FICOM Finalizes Broker Comp Disclosure

B.C. mortgage brokers have eight months to prepare for one of the biggest procedural changes ever to hit their industry. The province’s regulator, FICOM, has released its controversial broker compensation disclosure guidelines, and they take effect June 30, 2017.

The new rules make brokers list all monetary interests and benefits they receive when arranging a mortgage. “Any interest which has a monetary value must be expressed as a dollar amount” to consumers, the regulator states.

“…We are disappointed by this announcement,” said Paul Taylor, President and CEO of Mortgage Professionals Canada, in a statement Tuesday. “From the onset, we have encouraged open consultation and dialogue with the regulator and undertook extensive efforts to ensure our collective voice was heard. It is clear that the industry’s concerns and directional evidence on the negative implications were not taken into account.”

FICOM, for its part, believes that broker interests (compensation and incentives) create potential conflicts, albeit it hasn’t received any specific complaints of such conflicts from consumers (that we’re aware of). In a letter Tuesday, the regulator said, “The guidelines encourage industry to think about conflicts, identify conflicts, and describe conflicts in a way that is easy for consumers to understand.”

According to FICOM, a broker’s direct interests in a mortgage include, but are not limited to:

  • Base commissions
  • Known volume or efficiency bonuses
  • Loyalty or rewards points
  • Broker fees.

FICOM says typical indirect interests include:

  • Expected trailer fees, if the borrower renews the mortgage with the lender at maturity
  • Expected trailer fees or other compensation payable during the term of the mortgage
  • Potential volume or efficiency-based bonuses
  • The amount of volume-based compensation paid by a lender to the mortgage brokerage (firm)
  • Lender compensation paid to the corporate head of any network or franchise entity to which the mortgage broker is related or associated, based on aggregated volume for the network
  • Fees paid by a lender to a network, franchise or mortgage broker for any purpose related to mortgage transactions being directed by that firm or associate or related party to that lender (including but not limited to access fees and fees paid by a lender to be identified as a preferred lender)
  • Reduced desk, franchise or network fees, or similar, payable by mortgage brokers based on achieving certain targets, such as volume, with a preferred lender of the firm
  • The ability to offer preferential pricing to borrowers in future mortgage transactions based on volume or efficiency-based targets being met
  • Any benefit arising from achieving a certain status or designation with a lender
  • Beneficial ownership interests in the lender or the borrower

Other notable points:

  • Commission splits between sub-mortgage brokers and brokerage firms must now be disclosed
  • Fees paid by technology providers, like D+H, to broker networks do not have to be disclosed
  • Sub-mortgage broker salary (paid by the brokerage) does not have to be disclosed

We’ve talked about the pros and cons of these changes before, but in a nutshell we expect:

  • Savvy consumers will use this new information to negotiate better deals (i.e., ask for some of the broker’s now fully disclosed compensation, by way of rate buydowns or cash rebates)
  • Many consumers will be confused by the disclosure since there are limited benchmarks to compare a broker’s interests to what is “normal”
  • Some borrowers will choose the wrong provider based largely on a broker’s compensation, and not the broker’s service, advice and product recommendation (U.S. research supports this)
  • Some deep discount brokers will invite consumers to contrast their compensation to that of “full-service” brokers—and use that as a competitive edge
  • Lenders may not be thrilled as their confidential brokerage compensation agreements (which predate these new rules) become industry knowledge  
  • Lenders will find it harder to keep preferential broker compensation and rate deals secret from other brokers
  • Broker networks may be under increased pressure to share the newly disclosed incentives that lenders pay them with agents.

I’ve spoken with superbroker bosses who feel these guidelines could ultimately harm the broker industry, and consumers, by shrinking margins to a point where it’s unfeasible to provide in-depth advice and service to consumers. Other brokers brush it off, maintaining that most consumers won’t see the disclosures until right before they sign, and/or know how to interpret them. 

