Broker-on-Broker Competition

Every seasoned mortgage broker has lost deals to other brokers. It’s just part of doing business.

But a few in our profession feel it’s over the line to court another broker’s clients with better rates. They deem it okay to undercut banks, credit unions and other lenders, but somehow it’s a tacit sin to undercut another broker.

When a prominent agent recently suggested otherwise, this was a fellow agent’s response to him: “F*%k you. Learn some ethics.”

Fortunately, the e-bully behind that vulgarity is unrepresentative of the vast majority of civilized client-centric mortgage professionals. Yet still we see some brokers falling into this trap, the trap of condemning competitors instead of improving their own game—as if that will actually effect the change they seek.

To be clear, most brokers—this author included—would rather win business from outside of the broker channel than from one of our own. But, in the words of my colleague Bob McDonald, brokers are competitors first and friends later. Not only is it acceptable for one broker to outprice another, it’s healthy (to a degree). It’s the market functioning as the market should.

“Buying down a rate has nothing to do with ethics,” notes McDonald. “What is unethical is advertising a bought down rate and using it as a bait and switch, not disclosing that this bought down rate is a 30-day quick close high-ratio special that has to fund in June but is only available if it’s snowing and your first and last name are both Laverne. That’s unethical.”

If, however, a broker operates in full disclosure and wins a deal by undercutting another broker, they didn’t “steal” that client. That client was never the first broker’s to begin with.

For someone to be your “client” (and not just a “lead”), three requirements must be met. The customer must understand your value, like you and trust you. If a competitor’s rate alone has won that client over, you’ve failed to meet one or more of these three requirements.

Fear of losing business drives us to serve clients better. In my early days—well before I had any online presence—I lost more deals to other brokers than I care to admit. The pain of that loss forced a re-examination of how I speak to clients and portray my value proposition. I owe those brokers for eating my lunch.

If you’re in our business, beware of counterparts who preach that broker-on-broker competition is somehow “unethical.” It’s anything but. In a normal transaction, we as brokers don’t have a fiduciary duty to each other. That duty is only to our clients and lenders.

Until competing brokers start paying your expenses, you owe it to their clients to work harder for the business, provide better informed advice and price more aggressively if appropriate. (And by no means is that an across-the-board endorsement of buydowns.) It’s what consumers expect and it’s what we’d expect standing in their shoes. McDonald said it best: “If you put your client second, you will come in second…and eventually last.”

  1. In my 24 years in the business I have experienced this issue on both sides. I tend to try to convince the client that the broker they initially started with they should stay with, for we tend to have the same sources for lenders. Unless their experience was not positive. As far as undercutting another brokers interest rate offer, never! This to me is a sign of desperation in my opinion. We have enough challenges with the lenders so the last thing we need is to fight among ourselves. I agree in the end the client needs to feel comfortable with the agent ability and approach and they are the first priority in your business.

  2. I don’t think most customers really care about the ethical dilemmas of mortgage brokers. The main reason people use brokers at all is to get a better rate. The sooner you people realize this the better.

  3. Based on what I understood from that whole conversation is the agent in question was losing deals left and right to a competing broker or brokers and often with the same lender. You can lose a deal or two here and there but if the losses really add up there is clearly something wrong with that agent’s game, either on the rate or service or possibly both or the brokerage they’re part of is not meeting their volume or efficiency requirements to qualify for better pricing. In that case that’s a battle won fair and square and the agent in question has to take a deep look at their processes, value proposition, and trust building approach.

    Everybody wants to close business and sometimes it’s easy to forget that you have to ask your prospects specific questions to determine if they are even interested in working with you. I agree with Bob McDonald’s assessment on some of the practices conducted by certain brokerages and I would just like to add to that the practice of advertising “effective” rates supposedly based on a cash-back (how the cash-back is calculated and applied is usually never disclosed) and not the actual contract rate which is the rate the client will be paying no matter what they are getting back. So they’re basically advertising a number to stand out from the rest which is not the true price of the deal and even with the cash-back aspect is the compounding of the rate taken into effect now that you’re advertising an actual rate? Because if it doesn’t then the whole offer is misleading from the start and 100% false advertising which I believe is illegal according to FSCO. I truly wonder sometimes if they really have compliance people.

