Your bank mortgage: Is it fair and does it suit your needs?

Decoding the mortgage market

Your bank mortgage: Is it fair and does it

suit your needs?

Robert McLister Special to The Globe and Mail Published Monday, Feb. 11 2013,

Banks operate under the scrutiny of government watchdogs. But when it comes to

mortgages, those watchdogs don’t watch everything they could.

“Individual (bank) mortgage reps operate outside of regulatory boundaries which

commonly govern licensed professionals,” says Samantha Gale, a former mortgage

regulator with B.C.’s
Financial Institutions Commission and chief executive officer of the

Mortgage Brokers Association of British Columbia

. Rules pertaining to mortgage rep

competency, the suitability of mortgage recommendations and compensation disclosure

are largely left to the banks themselves.

That raises certain questions, like the procedure banks use when sending a mortgage

applicant to another lender.

At Royal Bank of Canada (RBC), for example, mortgage reps route applicants that don’t

meet normal guidelines to their Alternate Mortgage Solutions (AMS) team. RBC’s AMS

employees then farm those customers out to other lenders and the bank’s mortgage rep

gets paid when the mortgages close.

Some might easily mistake this practice for “dealing in mortgages,” an activity that

normally requires a brokering license. But, because bank employees are the ones

recommending the alternative lenders, and because banks are federally regulated, they

aren’t bound by tough provincial rules that make it an offence to broker without a licence.

Consumer protections differ in bank and broker circles. In Ontario, for example,

provincial penalties apply whenever a broker:

Suggests an unsuitable lender or mortgage – Ontario requires brokers to “take

reasonable steps” to ensure that any mortgage presented to a borrower is

Not only must the borrower be properly qualified, but recommendations should

attempt to minimize the borrower’s current and future borrowing costs and

provide the right mortgage flexibility given the customer’s needs. By contrast,

while bank regulations encourage banks to “Know Your Client,” they don’t

contain specific guidelines on ensuring suitability – apart from confirming the

borrower is properly qualified.

Sells a higher mortgage rate to get paid more – Brokers must disclose this

conflict of interest. Federal
disclosure rules don’t hold banks to the same standard,

even though many bank reps – like many brokers – get paid sales incentives and

earn more for selling a higher interest rate.

Policing these things falls in the lap of provincial regulators. Provinces draft specific

broker conduct rules, pro-actively monitor and audit brokers and sanction individual

brokers publicly when they’re caught violating regulations.

With bank mortgage reps, there is no independent government watchdog that directly sets

specific suitability and compensation disclosure rules, audits and monitors individual

reps, and publicizes it when a bank rep breaks the rules. The banks themselves are

responsible for “developing the policies and procedures to be followed” by their

mortgage reps, says Rachel Swiednicki of the
Canadian Bankers Association (CBA).

Many assume the
Office of the Superintendent of Financial Institutions (OSFI), the

primary bank regulator, supervises bank rep conduct. In fact, OSFI’s main role is to

“monitor and examine institutions for solvency, liquidity, safety and soundness,” says a

spokesperson. “OSFI does not have the authority to intervene in the day-to-day

operations of the institutions it regulates for individual consumer-protection purposes.”

That’s actually the job of the
Financial Consumer Agency of Canada (FCAC). It is tasked

with ensuring that bankers comply with federal consumer protection rules.

FCAC is a fantastic
mortgage educator and regulator when it comes to high-profile

problems like mortgage penalty disclosure or failure to provide cost of credit disclosure.

But “FCAC appears to regulate systemic institutional compliance problems only,” says

Ms. Gale.

Julie Hauser, FCAC’s spokesperson, explains that “FCAC supervises federally regulated

financial institutions, not individual employees.” Unlike provincial broker regulators,

FCAC generally does not:

· Have its own set of rules, prohibitions and competency requirements to promote

suitable mortgage recommendations (e.g., federal rules don’t deal with specifics about

what constitutes a suitable alternative lender for a declined borrower, or when a secured

line of credit, 1-year term or fully-closed mortgage are appropriate for a borrower)

· Impose specific educational standards and licensing for bank reps

· Pro-actively audit or monitor individual bank mortgage rep conduct

· Post online when a bank rep wrongs a mortgage customer (
like this.)

That means it’s up to a bank to set and enforce its own specific competency, suitability

and market conduct policies within general federal guidelines. In many ways, this makes

banks their own overseer.

So, why aren’t the feds watching mortgage rep activity more closely? Apparently it’s a

low priority issue for Ottawa. “We need the political will of regulators to get together and

sort this problem out,” Ms. Gale adds. “There is real risk here for consumers.”

Ms. Gale says that mortgage brokers have a fiduciary-like relationship with customers –

to recommend a suitable lender with suitable terms. But with banks, a similar fiduciary

relationship doesn’t exist because they primarily push their own brand.

“Banks are kind of like a mortgage shop,” she says. “And when they pass you off to

another lender, and you don’t know who you’re dealing with and why, that’s a consumer

risk.” (Banks always get a customer’s consent to work with another lender, but a bank’s

true reasons for choosing another lender are not always disclosed.)

Some banks refer customers that they can’t service to lenders or brokerages that the bank

has a monetary interest with. “They’re not necessarily working for you to get you the best

deal,” Ms. Gale says.

Rodney Mendes, a broker and former TD Canada Trust mortgage specialist of 15 years,

says banks’ internal guidelines are “just as stringent” as provincial broker regulators.’

RBC, for example, states it has a “strict code of conduct,” “comprehensive training” and

“pro-active monitoring and auditing practices for its entire mortgage business.”

That’s all good, but bank mortgage reps “don’t report to any governmental authority

unless there is a complaint,” Mr. Mendes says. “Bank mortgage specialists report to their

own internal compliance department” so it’s often up to management to discipline a

mortgage rep. And, in a small number of cases, it’s possible that management “may not

want to lose volume on their books” by coming down too hard on a big producer.

Banks have a “strong culture of compliance,” counters the CBA’s Maura Drew-Lytle.

Banks make mortgage specialists attest to their compliance obligations and subject them

to annual training and testing. Mortgage reps can also be fired, which is less of a threat

for mortgage brokers. Ms. Drew-Lytle also notes that banks address most consumer

complaints internally, using well-established complaint processes with a third-party

ombudsman as an arbiter.

All of that is true. But when it comes specifically to suitability and compensation

conflicts, the goal should be to fully disclose and avoid them, not address them when

there’s a complaint.

As a side note, not all mortgage brokers have clean hands just because they’re monitored

more directly by provincial regulators. Like the large majority of bankers, most brokers

are honourable professionals who care about their clients. Yet, as a broker, I regularly

witness biases, conflicts and competency issues in our industry. I’ll reveal examples in

my next column.

That said, the takeaway here is that Canadians are forced to rely heavily on banks to

police their own mortgage sales forces. There is no impartial government watchdog proactively

targeting bank reps who make unsuitable mortgage recommendations or fail to

disclose compensation-related conflicts. With more direction and better funding, the

FCAC could assume that role.


Kevin & Faye Kitzman

Sales Representatives

Remax Real Estate Centre

Direct : 519-577-0603



Faye Kitzman

Mortgage Agent

Mortgage Intelligence




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