With respect to timing, FICOM says the “Form 10” (which contains these disclosures) must be given to borrowers “at the earliest opportune time before they sign:

  • the mortgage; or
  • any ancillary agreement with the mortgage broker or lender, including but not limited to an agency agreement with the mortgage broker, that commits the borrower to the mortgage transaction.”

Here are the full guidelines and FAQs.

  1. More bank lobbying at it’s finest. Rob, in your opinion, how long do we have until these regulations are implemented by FSCO, and what can we as mortgage agents/brokers do to prevent it?

    1. Hi LT, I haven’t seen any evidence to pin this on the banks. As for FSCO, they haven’t seemed too eager to follow FICOM’s path. It’s come up before.

      What we need to do is be proactive and transparent about disclosure (in the absence of regulation) and ensure the regulators are aware brokers take consumer protection seriously. I expect Mortgage Professionals Canada will take a leadership position in pushing such best practices throughout our industry. FICOM acted, in part, because they didn’t feel brokers were dealing with potential conflicts adequately. This is despite the fact that they had no specific complaints from consumers who were sold inferior products due to compensation bias, so we’re told.

  2. Some businesses are subject to these kinds of disclosure requirements and some are not. It looks like we are destined to be one that is going to disclose every penny of income. Certainly crying about it is likely to be very counter productive. Selfishly, I have no objection to showing consumers how little we make on a mortgage transaction but our business model is not the norm. I think it will be interesting to observe how consumers react to seeing the total income that full service mortgage brokers, their brokerages and all the way up to the networks make on a $800K mortgage.

    Ultimately broker earnings will continue to see margin compression and likely there will be a drive to either work faster and harder for less margin or adopt a specialized business focus on a very narrow clientele who see the value in the special knowledge and genuine expertise the broker can offer.

    1. HI Ron,

      Why keep the people in suspense. The normal commission on an $800k mortgage is around $8,000. There may be 5 or 10 bps in other bonuses on the corporate level. So $8,800.

      The issue at hand is that the client knowing that information doesn’t serve the client in any useful way. This information might be useful if there was some way that the client was getting screwed over with a higher rate, in order to benefit the broker in a way that is beyond the normal industry standard compensation.

      There is already a spot for that on the current Form 10.

      1. Reed, the actual total comp on a $800K mortgage is actually just a touch under $10K that is with every little override and bonus. You may not think the client needs to know but shouldn’t we ask the client what they think?

        1. No, they don’t NEED to know that to make an informed decision about the rate they are getting on their mortgage.

          When i go get my car insurance renewed, I really don’t give a hoot if 10 or 15% or 25% of my premium goes towards compensating the insurance broker. What matters is that the premium i’m paying on my insurance is what i agreed to, and gives me the coverage that I wanted.

          It isn’t useful, in reality, for me to know that the commission structure of that insurance broker means he will receive 42% of the 15% commission payable, as expressed in a dollar figure, and that his national corporate office has negotiated a transaction fee per file of $14.72. ITS NOT USEFUL INFORMATION in the context of me getting my car insurance.

          You seem to be pleased with the only realistic consequence of this disclosure, which will be a race to the bottom for deep discounters. Cannibalizing the mortgage broker share of the market doesn’t help win business from the big 5, who have an obligation to their shareholders to fleece every client that walks though the door – and don’t have to disclose any of this nonsense while they do so.

    1. No, not really.

      More is not better when it doesnt help me make a better mortgage choice – like knowing what rates/terms where available from the various banks.

      1. More information is not better? That is horrible spin. Alternative Mortgage brokers/ business will be a fraction of itself.

    2. You can go ahead and tell your clients all this, you don’t need the regulator to force you.

      Let us know how it goes.

  3. When banks pay realtors 25-50 basis points for referrals, does anyone clearly disclose that to consumers? I bet not!

    This is a double standard meant to hurt our industry.