    1. Thanks for the comment Lior,

      Some points of note about cashback effective rates:

      * No broker wants to advertise them. They exist solely because lenders (for their own valid reasons) limit brokers’ ability to give consumers better rates.
      * You’re correct that the cash rebate must be properly calculated and fully explained and disclosed.
      * FSCO’s position is as follows:

      “The Mortgage Brokerages, Lenders and Administrators Act (MBLAA) does not prohibit mortgage cash back arrangements offered by lenders or by mortgage brokerages.” It merely requires that effective rate advertising comply with the MBLAA and Cost of Borrowing and Disclosure to Borrowers regulation (Ontario Regulation 191/08), which sets out the advertising requirements brokerages must follow for fixed rate mortgages. See Section 18 Advertising – mortgage for a fixed amount:

      “In addition, brokerages are required to provide to the borrower a written disclosure statement in plain language that is clear and concise, and presented in a manner that is logical for the borrower to understand.”

      (These quotes are directly from FSCO.)

  4. The consumer rules, it’s their money, their decision. End of story. In all industries experiencing great change, as this business is experiencing; there all always those individuals who in the grip of the death throes of their former complacency, will lash out. Scott Dawson’s well written post is a great description of a bronze age broker lashing out at the new reality. Luddite mortgage agents will persist in lamenting the end of “ethical” mortgage brokerage when it was hoped that every consumer would pay full price. This is exactly what travel agents said 25 years ago when Expedia blew up their business model; or for that matter, taxi drivers complaining how unfair and evil Uber is. In the end if the consumer sees value the new model wins.

    1. Lior, does anyone in this business use the APR adjusted rate? I was just on the Mortgage Edge web site and no APR is mentioned. I appreciate the rates offering a cash back to achieve an “effective” rate need to be thoroughly explained but at the end of the day if the consumer cashes the cheque to further reduce the net cost of the loan how was the consumer harmed?

    2. Except that the net cost of the loan is not offset if the contract rate is unchanged. If a brokerage is advertising 2.55% effective rate and the contract rate is actually 2.60% then the borrower is paying 2.60%, not 2.55%. The offset rate applies if they take the entire cash-back and apply it towards the mortgage as a prepayment. If they don’t then technically the advertised rate is not applicable and this constitutes false advertising. I’m sure FSCO has pretty good people working for them in compliance who understand the concept of tvm…. how they are letting this kind of advertising continue is beyond me. Also, the offers that some brokerages advertise as effective rates are not backed by a lender product…. these are all brokerage “incentives”. So now the broker has to disclose how they reached that effective rate taking into consideration all the different compounding between fixed and variable rates plus explaining to their borrower how that “cash-back” concept actually applies to their mortgage. We know fixed rate mortgage compounds semi-annually but variable rates are more tricky because the rate can change tomorrow, the compounding can be different from lender to lender, and since the effective rate is not backed by an actual lender product, how does the borrower knows what the real effective rate? It’s effective today but may not be effective tomorrow. Now you can see how it can get confusing and arguably outright misleading because the effective rate may not be what the advertised rate says it is. Simply put this whole effective rate thing is b.s. advertising to lure business but that’s just my opinion having the financial planning background.

      Just to touch on Rob’s point earlier on: I disagree about passing the blame to lenders because lenders have investors, lenders have funding costs, lenders have expensive overhead, and the rates of mortgages reflect those costs. Just because a few brokerages who derive the majority of their business from online leads and need to stay extra competitive on rates (and lean on comp) does not mean that lenders have to bend over backwards for them and give them additional discounts compared to brokerages who are more full-service and actually send the lender a lot more business than the online brokerages do. So if all of these online brokerages have to resort to all sorts of “creative advertising” on rates to lure consumers to their website then that’s a business decision they make. They shouldn’t expect the whole lender community to accommodate their model on rates and expect to get an advantage over other top producing brokers with a different model just to keep them super competitive so they can actually earn something on a deal.

