What follows is an exact copy of the letter that I wrote and submitted to FICOM on February 20th for their review and consideration. No doubt hundreds of other Brokers wrote similar letters.
On March 30, 2016 FICOM announced that they are moving forward with enhanced disclosure, despite the feedback from Brokers such as the letter below.
I am working on another post to discuss how we might move forward and find a way to ensure that this perceived mountain becomes a mole hill in reality. Or perhaps we can find a competitive advantage in enhanced disclosure. Only one thing in all of this seems certain, and that is that enhanced disclosure is coming to a Form 10 near you.
As it is said: ‘May you live in interesting times.’
FICOM Form 10 review
Feb 20, 2016
3.Fiduciary vs. Functionary
It is reasonable to say that the absence of complaints around disclosure is in itself not proof that the current system is perfect. At the least though, this lack of consumer complaints should be considered an indicator that consumers do in fact receive, on the whole, broader market information from an independent Broker than they do from a specific lender’s representative.
Statistics bear this out and on average consumers who work with an independent Broker receive a lower interest rate and are often left with a far greater awareness of mortgage penalty calculations. In particular the variation of these penalties from lender to lender and product to product.
The notion that a solitary line item disclosing the gross amount of compensation paid by a lender, not the actual net compensation received by the Broker, is providing a consumer with a useful data point is flawed at best, and potentially damaging to the very consumer themselves at worst. To be clear, net Broker compensation is also not a useful data point for the consumer, not as a standalone figure.
Government employees are in an excellent position to relate with this last point on net as opposed to gross disclosure of compensation. Yes, a public service employee’s net (pre-tax) compensation is public information, but this is not the actual gross cost of said employee to the employer. The true figure, the true gross compensation incurred by the lender, would be closer to double what is published, much as it is for a mortgage Broker once all true cost of business considerations are factored in. My own personal financial statements bear this out, and the numbers were posted publicly.
Imagine a civil servant with annual gross pay to them personally of $60,000 having published to the taxpayer that their role is a $120,000 per year job. I suspect civil servants of all stripes would rise with shouts of indignation over the public being misguided as to their true income. Also I suspect the public might cry out that many roles need to have compensation reduced. Both parties may have valid points, but is the public interest best served with such an analysis?
This is a nuanced can of worms. And as with any nuanced and multi-layered issue it is easier to ignore the complexities and go for a quick fix. As we have all been told; beware of the unintended consequences of the best of intentions.
Back to the consumer. Again, with just a single data point (X dollars of compensation) how is this meant to be useful? Without another easily accessed data point to compare with what value is there. Is going through the entire mortgage application a second and third time to get to that data point a reasonable expectation to put upon a client, or the industry.
A further challenge with providing this solitary data point is that the consumer does not receive comparable data when comparing an offer from the exact same institution via another channel, such as a branch sales force channel. Yet the compensation to the mortgage representative in the other channel may well be greater, and may well be composed of certain internal sales targets on specific products, such as five-year fixed rate product, or vastly overpriced mortgage insurance, or additional unsecured consumer debt. The list goes on.
The consumer is left with one eye still blindfolded, and with one eye there is no depth perception.
The proposed solutions this far do not show the consumer a documented range of compensation between lenders or products. Nor can an individual broker be expected to prepare and present such a convoluted document as that would be without creating significantly more confusion to clients.
A solitary data point is simply of no use to the consumer.
AN ALTERNATIVE SOLUTION
Perhaps it would provide greater clarity for a consumer to have all lenders regulated by FICOM post publicly on their websites the current rates, the full range of rates from floor rates up along with the corresponding Broker, branch, and mobile rep compensation offered.
This seems like it would offer far greater transparency for consumers, and perhaps if the Credit Unions were all doing so the Banks would have to follow suit from competitive pressure.
This seems far more useful to a consumer than does a single dollar amount buried in up to 35 pages of commitment and compliance paperwork.
Such a plan may also create a far more level playing field by allowing consumers to easily compare.
FICOM would then appear to be demonstrating a far greater concern for both consumer protection and consumer perception, utilising the full scope of their regulatory powers..
The suggestion that a credit union’s mortgage salesforce works in the interest of the Credit Union, and not in the interests of the consumer, may well be clear-cut for FICOM, and to those within the industry.
However, if one were to stop a person on the street and ask them, “does your person at the Credit Union Branch care about your needs and look out for your best interests?” the overwhelming majority would answer something along the lines of, “Yes, we have had the same contact there for years and we call them for all our mortgage/insurance/banking/etc. needs”.
When the consumer is advised to take the (non-competitive) mortgage insurance, or is cross-sold into an $83,000 unsecured credit line (as clients of mine recently were during a branch signing), those clients are not aware of the sales targets, incentives, and additional compensation that the individual signing them up is receiving for promoting that product. The consumer believes they are being advised of solutions in their best interests, and yes the institution will earn a profit – but few consumers would be aware of the extent of compensation and pressure on that individual to sign them up to specific products and programs.
In many cases, as fiscal year-end looms, the pressure on that sales rep to close just a few more clients on cross-sell products, or on a higher than market rate, or on a specific mortgage product, is in the magnitude of tens of thousands of dollars.
The clients knows nothing of this. Should they?
To suggest that consumers should only be made aware of such things, including the basic day-to-day compensation, when dealing with an independent Broker seems a biased and incomplete level of protection of that consumer. It would seem that a regulator’s job is to also address the incorrect perceptions of consumers as a part of addressing the protection of consumers. What better way than by market leveling disclosure, rather than market fracturing dicslosure.
The obligations of a fiduciary vs. a functionary differ significantly. However the distinction is being drawn only by the regulator on a day-to-day basis; such a distinction is not being drawn by the consumer.
Fiduciary vs. Functionary
Clients perceive that Brokers cost them nothing, and that is a reasonable summation in the case of the overwhelming majority of transactions. Indeed a Broker’s training (such as it is) and licensing requirements (such as they are) support this. The statistical evidence of the rates received by consumers supports this as well.
Do the majority of Brokers understand the difference in fiduciary responsibility as opposed to functionary responsibility with regard to their clients? Again, the evidence suggests that fundamentally the answer is yes, they do. And the majority act accordingly.
In any future ruling on this entire matter, the legislation must clearly spell out that all licensed Mortgage Brokers are forcibly and without option in the active role of ‘fiduciary’. Research to date has not allowed the writer of this piece to find such language.
If the option for a mortgage Broker to clearly adopt a functionary relationship with their clients exists, then this needs to also be made clear to Brokers and clients alike.
Thank you for your time.