Home Capital Group, one of Canada’s largest alternative mortgage lenders, through its operating arm Home Trust, suspended 45 brokers this July for allegedly committing fraud on mortgage applications by falsifying client income information.
These brokers, among the 4,000 the company uses, initiated nearly $1 billion in new mortgages for Home Capital in 2014, but only a small portion of the loans was issued based on falsified income documents, according to the company.
Home Capital’s clients include the self-employed, recent immigrants, and other groups that have trouble qualifying for mortgages at major banks. The company says the problems occurred when borrowers’ employment letters were altered to inflate incomes, in some cases showing that the borrower was making $84,000 instead of $64,000. Home Capital said accepting employment letters as sufficient evidence of borrower’s income is standard industry practice and in some cases additional income earners living in the home were helping to carry the loan.
However, the company said it has introduced new procedures that include creating a specialized team to independently verify borrowers’ income claims. The brokers were not at fault, nor is there any evidence Home Trust staff were involved, says Home Capital.
Raising the bar
While borrowers were concerned about the allegations, mortgage brokers aren’t too pleased either, and they’re advocating for tighter industry rules to demonstrate that the industry has integrity.
Tougher educational requirements is one suggestion. Currently, somebody wanting to become a mortgage broker only has to score 60% in a mandatory course. The proposal is to raise the standard for entry, even if only by a small margin. Ethics training is another proposal. Many in the industry would like to see the penalties for fraud strengthened, and others are proposing that the borrowers who knowingly sign inaccurate documents should be held responsible.
But the financial landscape is changing. Mortgage brokers are no longer just for challenged borrowers like new Canadians, the self-employed, and young, first-time borrowers that makes up the bulk of Home Trust’s business. Now everybody can benefit from the guidance of a reputable mortgage broker.
Whereas previously you would go to your local bank branch and take what they give you, that day has passed. There’s more competition and it pays to shop around. Even if you’re already doing business with one of the large chartered banks, mortgage brokers are in a position to negotiate for you. Mortgage shopping can be daunting for those who’ve never done it before. It’s tough to know you’re getting the best rate, or, if the terms and conditions of the mortgage are best suited to your specific circumstances. And haggling may not be one of your strong suits.
How do you identify reputable brokers?
Borrowers should check out the brokers they’re considering working with by asking about qualifications and years of experience and getting references.
Mortgage brokers are required to take courses, pass exams, and undergo training and apprenticeships before they receive their licenses. Qualified brokers carry the title of accredited mortgage professional (or AMP, for short). But just because they’re licensed doesn’t mean all brokers are equal. Consulting a site like Ratehub.ca and using its tools to check mortgage rates online should also be part of the procedure of finding the brokers who are right for you.
Mortgage brokers don’t get paid unless a deal closes. If you spend four weeks discussing a mortgage deal with a broker and the bank decides to decline the deal, not only will you be left without a mortgage, your broker will also be left without a paycheque.
To avoid this situation, some brokers will qualify a client—a term used to determine whether or not you’re the type of borrower most banks would consider a prime client. Typically, a qualified client is a person who holds a regular, full-time job, has little or at least manageable debt and a credit history that proves the bills are paid consistently.
If you’re a prime client, you shouldn’t expect to pay a fee to your mortgage broker and you will get offered the most competitive mortgage rates available in the market. Brokers receive a commission from the financial institution with whom they arrange your mortgage. It’s usually a set fee based on the term an individual is taking: the longer the length of the mortgage, the bigger the compensation. (And longer is not always in the interest of the borrower.)
Those on the non-prime client list can expect to pay mortgage broker fees that range from 0.5% to 2%, but you only pay this additional fee once the mortgage application is approved and closed. Because non-prime mortgage clients usually have complex applications that take more time, it’s common for a broker to charge non-prime borrowers an additional fee to top up the finder’s fee paid by the lender to the broker.
Some mortgage brokers will also charge clients a cancellation fee—an additional cost from $300 to 1% of the mortgage amount—should you cancel your mortgage before you close the deal. This can happen when you’re working with more than one broker and opt for a mortgage with a better rate, leaving the other mortgage broker without a deal.
In Ontario, the law requires mortgage brokers to disclose all fees up front before a binding mortgage agreement is signed. And for mortgages that are $300,000 or less, a mortgage broker cannot accept fees at all before obtaining a mortgage approval.
An experienced, competent mortgage broker can help you find the right mortgage. While 20% of brokers say their role is to get the lowest rate and 25% say it’s to help credit-challenged borrowers, the majority—55 per cent—say they want to act as partners to select appropriate mortgages.
Flickr: Niels Sienaert