Sometimes well-intended rules and regulations cost consumers money. Here’s a perfect example…
British Columbia currently has a prohibition on charging fees for mortgage advice unless those fees are deducted from the mortgage amount at closing.
The rule was designed to prevent brokers from taking money from unsuspecting consumers and then not providing the financing requested.
It’s a rule that’s served a useful purpose, but it’s also created adverse effects. Those negatives are becoming more apparent in the digital age.
Most notably, this rule stifles new business models that could save consumers money. And not just a little money, but literally thousands and thousands of dollars every five years.
Yours truly has long advocated for more flexible legislation in this area to better serve Canadians. What follows is an excerpt from a recent letter I wrote to the B.C. government, which is currently soliciting comments from the public on the Mortgage Brokers Act.
Over the past decade, B.C. laws have failed to keep pace with technological advances in the area of mortgage advice.
In most financial markets, business models have evolved that slash Canadians’ costs, deliver better advice and offer a smoother online experience.
One such model is fee-only advice. It’s a blossoming trend in financial services because it has proven to be less expensive, more objective and more efficient.
Fee-only advice is a model that financial advisors are increasingly turning to. It’s the method countless other financial professionals (tax advisors, credit counsellors, etc.) have used for years.
If you need tax advice, for example, you can buy a few hours of an accountant’s time.
If you need retirement advice you can buy a few hours of a CFP’s time.
If you need basic estate planning you can buy a few hours of a lawyer’s time.
But with mortgages, it doesn’t work that way. If you want honest a la carte mortgage advice, you can’t just buy a block of your mortgage broker’s time, not in places like B.C. or Ontario. (Ontario has a fee prohibition if the mortgage is under $400,000.)
Almost always, you have to use someone who gets paid a commission and/or works for only one lender. They’ll almost never compare the best options from all mainstream lenders. By not being exposed to all the lowest cost mortgages, Canadians pay more.
In a mortgage context, fee-only advisors would not be dependent on lender commissions. This would free them from the compensation shackles that influence advice, a problem documented by B.C’s mortgage regulator in 2016.
Fee-only mortgage advisors would allow—for the first time—purely objective one-on-one counsel to borrowers. To date, such innovative consumer-friendly models have been completely stymied by the current regulatory framework in B.C., particularly the province’s advanced fee prohibition. If that doesn’t change, borrowers will lose.
A Better Way
Policy-makers would do a great service to consumers by encouraging a full parliamentary review of the Business Practices and Consumer Protection Act — sections 4(3)(b)(ix) & 5. As the BCFSA notes, this law: “prohibits mortgage brokers from charging any fees for arranging a consumer mortgage in British Columbia, unless those fees are deducted from the mortgage advance at time of funding.”
Post-funding fee regulation is a clear roadblock to fee-only mortgage advice. Unlike traditional brokers, fee-based mortgage advisors sell time and knowledge, not closed mortgages. That allows them to recommend non-commission paying lenders without hesitation.
With Canada’s average new mortgage around $300,000, traditional broker compensation can be $2,500 to $3,500 gross. By contrast, a fee-only model (e.g., $85/hour x 3 hours) might cost the consumer less than $300, for example, saving Canadians up to 90%. That’s money consumers could put to far better use—like debt reduction, retirement savings and so on.
Borrowers would have to consent to fee-only advice, of course. And they’d have to acknowledge that the advisor is not providing any guarantee of financing. Regulators might even decide to put limits on advice fees (e.g., like a hard limit of $950 per mortgage).
Advisors would need to be licensed mortgage brokers and comply with all applicable broker regulations. They’d be motivated to provide exceptional service, not only by regulation (e.g., suitability guidelines), but by economic interest (achieving 5-star Google reviews, for example, which often dictates the success of an advisory business).
Improving the law to allow for lower-cost, flat-fee mortgage models would be a boon for consumers. Almost immediately, it would give people options that drastically reduce the hidden commission expense baked into mortgage transactions. It’s an idea whose time has come and one that deserves consideration.
Views expressed here are solely those of the author and do not necessarily reflect opinions of any other party. To share your own thoughts on this or other B.C. mortgage broker legislation ideas, email the British Columbia Ministry of Finance at [email protected] by March 13, 2020.