Keeping brokers honest

Mortgage brokers can be a home buyer's best friend. As intermediaries with various lending institutions, they may find the best deal on a loan. They are also expected to be honest and to tell their customers whether they have any other interest in a transaction.

On August 24, the Financial Institutions Commission of B.C. issued a bulletin advising brokers to clearly fill out a conflict-of-interest disclosure statement when packaging a mortgage. This statement is known in the industry as Form 10.

"We have found that many mortgage brokers complete Form 10's in a perfunctory manner, using boilerplate language which may have little meaning to the borrower or lender," the notice stated.

Colin Parcher, manager of investigative services at FICOM, told the Georgia Straight that the bulletin was issued to ensure full transparency to the public. "The purpose of that is to make it clear to mortgage brokers that they have to–in plain language–explain any conflict to both the borrower and the lender," he said. "Keep in mind that most of the public are not sophisticated when it comes to this type of stuff."

Parcher also pointed out that the notice was likewise meant to reinforce the point made in a decision handed down last year by W. Alan Clark, CEO of FICOM and B.C. registrar of mortgage brokers.

In his ruling dated June 1, 2006, Clark established that in three brokered mortgages,  a broker  didn't inform his clients that they were referred to him by his wife, who was employed by a financial institution. These were customers who didn't qualify for a mortgage from the bank.

Clark ruled that  the broker  was required under the Mortgage Brokers Act to complete a Form 10 and in doing so "disclose the fact that his wife had an interest in the transaction".

"With respect to disclosure, I note that in a mortgage transaction, the broker and the lender have far more information and resources at their disposal than the borrower," Clark wrote in his decision. "The only way consumers are able to safeguard their interests is with complete disclosure."

FICOM's bulletin cited various situations in which a broker "may have a disclosable interest". One is acting in multiple roles for borrowers, such as also being a realtor, insurance agent, appraiser, or notary in the same transaction. Another example is arranging a mortgage where a submortgage broker of the mortgage broker is the lender, or has an interest in the transaction as a shareholder, or is a director of a corporate lender, or is the spouse of a lender. Another instance is arranging a mortgage for a borrower where the lender is related, either directly or indirectly, to the mortgage broker.

The bulletin also stated that the broker must tell the client whether the lender provides any kind of compensation, including bonuses for volume, points, or other rewards to the broker. Also, a borrower must be told if a broker is accumulating points from a lender by not providing the lowest interest rate, in order to bank points and eventually use them to benefit other clients.

"Mortgage brokers should always act cautiously and disclose all potential interests, even if it does not appear to be a conflicting interest or the interest appears to be remote," the bulletin states.

In an interview with the Straight, independent mortgage broker Ingrid Faisal noted that commissions paid to brokers by lending institutions are fairly similar. She explained that an "independent" broker would therefore try to negotiate for the best mortgage product from a variety of lenders in the market. "What happens with most brokers is when they get used [to] working with a lender or an underwriter, it makes things easier," Faisal said.

More than one in five Canadian house purchasers use the services of a broker to arrange their loan, according to a 2006 survey conducted by the Canada Mortgage and Housing Corporation. About half of all consumers felt brokers provide a "valuable service", the survey results showed.