The article, published last week, claims a Toronto couple was charged a $10,000 fee for choosing to stay with their existing lender once they learned they would be hit with an even more sizable prepayment penalty of $43,000 from their existing lender.
The brokerage, Monster Mortgage, tried defending itself in the original Toronto Star article.
“We’ve been doing it for at least 15 to 20 years. It’s always been our practice,” Vince Gaetano, president of Monster Mortgage, told the Star. “Our clients are fully explained, what their obligation is. If you’re not happy with the service, don’t sign anything.”
However, Gaetano told MortgageBrokerNews.ca that the article contained incorrect information and that the writer showed little interest in accuracy.
“It’s not a $10,000 penalty, that’s not accurate,” Gaetano said. “It’s 1% of the mortgage amount … I really don’t want to get into the particulars because it’s before the courts.”
Gaetano also said it was a mortgage for a single client and not a couple.
The client signed a contract that stipulated the fee would be charged in the event the mortgage process was cancelled after the client had signed off on a commitment, according to Gaetano. He said the penalty is aimed at helping the brokerage recoup lost commission on the cancelled deal.
Many brokers argue cancellation fees are necessary in today’s mortgage market where rate shopping is the norm.
In a poll hosted by MortgageBrokerNews.ca last year, 68% of industry players said they would consider implementing cancellation fees of some sort in a bid to deter flighty rate shoppers.
“I use cancellation fees, of course; I put them in the contract,” Walid Hammami, a broker with Dominion Lending Centres in Montreal, told MortgageBrokerNews.ca. “If I feel like I’m dealing with a rate shopper, I make sure to put it in; I call it the ‘keep you honest’ clause.”
However, while many are supportive of the practice, some argue the penalty should be a token cost that doesn’t charge the entire potential commission amount.
Still, these penalties may become even more prevalent with brokers doing whatever they can to protect the ever-important efficiency ratios.
After all, as Dan Eisner of True North Mortgage pointed out in the original Star article, lenders sometimes punish brokers whose deals fall apart.
“When we submit a deal, there’s a cost to the lender to underwrite it and they hold it against us if the deal doesn’t close,” he said. “They pay us less (and) give us worse rates going forward.”
Still, industry players point to the importance of properly explaining cancellation fees and prepayment penalties.
“Clients don’t always understand what they are signing,” Mike Maguire, a broker with Mortgage Wise Financial, told MortgageBrokerNews.ca.
Gaetano told MortgageBrokerNews.ca he assumes the agent responsible for the file explained the penalty ramifications to the client.
MBN
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