The Prepaid Fee and the Undisclosed Referral
Priya is a licensed mortgage broker in Ontario. She is approached by Daniel, a real estate agent, who offers to refer his buyer clients to her in exchange for a $500 payment per closed file. Priya agrees verbally. Separately, she collects a $1,200 'application and processing fee' from a client, Marcus, at intake, before any lender has been identified. Marcus later learns his file was declined by two lenders and Priya kept the fee. Marcus also discovers Priya never disclosed the $500 referral arrangement to him, and that the referral payment was built into the brokerage's cost structure that influenced the rate quoted. Priya argues the fee was 'earned' because she did substantial work, and that the referral was a private business matter unrelated to her licensing obligations.
1. Evaluate Priya's conduct on both the fee collection and the undisclosed referral. Identify the specific obligations engaged and whether her defences hold.
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Fee collection. Ontario brokers may not collect fees before the services are actually provided unless the fee arrangement is fully disclosed in writing and the client understands what triggers the fee. Collecting $1,200 at intake, before a lender is even identified, and retaining it after two declines raises two problems: (1) the fee must be disclosed in a written agreement signed before collection, with clear terms on refundability; and (2) retaining a fee for services not delivered is inconsistent with fair dealing. Priya's 'I did substantial work' defence fails because the test is not effort but whether the fee was disclosed, agreed, and earned against defined deliverables. A client who receives no financing and no defined work product has a strong claim to a refund.
Undisclosed referral. A payment to a third party that influences which clients are steered, or that is embedded in the cost structure affecting the rate, is a conflict of interest that must be disclosed to the client in writing. Priya's 'private business matter' defence fails: the conflict arises from her licensed activity, not from the payment being personal. The referral fee was effectively a cost of doing business passed into the rate, and Marcus had a right to know.
Conclusion. Both defences are untenable. Priya should refund the unearned portion of the $1,200, disclose the referral arrangement to affected clients, and expect regulatory scrutiny for the fee and conflict failures.
2. What should Priya have done differently at intake, and what documentation would have protected both her and Marcus?
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At intake she should have:
- Signed a written service agreement stating the fee amount, when it becomes payable, what services trigger it, and the refund policy if no lender placement occurs.
- Deferred collection until a defined milestone (e.g., a signed commitment) or held funds in trust with clear release conditions.
- Disclosed the referral arrangement in writing to Marcus, including the amount and that it may affect the products or rates offered, and obtained acknowledgment.
- Documented the lender search - which lenders were approached, why they declined, and what alternatives were offered - so the work performed is evidenced.
With those steps, the $1,200 would be defensible as a disclosed, earned fee, and the referral would be a disclosed conflict rather than a hidden one. The documentation converts a judgement call into a record.