      1. Hi Lior, Just to be clear. No one here is blaming lenders for buydown limits. As noted, some lenders impose these limits “for their own valid reasons,” which include securitization considerations, continuity with retail branch pricing, etc. It was just a statement of fact as to why cashback effective rates exist. And it should be noted that some lenders impose no buydown limits whatsoever, making it far easier to offer the client more competitive pricing.

        The fact is, some brokers rail against cashback effective rates for reasons besides disclosure, namely because they don’t want competitors to have an edge at their expense, because they don’t understand how they work and/or because they find the cashback rebates a hassle. But from a consumer’s standpoint, cashback effective rates are unequivocally beneficial when they save consumers money and are explained properly.

        All of the considerations you point out can easily be addressed in a disclosure, and good brokers generally do so.

      2. @Lior

        You made a point about “TVM”. What does time value of money have to do with it?

        Just trying to understand this cash back strategy better.


      3. I’m honestly fed up with brokers who do everything possible to keep borrowing costs high for consumers. Railing against cash back rates is a perfect example of scaremongering and deception intended to keep your commissions high.

        Take Lior’s quote for example: “Except that the net cost of the loan is not offset if the contract rate is unchanged. If a brokerage is advertising 2.55% effective rate and the contract rate is actually 2.60% then the borrower is paying 2.60%, not 2.55%. The offset rate applies if they take the entire cash-back and apply it towards the mortgage as a prepayment.”

        That is totally bogus and irrelevant from the standpoint of consumer protection and disclosure. Effective borrowing cost is measured by the total net amount of interest and fees paid over the term. Cash back reduces the total amount the borrower pays. Period. End of story.

        What people do with the cash rebate is their prerogative. I’m sure some people use it to buy a TV while others might pay off credit card debt at 20% interest. It is none of my business and it is none of yours Lior.

  5. I personally do not try to take business away from another broker. If the client is unhappy with the service of another broker then I will take the application. This has occurred a few times over the years.
    Many years ago when I was fairly new to this business I lost a good client to another broker that was introduced to my client by the real estate agent. This other broker offered my client in writing $2000.00 if she went with him. I worked for Invis at the time and I think I was getting a 85% – split but no portion of volume bonus. The other broker was part owner of a franchise so was getting the full commission plus volume bonus. My finder’s fee was a little less than $2000.00 so I had to give up the deal. My client wasn’t happy about it but $2000.00 is / was a lot of money.
    Just because you lose out to another agent it doesn’t mean you were not doing your job. Competition isn’t always fair but that is life.

  6. If a client has started the process with you and then leaves to work with another broker / bank then you have to ask yourself why. Rate? Service? Personality? Rather than blaming broker X or bank Y take a look at what you are doing and figure out how you can improve. What “value add” to do you have if you don’t want to provide the best rate, or you can’t provide it? Take a look at what the successful brokers are doing. If you spend some time looking into the insights and actions from the author of this article and some of the brokers who have commented, you will be a better broker.

    Clients are all unique. Some are new to the process and need their hand held. You have to be prepared to spend that extra time. Some just want the lowest rate, regardless of any terms or conditions and you may lose them to a rate site. Some value long term relationships and some don’t. This will not change. You will always lose a percentage of your clients to other brokers or banks, figure out how to make this a very low percentage.

    This article has given me a different thought on things though. Twice this month I have had people call me who where working with other brokers. They had questions. When I asked why they were not asking their broker, the response was, “They are not returning my calls.” Twice I referred people back to their original broker, after answering their questions. Time for that to stop.

    1. Appreciate the thoughts Shayne.
      Like you say, clients seek out other brokers because their current broker hasn’t met all of their economic and/or emotional needs.
      When a broker sends a client back to that sort of competitor, the message to the client is: I’m not fully in your corner. I’m not willing to put you first, provide exceptional service and promptly address your immediate concerns.
      Ultimately, no one wins in that scenario.

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