategy for RBC. The reason: fewer lenders offer free switches on Canada Guaranty-insured mortgages. Therefore, if consumers find it more expensive to switch CG-insured RBC mortgages to other lenders, RBC keeps more renewal business.

RBC’s disclosure says, “The bank, not the borrower, selects the mortgage insurer.” So this is something consumers may want to consider when evaluating an RBC mortgage. Mind you, as Canada Guaranty adds more lenders (and it will), concerns about switching limitations should diminish.

About Canada Guaranty

Canada Guaranty is owned by Ontario Teachers’ Pension Plan and National Mortgage Guaranty Holdings Inc. (the private holding company of Stephen Smith, co-founder of First National Financial LP). These two partners bought AIG United Guaranty Mortgage Insurance Company Canada in 2010 and changed the name. (See Canada Guaranty Launches.) CG is thus the only 100% Canadian-owned default insurer in Canada.

Robert McLister, CMT

  1. Hi RBC – Credit my account for the $140 that was paid to you from Guaranty, seeing as I paid $5675 for the coverage in the first place. I thought schemes like these were outlawed the last time AIG went bankrupt.

  2. ” with no consumer impact on the service or cost of their mortgage insurance premiums.”
    arithmetic would suggest it is costing the consumer an extra $140.
    Does RBC disclose this tidy cash arrangement to the consumer prior to signing up?

  3. Considering it is Canada Guaranty making the payment, and charging the insurance premiums, shouldnt you be asking for disclosure from Canada Guaranty and not just RBC?

  4. Surely the Royal and Canada Guaranty both will be disclosing this payment to customers.
    Is it not illegal to accept secret commissions without isclosure?
    Realtors, lawyers, everybody has to give full disclosure.

  5. If this story is true, then neither RBC nor CG are agents of, nor has either company a fiduciary relationship with, the borrower. So it does not appear to be illegal in the way it may be for a lawyer or a MB. On the otherhand the optics of this to the industry & to consumers, are less than impeccable.The optics for OTPP & RBC stakeholders/shareholders/boards will be seen in the response to this story by each entity.
    Is it a good business model to build a long term business upon by “rebating” $140.00 on every deal? What would happen if Genworth or CMHC offered RBC $150.00 on every deal?
    Do all of the First Nat title insurance purchases go GC?
    If this title insurance is purchased to protect the lender, & the mortgage is ultimately securitized & sold off as MBS units, are the purchasers of the units made aware of this practice of “rebating”? Does it impact their security?

  6. Wayne…I agree. It is time to bring mortgage lending under the rules and regulations that govern the rest of the transaction such as realtors . lawyers etc. In this case under the provincial regulator. We have an opportunity to do this coming up as the BC Government reviews the Mortgage Broker’s Act. Do get involved with MBABC and we can correct many of these inequalities that not only favour the big banks but put the consumer on the back burner when it comes to disclosure and fair treatment.
    John Woods.. The Mortgage Centre, Fitzwilliam Mortgage, Nanaimo

  7. Another great piece of reporting Rob, don’t know how you find time to consistantly scoop just about everyone else in the business.
    As far as the “ethics” issue goes, I think most of the points raised in the comments section simply continue to underline the fact the average mortgage broker understands very little about how our business really works. The consumer was unaffected by this transaction, end of story, the consumer paid the same premium they would have paid at the other two insurers. People who try to posit a negative impact for the consumer other than the free transfer issue Rob sighted are reaching for straws. Even the free transfer issue shrinks quickly in the face of the constant growth of collateral mortgages and the relentless addition of HELOCS to title.
    Mortgage brokers and all other intermediaries were unaffected so why cry about it? What if there actually were services RBC provided that streamlined CG’s process? That would have a value, would it not? We simply don’t know.
    Those who actually were affected appear to have had no comment yet.
    CMHC and Genworth must have there own thoughts about a rival offering cash inducements (although this has happened before in a slightly different way and it lead the Ministry of Finance to curtail certain inducements that an insurer was offering a bank, and if memory serves: the same bank, several years ago).
    The most interested parties would be the lenders who use CG and do not get the rebate. Frankly, we don’t know if those lenders have other reasons they want to support CG. Perhaps they do and it is really not a matter for mortgage brokers to concern themselves with.
    Andy Charles and Steve Smith are a couple of the smartest people in the mortgage business. They know how to build businesses and make money. Steve Smith and Maury Tawse have made and continue to make a staggering amount of money from First Nat and Steve Smith appears to be continuing that tradition at CG.
    There are a lot of interesting issues in this article but complaints about how the consumer is being duped are about as serious as complaints about a second and third gunman on the grassy knoll.