  4. Many other industries have to disclose what they make. The idea rhat a consumer may be worse off with this information because they may cihoose an inferior broker is a pretty lame arguement. People can choose an inferior provider in any line of service to pay less feesif all they are concerned about is fees not quality or value. So it is up to the broker to ahow that value he/she is adding to earn their commision. Mutual funds now have to disclose what they oay to Advisors on a sale; Financial Advisors now have to disclose to xonsumers what they are earning on the product solutions they are oroviding.
    Yes, a consumer can always choose to go to a cheaper broker. Freedom of choice.
    Will this bring down broker commisions somewhat? Yes that is likely. Is that a bad thing foe consumers? No not likely. Will the good brokers still add value and earn their commision in the eyes of their customers? Yes very likely. Will some poor brokers be forced out of the vusiness? I hope so, just like the poor financial advisors are being pushed out when they could not demonstarte good value for their commisions earned.
    More information is not a bad thing Rob. Don’t lump in all consumers into the samw bucket and say they arenot smart enough to oay for value…..or to not pay if they don’t see value
    You used to be very open and transparant. Ut lately tou seem to be very defensive rather than objective. Your posts on the mortgage rules is a similiar vein. I liked you much better before when you proclvided the facts but no biased opinions. You are in rhe business and trying to defend the status quo I get that, but so are the rest of us in the business. Every industry and profession has its’ challenges but limiting information to consumers on fees in order to protect the broker is not consumer friendly no matter which way you slant it.

    1. “The idea that a consumer may be worse off with this information because they may choose an inferior broker is a pretty lame arguement.”

      In fact, Earl, the prominent research cited shows that numerous people will do just that.

      If you were good at your job, you’d earn more than average, and you’d deliver more value than average. But folks would still grind you down, knowing what you’re paid. And, if you’re like most rational people, you’d pare back your service offering to do more business in the same amount of time, and preserve your overall income. The risk of this regulation is that it effectively suppresses what brokers earn, despite no data to establish that the “problem” outweighs the solution, and no data to show that consumer decision-making will actually improve overall.

      “…it is up to the broker to show that value he/she is adding to earn their commision.”

      Most brokers already do this Earl. And the data supports it. Broker share is growing because their customers pay lower rates, lower fees and lower penalties. Plus they get exposed to a far wider array of products that can be tailored to their personal need for flexibility. Is that enough value?

      “Yes, a consumer can always choose to go to a cheaper broker. Freedom of choice.”

      Absolutely, and folks can already make this choice based on the rate and terms they’re offered. They can already ask a broker how they’re paid. They can already see conflicts of interest on B.C.’s Form 10, as required by law.

      But here’s the thing. If a broker’s status helps a consumer save 10 bps more than the competition, or the broker’s experience saves the borrower from choosing an inferior mortgage with costly restrictions, should that broker have to jump through more regulatory hoops and earn an inferior living, despite delivering better value? That’s exactly what’s going to happen to countless professionals in this business.

      “Will this bring down broker commissions somewhat? Yes that is likely. Is that a bad thing for consumers? No not likely.”

      There’s no question earnings are coming down. But who saves more, a borrower with a $200,000 mortgage that saves 5 bps and pays a $4,000 higher penalty? Or a borrower that pays 10 bps more and pays a $2,000 penalty, that’s discounted 20% because their broker kept in touch and suggested they make a prepayment before discharge? Can you answer this by looking at a regulatory disclosure, Earl?

      The reality is this. The absolute level of compensation is completely irrelevant to consumer protection. It is the difference in compensation and benefits that matters. That’s where the conflicts exists. And the regulation, as communicated, does not readily help consumers compare those potential conflicts.

      “Will the good brokers still add value and earn their commission in the eyes of their customers? Yes very likely. Will some poor brokers be forced out of the business? I hope so, just like the poor financial advisors are being pushed out when they could not demonstrate good value for their commissions earned.”

