On October 2, B.C.’s mortgage broker regulator put the industry on notice that charging advanced fees for mortgages will not be tolerated.
The Financial Institutions Commission (FICOM) issued a bulletin on the practice, quoting sections 4(3)(b)(ix) and 5 of the Business Practices and Consumer Protection Act (BPCPA), which it says:
“…Prohibit mortgage brokers from charging any fees for arranging a consumer mortgage in British Columbia, unless those fees are deducted from the mortgage advance at time of funding.”
With all the anti-fee sentiment in the financial services industry, it’s easy to deem FICOM’s well-intentioned stance as pro-consumer. Unfortunately, this interpretation of the BPCPA could cost consumers more than it saves them, and here’s why.
There is a movement in the mortgage business to offer deep discount rates online. It’s a business model that depends on extreme efficiencies since the profit per deal is so small, relative to traditional mortgage originators. Those efficiencies rely on minimizing frivolous applications and cancellations, which impair a broker’s “closing ratios,” which in turn can prevent a broker from accessing and offering a lender’s best rates. Cancellation fees help solve that problem by dissuading applicants with a low probability of closing.
Preventing cancellation fees means that deep-discount online brokers may very well:
impose more upfront hoops for consumers to jump through before submitting their applications, and/or
charge third-party fees up front, and/or
cut back their efficiency-dependent discounts, this raising BC mortgage rates (or at least the lowest BC mortgage rates).
This could ultimately mean less choice, higher costs and more hassle for thousands of mortgagors in British Columbia. It also makes novel cost-saving business models unworkable in the province, like flat-fee mortgage origination, rate auction models and hourly mortgage consulting.
As someone who runs an online mortgage business, it’s a difficult topic to write about. FICOM, for its part, is just doing its job and enforcing the legislation it is mandated to enforce. Its position is that “arranging a mortgage” doesn’t require the consumer to actually close on the mortgage. Maybe its interpretation of the BPCPA is valid, but one thing’s for certain: there are dissenting opinions. Some top lawyers who specialize in BPCPA litigation feel the BPCPA does not prohibit fully disclosed cancellation fees that borrowers willingly consent to, in order to secure themselves a better interest rate. (Note: We’d strongly advise brokers not to rely on that, at least not without seeking their own legal counsel.)
Interpretations aside, the province of British Columbia needs to have another look at this legislation. Good on the MBABC for furthering this cause. Other big provinces like Ontario and Alberta do not prohibit cancellation fees. Nor do most other major jurisdictions around the globe. And of course, no one gives cancellation charges a second thought in countless other businesses.
People of sound mind can assess for themselves when fees are warranted and direct their business accordingly. Big brother is overstepping when it decides for people which legitimate mortgage model they must choose.