Hidden fees and penalties are creating problems for many borrowers, says COO
The growing popularity of private lending in Canada has seen an influx of “bad apples” to the space – unscrupulous lenders whose practices don’t have borrowers’ best interests at heart, according to a top executive in the sector.
Chris Cheng (pictured top), chief operating officer of the RESCO mortgage investment corporation, told Canadian Mortgage Professional that brokers and agents needed to be alert to a variety of hidden fees and penalties with the potential to dramatically hike borrowing costs beyond the rate advertised by certain private lenders.
“There are now more players in the private lending industry, which is good – I always welcome competition,” he said. “There are a lot of reputable and well-established MICs and private lenders in the industry, many of which are doing a great job and have a lot of integrity. But on the other hand, you have quite a few bad apples as well.
“I always try to caution mortgage agents and brokers to be careful when it comes to private lenders, just because they are not regulated like the banks. At the banks, you can’t do anything considered unreasonable when it comes to fees or penalties, whereas with private lenders it’s not the same.”
Time to ‘weed out’ bad actors
The industry could do itself a favour by “weeding out” some of those less principled private lenders, Cheng said, something that can only be achieved by brokers and agents doing their due diligence and being able to spot predatory actors in the space.
“Rates and fees are an example. We need to take a look at the total cost of borrowing, meaning the effective interest rate with all other fees involved,” he said. “For a six-month term, someone might offer 7.99% compared to my 8.99%, but if you look into all the hidden fees – upfront fees, approval fees, administration fees – the cost can end up far higher.
“I always encourage brokers and agents to read the commitment front to back. Unfortunately, they usually only look at a few things on a commitment – approval amount, the interest rate, lender fee, and maybe the broker fee. They don’t dig any deeper.”
Even where upfront fees are not present, private lenders can also include backend charges and penalties which aren’t as easy to detect, Cheng said – for instance, a $15,000 or $20,000 discharge fee that ultimately make a loan much more expensive than envisaged.
“This is not from reputable MICs that have a lot of integrity,” he said. “I’ve seen some smaller private lenders and MICs do things like this. For brokers, it’s going to affect your relationship with the borrowers because the next time they need something, they’re not going to come back to you.”
Suitability and borrower responsibility are paramount in today's volatile mortgage market, says leading broker Daniel Vyner of DV Capital.https://t.co/HsAXUHlCtB#mortgagenews #mortgagebroker #privatelending #lenders #interestrates
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 31, 2023
What should agents and brokers keep top of mind?
Rather than focusing on a short-term transactional approach that prioritizes dealmaking and a quick profit above all, Cheng said seeking to build relationships through a responsible and proactive approach should be top of mind for brokers and agents.
“I always urge people not to look at the short term,” he said. “Look at a long-term relationship because if you do a good job and explain why a deal is suitable, clients are going to come back to you.”
Today’s turbulent mortgage environment is presenting plenty of new challenges for borrowers, some of whom might feel compelled to take further action against their mortgage professional if they feel they’ve been wronged or placed in an unsuitable product, according to Cheng.
That’s why it’s doubly important for brokers and agents to make sure they’re doing their due diligence to find the right deal for their clients and guarantee peace of mind for all parties.
“I believe E&O [Errors and Omission] claims today are probably in many cases higher than a few years ago,” Cheng said. “When it comes to private lending, borrowers may sue if they feel they were not told about certain fees or were put in the wrong product. The broker and the agent do to the disclosure, and it has to be done in detail: Why did you pick a fixed rate or variable rate? Why did you pick a six-month or a year?
“My advice is to do the right thing. Dig a little bit deeper, look at the commitment carefully. Pick out all the fees, look at all hidden fees. It might take five or 10 minutes more, but you’re going to save yourself a lot of trouble when the mortgage gets paid out.”
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