Allowing for bias

The industry must take steps to keep commissions from being a factor in brokers’ decision-making process, writes Jason Armstrong

Allowing for bias

As a mortgage broker, what does being unbiased mean to you? Are you unbiased in your decision-making process when selecting the most appropriate mortgage for the borrower you’re representing?

The short answer is no. A mortgage broker cannot be unbiased or impartial if they have a monetary stake in the decision-making process. You are likely more biased than you think – and I’ll highlight how.

Our industry has successfully manipulated the public’s perception of how mortgage brokers are compensated. All too often, we hear about how mortgage brokers are compensated by the lenders at no cost to the borrower. Although there is some truth to this statement, nothing in life is free, and everything comes at a cost.

Digging deeper into how we are compensated highlights the potential risk of mortgage brokers to influence the decision-making process to benefit ourselves at the ultimate expense of the borrower. I’ve identified four keys factors of a mortgage that can impact commission: term, lender, conditions and rate.

The most popular mortgage term in Canada is five years. I have a tough time believing that it’s merely a coincidence that this just so happens to be the term mortgage brokers are typically compensated most highly for. If you’re recommending a five-year term, are you explaining why you’re recommending that term?

In terms of lenders, borrowers’ main reason for using a mortgage broker is that they believe we shop their mortgage around until we find an appropriate lender that offers the best terms and conditions. FSCO, on the other hand, acknowledges that most brokers tend to work primarily with one or two lenders. Although it’s nearly impossible to keep current with every lender’s product offerings, being incentivized to support a particular lender based on volume bonuses encourages this behaviour among brokers. This isn’t necessarily in the best interest of the borrower, but instead in the best interest of the broker, who receives higher compensation and often needs to spend less time on a file.

As for conditions, lenders’ projected income takes into consideration the risk of the mortgage being paid out prior to maturity and the associated penalties for doing so. If the mortgage’s conditions include higher penalties or a bona-fide sales clause, some of the lender’s risks are mitigated, and in turn, brokers are typically compensated more. I’ve found that this is often a solution for many brokers, as it achieves the goal of lower, more competitive rates while not impacting their compensation – but do clients truly understand the restrictions of a bona-fide sales clause?

Finally, there’s the question of rate. Often the first question from a prospective client is: “What’s your best rate?” This is not an easy question to answer, as there are so many factors that impact rate. Is our best rate the one posted on lender’s rate sheet, or does the best rate we can offer include our ability to sacrifice commission in the name of a rate buy-down?

I believe most borrowers understand that mortgage brokers are indirectly paid by the interest on their mortgage, but I don’t believe they understand how much control we have over our commission. As an industry, we have made huge headway in recent years by increasing our market share while also educating borrowers on the benefits of using a broker. However, we risk losing the momentum if we don’t address compensation.

Doing so will require mitigating brokers’ influence over our own commission in the decision-making process. Disclosing commission and/or standardizing compensation to a fee-for-service model can effectively mitigate some of the risk. If you believe in the value of the service you’re providing and that the commission won’t impact the decision the borrower makes, then what harm is there to disclose? A fee-for-service model could result in the borrower paying for your services directly, completely removing any bias and allowing you to truly search for the terms and conditions that are most appropriate for the borrower’s needs.

To personally reduce the influence of commission in my decision-making process, I have removed it completely from my database and no longer track my commission, except for tax-preparation purposes. I encourage all brokers to review how commission impacts their decisions and to examine if the recommendations you’re making are truly in the borrower’s best interest – or your own.

 Jason Armstrong is a London, Ontario-based mortgage broker with Mortgage Intelligence. He is also qualified as a Chartered Professional Accountant and has more than 10 years of experience in the field.