Did you know that if your Bank is unable to process your Mortgage application due to poor credit, insufficient income or not enough equity in the property, that they will refer you to one of their alternative financing lending institutions.
According to a recent article in The Globe and Mail, this raises questions like the procedures banks use when sending a mortgage applicant to another lender. At the Royal Bank, 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. Normally this requires a brokering license but because banks are federally regulated, they aren’t bound by tough provincial rules that make it an offence to broker without a license.
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 suitable and minimize the borrower’s borrowing costs and provide the right mortgage flexibility given the customer’s needs. Banks do not need to do this
- 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 get paid sales incentives and earn more for selling a higher interest rate
This means it is 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. “Banks are kind of like a mortgage shop” says Ms. Gale, a former mortgage regulator with B.C.’s Financial Institutions Commission, “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.” “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.”
Should you be in the position that your bank cannot help you and they refer you to an alternative lender, just be aware that this may not be the best financing package available to you. Do your research to protect your interests and make sure the financing package is not too expensive.
Colleen Saunders is a 20 year veteran in the mortgage industry, serving Mississauga, Burlington, Oakville and Toronto and offering all mortgage related services such as 2nd mortgages, private mortgages and more.