      If you get paid X for your service, and now you get paid one-half of X, will that encourage you to spend more time looking out for your customers? If you’re a do-it-yourselfer, this may not matter to you. But those self-directed borrowers are just one minority slice of the market.

      “More information is not a bad thing…”

      Clearly it can be, as shown above. The outcome completely depends on the clarity, cost and utility of that information. Compensation disclosure, when put in context, can be beneficial as mentioned, and we’re all for that particular brand of disclosure. But that’s not what’s been proposed.

      “Don’t lump in all consumers into the same bucket and say they aren’t smart enough to pay for value…”

      Absolutely nowhere did this website state that.

      “You used to be very open and transparent. But lately you seem to be very defensive rather than objective. Your posts on the mortgage rules is a similar vein.”

      We’ve had a lot to defend lately with regulators decreeing rules without open dialog on the myriad of consumer ramifications. The funny thing about opinion is, people usually appreciate you more if your opinion matches theirs. We’re not here to match opinions Earl. We’re here to convey how mortgage news affects Canadian families and the industry. You have every right to question our motives, and you have every right to be wrong.

      Opps. That was a little defensive!

      “I liked you much better before when you provided the facts but no biased opinions.”

      Fact without commentary is like toast without butter. We aren’t in the dry toast business, Earl …but I can refer you to some sites that are.

      “You are in the business and trying to defend the status quo I get that”

      Heck of an ad hominem. How does your insinuation line up with the fact that I will personally benefit from this policy change? Don’t forget, I run a discount brokerage and go out of my way to show people how much I save them versus traditional brokers. The little you think you know about my motivations couldn’t possibly be more inaccurate.

      “Every industry and profession has its challenges but limiting information to consumers on fees in order to protect the broker is not consumer friendly no matter which way you slant it.”

      There are no fees on prime mortgages Earl. I’m not sure where you’re getting that from. Most consumers don’t pay brokers a dime. Lenders pay brokers.

  5. I think I will laminate my NOA and leave it on the desk so I can point it out to them along with what the gross commission I get from their mortgage but lets not pretend that I don’t have expenses just like any other business. Advise them that the banks do not have to disclose their salaries or bonuses that they receive. Never mind how much their mortgage generated towards the dividend that they paid out to their shareholders. They don’t have near the regulations that our industry does. My job is to give them, the client, options and the best deal that works for their needs, first and foremost, and how I am compensated is secondary. I feel our service provided is worth the amount the lender is paying me so that I can pass along these savings to them the customer. Because ultimately without a mortgage broker involved the savings isn’t as great most of the time.

  6. Are you kidding me Faye? Banks not regulated as much as Mortgage Brokers? I hope that was a sarcastic remark and you don’t really believe that.

    Governments, both Federal and Provincial have been taking steps to ensure consumers are aware of what many commissioned sales people are making when they give advice to their customers on the products and services they are recommending. Mutual Funds salespeople, Financial Advisors, Real Estate Agents. and many others who work on commission or referral fees are required by law to disclose those fees, trailers, bonuses, etc to their customers.

    That is not a bad thing Faye unless you feel you do not earn the commission you are getting paid. I’m sure you do earn it and deserve it, so don’t worry about having to explain that to your customers. It is those sales people who cannot sell their value to the customer who will have challenges. Yes it may bring our commissions down as people may not be willing or allow us to make what we make on some transactions. That happens in many industries. It will happen here soon with brokers, mark my words. It is coming.
    Look how the car dealerships had to change their sale models when the true price of vehicles and the commissions sales people were earning off the sale of the car became known to consumers? Yes these things sometimes change industries. But we have to change with them. Don’t be afraid or defensive, just be prepared to justify what you make. Or find new ways to show your value. Or find another job.

    1. Find another job. That is easy for you to say.

      The bottom line is that FICOM has no business upheaving an entire industry if it can’t even prove there is even a problem.

      What happens if brokers start earning peanuts and quit? People will resort to banks and we all know the quality of advice you get at a bank:

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