A modified excerpt from the upcoming Volume 2 of Be The Better Broker

Collateral Charge – A Competitive Advantage?

 Short Version

• Collateral charge registration is here to stay.
• Be balanced in your explanation of CC’s.
• Understand the advantage the existence of CC’s creates.
• Demonstrate rationally why a client should not have all their debts with a single financial institution.
• Be the informative, educational, and unbiased Expert!

Long Version 

This topic came up at a conference recently when a newer Broker told me he had lost two mortgage clients in as many weeks to a “big bank”. I asked which bank and why. He replied, “TD, just because it was the client’s own bank”.

This floored me. We Brokers have access to TD – how could this Broker have lost clients to a lender that he could have placed them with himself? In fact when a client tells me that TD is their primary bank, that is where we start the conversation of which lender to work with. The clients can have the best of both worlds – my independent market analysis at no extra cost, and their mortgage can ultimately be placed (through me) at their own bank. A win-win for sure.

So what was the problem? Where did it all go wrong?

The Broker told me that his office manager told him not to use any chartered banks because the banks register the mortgages as collateral charges.

I asked what the issue with that was exactly?

“Well, they’re bad,” was the response.

Bad, specifically how? I asked.

“Um, because my manager said so. He said I would not be able to move the clients at renewal…”

OK, this is the very start of this Broker’s career so let’s worry about first things first. Should the focus be on placing the client with a lender that you perhaps have a 1% better chance of breaking the client free from at renewal? Or should it be with advising that client of all of their options, including working with their own bank allowing them to proceed in the fashion they are most comfortable with?

Losing a file, losing a client, to a lender that we represent ourselves… that is just plain wrong. So let’s talk about the collateral charge issue, and why it can in fact be a good thing for a client. And what’s good for the client is always good for the Broker. The opposite is not a viable business model.

Much has been made of the presumed “evils” of the collateral charge-style registration of mortgages, a method more and more lenders seem to favour. Ostensibly this is due to issues around a client’s inability to move to a new lender at renewal time without triggering legal fees.

(Credit unions use the terms such as “Credit Master”, and lenders register these mortgage in slightly varying ways; for our purposes we will use the term “collateral charge as a general description of these sorts of registrations)

Often at the heart of negative spin Brokers create are concerns around a Broker’s inability to “move” a client at renewal time. Brokers’ incentives to “churn their book” may change should trailer fees gain greater acceptance, but for now the incentive is there because the only way a Broker earns a direct commission at renewal time is to either increase the mortgage amount (by set amounts with certain lenders) or move the client to an entirely new institution.

Moving the client just so the Broker can get paid is the worst possible plan. This is a solution for the Broker and not a solution for the client.

Arguably the lack of trailer fees in our industry is a limiting factor in raising the standards of professionalism. Up-front-only compensation tends to create shorter-term focus, and a lower standard of long-term service in some cases. This same structural compensation issue applies to many bank representatives with very similar commission structures, resulting in zero fiscal motivation for subsequent personal client follow-up. The opportunity within this dichotomy is another topic altogether, but let’s focus on how the collateral charge-style registration can in fact give you, the independent Broker, a competitive advantage.

Words to live by:

• The client’s best interests are Priority #1.
• The lender’s interests are a very close second.
• Those of the Broker are a distant third place.

After all without the first two parties, a Broker’s existence is moot.

Let’s consider the topic of collateral charges from these three perspectives:
The client
The lender
The Broker

1. The client – being placed in a collateral charge product

The (potential) win for the client is that there are no new legal fees for securing a line of credit or increasing the mortgage balance in the future (assuming, generally speaking, that they choose either the 125% of the value option or an amount above the actual mortgage amount). If the client chooses to register their mortgage with a collateral charge lender for ONLY the specific initial approval amount, then the upside for them is more limited moving forward. Registering for the higher amount on markets like Vancouver and Toronto has been beneficial.

Some negatives for the client:

1. They are effectively entering into an “all indebtedness” mortgage which brings any other debts held at that specific lender under the umbrella of the registered security against the client’s real estate. In other words, co-signing a credit card or car loan for somebody with the same lender as the one holding the client’s mortgage can ultimately result in a foreclosure notice against the property if that person stops making payments. This is not something clearly spelled out on mortgage commitment or registration documents. But this is how it works. I refer to this as the dark side of the CC.

Clients often are amazed at this (A Visa balance can trigger a foreclosure?!?!) and it is enough to stop most clients in their tracks.

 

1. It is costly to move the mortgage to a new lender at renewal time, in particular if the mortgage is a smaller one. This is now somewhat secondary as clients are still wrapping their head around a $5,000.00 credit card balance potentially triggering the foreclosure process – which it very well can. In one of my own clients’ cases, it was a 29K Visa balance of an ex-spouse still on title, although said ex-spouse was neither residing in nor contributing to the property itself. In another it was a car loan co-signed for a related family member. In both cases the balance was paid by the homeowner and the process stopped, but it was still a highly stressful experience.

The collateral charge is neither good nor evil. It simply “is”. 

It is here to stay; it is the future of the majority of mortgage registrations. Thus we need to learn how to present it in a balanced fashion. Considering many of our clients’ lender options are limited to chartered banks or credit unions, it would seem illogical to throw the entire concept away as sinister. Instead I stress that clients not co-sign for other people’s debts, as it can also limit their own future financing options.

