Referral Fee From a Private Lender
A broker in Edmonton has a client whose bank declined financing because of a thin credit file and a 12-month work history. The broker places the client with a private lender at 11.5% with a two-year term and a 2% lender fee. After funding, the private lender's principal sends the broker a $3,500 'thank-you' payment, separate from the brokerage's disclosed commission, and suggests that more referrals will follow if the broker keeps sending files. The broker's brokerage agreement requires all compensation to flow through the brokerage and be disclosed to the client. The broker has not yet told the client about the $3,500, and the client has already signed the mortgage documents.
1. Identify the conflicts and regulatory issues raised by the $3,500 payment.
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The payment is undisclosed compensation tied to placing a specific mortgage, which creates a direct conflict between the broker's duty to act in the client's best interest and the broker's interest in future referrals. Because the brokerage agreement routes all compensation through the brokerage, accepting the payment personally also breaches the broker's contractual obligations. The client is entitled to know every form of remuneration the broker receives in connection with the mortgage, including its source and amount, before committing. An undisclosed payment from the lender - especially one framed as an incentive for future business - undermines the client's ability to assess whether the 11.5% rate and 2% fee were the best available option and exposes both the broker and the brokerage to complaints and licensing consequences.
2. What should the broker do with the $3,500, and how should the client be informed?
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The broker should not retain the payment personally. The correct step is to notify the brokerage in writing, remit or hold the funds as the brokerage directs, and disclose the payment to the client in writing with a clear explanation of what it is and who paid it. The disclosure should be made promptly, even though the documents are already signed, and should invite the client to ask questions. If the brokerage determines the payment cannot be accepted consistent with its agreement and disclosure rules, it should be returned to the lender. The broker should also avoid any arrangement that conditions future placements on receiving such payments, because that converts a gift into an undisclosed referral incentive.
3. The lender hints at more referrals. How does that change the broker's obligation when advising this client on renewal?
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It raises the stakes considerably. Once the broker has a financial interest in maintaining the lender relationship, there is a real risk of steering the client toward renewal rather than testing the market. At renewal the broker must run a genuine comparison of alternatives, document what was considered, and present the client with the options - including any lower-cost lender the client could qualify for - rather than defaulting to the incumbent. If the broker cannot act impartially because of the referral relationship, the broker should disclose that conflict and consider whether the client should be served by someone else at the brokerage. The test is whether the client, knowing about the referral arrangement, would still see the advice as being in their interest.