Twice over the last week I’ve fielded questions about mortgage fees, so I thought this might be information worth sharing. It is important to note that this information applies to residential mortgages only; commercial mortgages are structured differently.
It is also important to know that most brokers work hard to find solutions and have their clients’ best interests at heart. There are always two sides to every story. Most brokers work hard to treat their clients with respect and to do right by them, so it pains me to hear stories about clients who have been taken advantage of.
First conversation was with a client I worked with last year. He was looking to refinance his home. Due to the unique nature of the home and the way the property is registered with Land Titles, there was only one lender (when he first bought it) that would provide mortgage financing.
The second call I took was from a buyer that was put into a last-minute panic situation to find financing as the bank she had been working with assured her she had financing in place. After subject removal (and less than two weeks until closing) they told her that they actually could not arrange financing.
The first client wanted to find different financing as the lender he was with was charging rates about two per cent higher than what was available with other lenders.
I wasn’t able to find a solution for him and referred him to one of the chartered banks as they promoted themselves as specialists in this particular area. They in turn referred him to another broker.
The client came back to me this week and asked if I would mind reviewing the documents they had from the new broker.
The first thing that popped out at me was they were being asked to sign a fee agreement which included wording that the fee was payable even if the mortgage did not finalize.
The second thing that concerned me was that the compliance documents referred to a specific mortgage approval, but the commitment document from the lender was not included in the package.
Third, and most concerning, was that the fee referred to above was not included or disclosed on the compliance forms.
There are a few red flags here.
For residential mortgages, brokers can absolutely charge fees. This is the norm when we work with private lenders. There are also situations where we need to work with a lender that does not compensate brokers for introducing new clients.
In both of these situations, conversations should happen up front so that there are no surprises and to ensure that clients are aware of what to expect in terms of fees or costs.
From time to time we may find out part way through the process that we have to charge a fee as we can’t find a lender through our regular channels. A conversation should happen at that time to make sure the client is aware of the fee. Ideally this is confirmed in writing by having the client sign a service agreement which references the specific fee.
What brokers CAN NOT do is ask that fees be paid directly to them or paid prior to a new mortgage being advanced, or charge fees for a mortgage that never finalizes (exceptions are out of pocket third party expenses like appraisals that the broker covered).
Broker fees must be paid from mortgage funds at the time the mortgage is finalized with the lawyer.
At the time your mortgage closes your lawyer will ask you to bring in a draft to cover closing costs. If the fees have not been added in to the mortgage amount, your draft will include those fees even though the fees are technically paid from the mortgage funds.
With private mortgages broker fees are usually built in to the mortgage amount. In a situation where we take you to a lender that doesn’t compensate brokers, it will not generally be built in to the new mortgage.
As of July 1 2017 mortgage brokers in B.C. are required to disclose our compensation on a compliance form (Form 10 – Conflict of Interest Disclosure Statement) that must be signed by our clients.
This form must show any fees are paid to the broker, either by the lender or by the client. The compliance form this client was being asked to sign did not include the broker fee. This may have been an oversight on the part of the broker, but the client was concerned about the wording of the fee agreement so I encouraged him to discuss this with his broker.
The second client had purchased a leasehold property so there are fewer options available, especially with a tight turnaround time. Her realtor referred her to a mortgage broker.
The broker scrambled to get an approval in place for the client. She has signed documents with the lawyer and her purchase will complete on time.
Her concern was that the broker informed her after everything was signed with the lawyer that she was being charged a one per cent fee, even though the broker would be paid by the lender. The broker told her that he was charging an additional fee due to the rushed nature of the approval.
Because of how her situation unfolded, she would have happily paid a fee so that she didn’t lose her deposit or risk being sued if her purchase did not complete. She was upset that this had not been discussed at any point during the process.
I’ve been under the gun many times where we have to arrange financing as quickly as possible. It is a high-pressure situation – we are dealing with peoples’ lives and not finding suitable financing can have dramatic consequences.
I only heard the client’s version of how this situation was handled, so again encouraged her to go back to her broker to confirm what she is responsible for in terms of fees or costs.
Mortgage brokers in BC are governed by the Financial Institutions Commission (FICOM) and the Registrar of Mortgage Brokers. There are very specific guidelines about fees that can be charged, and how they can be collected.
What it boils down to is working with an individual that you trust and asking the question up front about any fees that may be charged. On the residential side, brokers are prohibited from charging:
· Application fees
· Commitment fees
· Cancellation fees
Brokers are also prohibited from threatening legal action to collect fees if clients decide not to move forward with the financing they’ve arranged.
Miscommunication can happen at so many points during a mortgage application. If you are concerned about how things are going, the best bet is to ask your mortgage professional about what’s on your mind. A very simple misunderstanding might be causing you to lose sleep, and this can often be solved by a conversation.
This felt a little heavy, but the point I was trying to make is that it is important to know who you are working with. Ideally you are not in a rush situation and have the time to discuss and learn about your options, particularly if your situation is out of the norm.
For information about different types of lenders, check out one of my previous blog posts Know Your A B C’s – of Lenders