Educated and enlightened clients are the key!

Once aware of this far-reaching method of registration and its serious ramifications, how best to proceed?  Considering that nearly all institutions (most likely including the client’s current bank) now register in this fashion, it is perhaps worth suggesting that the client specifically not have all their banking, credit cards, and small loans with the same institution with which they place their mortgage.

Instead they will benefit from two, or more, financial institutions in their lives. In fact placing their mortgage with a third institution altogether is more prudent still. e.g., personal banking with Lender A, business accounts with Lender B, and mortgage(s) with Lender C. (Clearly this opens the door for a discussion on the virtues of Monoline lenders as well.)

If all banking as done at ABC bank, and the mortgage alone is all that is held at DEF bank, we then eliminate the sinister side of a collateral charge mortgage, i.e., a foreclosure triggered by a small consumer debt.

This is the simple solution for protecting your client from the downside of a collateral charge product.

Yes this is you, the expert Broker, using the collateral charge against the client’s own bank. You are educating the client as to the pitfalls of having all their eggs in one basket. Again this is not an “evil bank” scenario, nor is it an “evil policy”; it is simply a policy that exists with nearly all chartered institutions. If the client still prefers to be placed with a big bank or credit union, fair enough – you have not painted a picture of the collateral charge as a negative, instead the exposure is greatly decreased with the multiple institution solution. This can be a win-win as you talk it through.

What if you slam the CC (for no other reason than your own personal concerns) and then the only lender that will approve the file is a chartered bank. Now what? A balanced representation on this topic is not just applicable, it is prudent. Keep all the options open.

Place the client with the lender that makes the most sense for them in the long run. Do not let your own issues cloud things. Do the right thing for the client every time. The money will follow.

Ultimately “porting” at renewal is becoming less of an issue, as we already have at least two lenders stepping in to offer a no-fee switch program for collateral charge mortgages. No doubt 3–5 years from now there will be more doing the same.

2. The Lender registering a collateral charge.

I think that we have made the case for why lenders love this format and are unlikely to change it anytime soon: “all indebtedness” and the increased security over the entire client relationship.

Although lenders are increasingly under pressure to disclose all of the details more clearly, current mortgage commitments are lacking in any sort of detailed explanation. This is left up to the Mortgage Broker to provide. Master your script and ensure that the language is unbiased. Matter of fact, and when clients ask for more information from the lender themselves you can forward this excerpt from the DoF site;

Collateral Charge Mortgage – Dept. of Finance comments

While many consumers continue to choose a traditional mortgage to secure their home loans, many are increasingly choosing collateral charge mortgages. The impacts of having a collateral charge mortgage may differ from traditional mortgages. For instance, switching between lenders may be more difficult. To make an informed choice, consumers need sufficient information to clearly understand the costs and consequences of collateral charge mortgages relative to traditional mortgages. The Government will require enhanced disclosure, better equipping borrowers to understand these impacts.

The above communication is now a few years old, and little has been done in the way of “enhanced disclosure”.

It is up to you, the front-line representative to understand and articulate what this is all about.

3. The Broker

Let’s address the main points from the Broker’s perspective.

1. During mortgage inception, Priority #1 should be to focus on what makes the most sense for the client, both product- and lender-wise.
2. A Broker should ensure the client is placed with the appropriate lender up front, rather than being concerned about switching to another lender 3–5 years later (80% of my clients renew at the same lender, and we discuss it at some length).
3. Strong communication throughout the mortgage term will generally ensure that the client refers business and returns to their original Broker for any increases or a port.
4. When the client does return looking for more funds, say $7,000.00 for a special assessment, if you originally spent time talking them out of a collateral product up front, ask yourself this: Are you now going to cover the cost of their legal fees which otherwise would have been nil for such a small simple increase?
5. As more lenders go the way of the collateral charge-style product, there will in turn be more lenders that will accept a transfer in of an existing collateral charge.
6. Most importantly, understand all the ins and out and ups and downs of a collateral charge and do not paint yourself into a corner one way or the other. Simply be informative and neutral.

I recently came across a sad example of a bank’s own employee failing to understand and clearly explain this topic. A client came into my office convinced by a rep at their bank that they could borrow 125% of the value of the property with no need to re-qualify. This client was less than impressed to discover this in fact was not the case. Ultimately we were successful in winning both their trust and their business by demonstrating a better understanding and knowledge of the lender’s products than the lender’s own representatives. That misunderstanding eliminated the original rep’s chances of doing any further business with the client. However my not bashing the rep, the lender, or the CC allowed us to simply increase and refinance with the client’s current lender… the lender at the time with the very best product for that client.

Be the Expert: Know your stuff!

Yes, legal fees are waived, but there is still an update appraisal required, and of course updated credit and income confirmation. It is essentially the same as underwriting any other refinance transaction – minus the trip to the lawyer’s office. So truly the only upside to the collateral charge is the avoidance of additional legal fees to re-register a higher amount or secured line of credit after the fact.

Collateral charge products are here to stay. Learn about them and use them for what they are: an excellent competitive opportunity to move a client’s mortgage relationship away from their existing financial Institution.

Be considerate of both the client’s time and the current lender’s status, and make use of the provisions that a collateral charge provides before looking to move the client off the path they are on to one they may be less comfortable with and less likely to complete on.

Here is the Post I wrote for my clients to better explain this topic to them as well.

Thank you

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Dustan Woodhouse