Disclosure concerning hypothecary referrals

by Robert Nadeau Director General, ACAIQ

July 1999 / Reviewed in March 2008 • Brokers and agents frequently direct buyers to one or more financial institutions to obtain a hypothecary loan. Others make hypothecary brokerage their main activity. If a buyer borrows from a financial institution identified by the agent, the agent's broker often will receive compensation from the institution. This practice is legal, since brokerage of loans secured by hypothec is one of the activities in which real estate brokers and agents may engage.

Conflict or apparent conflict of interest

The agreement between the financial institution and the broker may create a conflict of interest between the broker and the client borrower. In such a case, the law is clear: the broker or agent must disclose this agreement to the buyer IN WRITING. In fact, it is not even necessary for an actual conflict of interest to exist. The mere appearance of a conflict is enough to report it. Therefore, this agreement must always be disclosed.

When to disclose?

The written disclosure of an agreement between the broker and the financial institution must be made without delay, that is, as soon as the broker or agent refers the client borrower to the institution. Not only must the buyer be informed of this agreement before entering into contact with the institution, but he must also know it at the time he decides what lender he will use.

What is meant by "compensation"?

Compensation extends to the broad meaning of the term and is not limited to payment of a sum of money. According to the Office de la langue française, the French equivalent of compensation ("rétribution") means "that which is given in exchange for a service or work (in general, this involves a sum of money)". It may therefore take different forms, including that of a trip awarded after a certain number of clients referred to the institution during a given period, or a line of credit on future compensation. For example, the financial institution could grant the broker who sent it the customer a $2,000 advance on the compensation he will receive upon the sale of the immovable concerned by the hypothec. Another type of compensation is to obtain a brokerage contract on an immovable belonging to the lender, after the broker has referred a certain number of borrowers.

Obligation to advise the buyer

Directing a buyer to a financial institution is an act of real estate brokerage. Therefore, the broker or agent has the obligation to advise the buyer, particularly by indicating what institutions offer him the best conditions, in term of hypothecary rates or terms of payment, for example. The advice provided must never be subject to the benefits that the broker or agent might obtain, regardless of the nature or rate of compensation. The client's interests must prevail.

Payment to the broker and not to the agent

Remember that it is prohibited for an agent to receive compensation from a person other than the broker who employs him or on behalf of whom he is authorized to act. If the agent receives compensation directly, he must turn it over to his broker without delay.

Disclosure form

A disclosure form has been prepared by the ACAIQ. The Association has also incorporated a disclosure clause in the "Disclosure of compensation agreements" form, which may be transmitted to the financial institution. These forms are available on the Association's website (www.acaiq.com). To access, click on ''Our forms'' on the site's home page. A menu will open under this heading. Click on ''Real estate brokerage''. A new page will open. The "Disclosure of compensation agreements" form, in PDF format, is found under ''Recommended forms''.

ACAIQ action plan

In accordance with an objective of our strategic plan, the Association will develop a conflict of interest detection and education program. Information concerning different aspects of the question will be circulated by the end of the year. The Office of the Syndic and the Professional Inspection Department will also begin to provide education on this subject. The Syndic is already raising these questions during his lectures, as is the Professional Inspection Department in its inspection reports and during meetings with agents. The Association also intends to examine advertising on hypothecary loans and make recommendations to the main interested parties so that they accurately describe the characteristics of the products presented. Financial institutions must be made aware of the fact that payments of undisclosed rebates to agents harm the climate of trust which must prevail between consumers and service providers. This type of practice generally perceived by the public as a potential conflict of interest. Managers of real estate brokerage offices will also be made aware of the problems of sums of money and other benefits offered to their agents, as will all the members of the profession and real estate brokerage students. The public will be informed of the most common conflict of interest scenarios that a broker and agent may face in their professional practice and the ways in which they should advise their clients.