  8. Hi Rob,
    Just wondering (if possible) for the mortgage applicant before signing the dotted line to have at least a written brief information copy of the need for default insurance how it works, why it is necessary (who protects it) and options, if there is any because most of the time we (UN-educated applicants) seeing the mortgage premium as add’l fund included on the loan. Who should be responsible for this, the bank’s rep, broker, lender or insurer or the government body looking after the industry? Can they make it a mandatory piece of information available whether on pre-approval or live deal?

  9. What is to stop CMHC and or Genworth matching or exceeding the $140 kickback? what happens then, does CG increase theirs to 340…500..$1,000? Then what happens when all the gravy is going to the lenders? Premiums go up, and public outrage ensues, that’s what.
    and Mr. Butler, I disagree in whole. Introducing kickbacks to lenders is a desperate move on CG’s part to grow their business and if it blows up in CG’s face, may prove CG’s CEO, Andy Charles, to be the most short-sighted person in the mortgage business.

  10. Rob, CIBC receives a fee back from FNF for title insurance placed on all CIBC and PCF mortgages, “kickbacks” are nothing new in the industry and are usually veiled in secrecy. CIBC does not declare this tidy piece of extra income to the customer, this would be a great topic to explore.

  11. As a former Mortgage Insurance employee, both CMHC and Genworth have provided funding and/or incentives of sorts to induce more business flow to be directed to their respective businesses in the past. Whether it was in the form of monetary sponsorships, internally or externally or cheaper low ratio premiums. How else could Genworth chip away at the massive hold CMHC had (& has) on the MI market. Many of the Big 5 continue to operate on a “toggle” basis whereby they will throttle 70% of business flow to CMHC leaving Genworth the remaining 30%. At one time RBC opened the throttle to both to compete, only to be toggled again.

  12. There is a big difference between donating charity silent auction gifts or sponsoring holes at a realtor/banks charity golf tournament verses handing out contractual kickbacks in hard currency to a bank.
    Also, I will bet the bank that CMHC’s Karen Kinsley micro-manages and demands full accountability for every nickel that goes towards such endeavours.

  13. So, we’ve gone from $140.00 to $1000.00 to increased premiums to public outrage in the blink of an eye. Wow, I rarely see anyone in an Ivory Tower who can extrapolate that fast.

  14. As was correctly mentioned by Former Mortgage Insurance Employee, RBC has a toggle that is set by RBC itself. The client isn’t provided with the option to chose which Mortgage Insurer they want to insure with, at the time of the application. Unless the client is knowledgable and insists to a mortgage insurer the bank is the one that ultimately decides.
    Benefit to RBC: Retention: Harder to switch out mortgage if next lender does not work with CG (most monolines work with CMHC)as you cannot port the premium. Benefit to CG: More lenders forced to deal with CG as changing landscape will force them to do so in order to stay competitive albeit at a higher pricing cost(higher cost of funds).
    How does it affect the consumer: It will make it harder for them to switch, once the term is over, to a much lower (monoline)rate currently provided due to CMHC insured funds.

  15. I am not speaking of sponsoring golf tournaments, rather tens of thousands of dollars (hundreds annually) in incentives to send deal flow to insurers. Look at the profits made from both insurers over the last 5-10 years and to really believe there were no kickbacks is a myopic view. Only in the last 2-3 years has CMHC pulled back on the incentives, but bet that nickel of yours that prior to the public’s understanding of the profit making crown corporation and further oversight, the money was flowing endlessly.

  16. So you’re saying because CMHC made billions in profits annually, there must have been financial kickbacks in the hundreds of thousands annually. Seriously, that’s all you have? If so, you have nothing.

  17. Agreed, I highly doubt it would escalate to that too but only because the government would intervene.

  18. Be it resolved that the “banker in an ivory tower” knows all and eight years as a former MI employee couldn’t possibly have a clue. Go Banker!

  19. Great Article Rob. I wonder whether or not it is also disclosed that they receive a referral fee from the National Appraisal programs in Canada? It is something that just seems to be done quietly but in my opinion should require full disclosure and what happens when the appraisal is challenged in court and the Bank was paid a fee for the service, will the judge say the appraisal was coerced?

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