Updated: Sep 23, 2020
Everyone in the mortgage industry in Canada is familiar with the challenges currently faced at all levels. With the consistent increase in the average value of a home throughout most of the country, incomes levels that are not matching the same growth trajectory, and ever mounting household debt, government has been taking measures to try to curb risk. The tightening of credit requirements to obtain a mortgage has pushed greater use of private lending, and has also resulted in an increase in the rates of fraud.
So what does fraud look like in the Canadian marketplace? There are two primary forms; fraud for housing and fraud for profit. While some will say that fraud for housing is the lessor of these two types, the reality is they both hurt the industry in the long term for several different reasons. Just looking at the more prevalent fraud for housing, where there are falsified documents used to verify things like income, or the applications are 'beefed up' to make it easier to get approved.
Fraud for housing is common across all areas of the country, and it is often facilitated through third party document farms, unscrupulous brokers or agents, real estate agents, and even can involve lawyers and the lenders themselves. Most of these incidents never make it past the lenders internal risk departments, and unless there is actual loss incurred, are rarely reported to the authorities. In Canada we have seen case after case of instances where fraud has caused immense damage to the consumer, and the lender. The most vivid case is that of Home Capital and their near total ruin.
Home Capital was discovered to be rife with fraudulent activity and it was perpetrated by mortgage brokers who had submitted hundreds of millions in volumes to them. The lender appeared to be turning a blind eye to what was happening and the resulting fall out meant most of their executives were let go from their positions. The company worked hard to rebuild and under new leadership has risen from the ashes perhaps stronger than ever.
The mortgage brokers who participated in the scheme however, seem to have gotten away almost unscathed. In fact those brokers are still in operation and were labelled as being "unlucky" for submitting fraudulent loan documents, but none of them were charged for their actions. It is almost surreal that the lender should almost collapse and yet the people who actually submitted the fraudulent documents got away with not even a slap on the wrist.
So why talk about fraud, and how does it relate to the security of a brand? Well, with the Home Capital case hitting international news it placed a spotlight on the deficiencies in the regulatory regime that governs independent mortgage professionals in Canada. Even comparing our industry to the wild west, the lack of regulations in the United States and the resulting collapse of their mortgage industry. As a result provincial regulators across the country are tightening the rules, staffing up, increasing their oversight, and enforcement actions.
In Canada funded mortgage volume is the undisputed king. Lenders reward mortgage brokers for volume, and the brands are always seeking to sell franchises to the highest producers to increase their royalty revenue. It makes sense. In both situations the more volume you produce, the more money you make. For the big brands that also means that the competition for volume is increasing, and with new entrants to the industry (like Haystax) it is only going to be more so.
A lot of the brands have taken to fast tracking new franchises and in some cases even pay the potential candidate a sizeable fee to join them. This means that the brand experiences fantastic growth, but does it sacrifice the quality of the brand?
When you are considering a brand to join one of the things to think about is how tough it is to become a franchisee. Nobody wants to feel as though they are jumping through hoops or being subject to an inquisition, but ultimately that brand is going to be how you identify to the world. If it is really easy for you to join, it stands to reason it is just as easy for anyone to do the same. So then the question becomes, do they really vet the quality of their franchisees or is it just about volumes and writing big cheques? If it is the latter, how would you feel when the headline is "BRAND NAME" caught doing fraud and that same franchise shares your identity as a business?
Franchisors will argue that each office is independently owned and operated, and that protects you from the actions of another office. However, in the eyes of the consumer a brand is a brand is a brand. There may be no legal ramifications to you for the actions of another location, but what of the reputation risk? It is true also that rubber stamping a franchise doesn't mean that it will absolutely result in bad things happening. It does however increase the likelihood and that should be enough to cause anyone to pause.
A franchisors key role is to protect the brand from legal and reputation risk. That means that they not only enforce the rules for branding compliance, but they also have a fiduciary duty to ensure that new franchise owners are properly screened before they are allowed to hang the brand shingle. If the franchise sales process you experience is tougher than others, rather than looking at this as an obstacle to joining a brand, consider that it will protect your business against possible future risk because everyone experiences the same process.
In the previous articles I mentioned the challenges that companies like Subway and Tim Horton's faced. Their franchisees are independently owned and operated, but did you consider that or was it really just all about the brand? Based on consumer ratings for each company regarding brand reputation, it was all about the brand.
I am not suggesting that when you want to join a brand it should be difficult to do so, only that it should not be a rubber stamped process. You need to have full confidence in the franchisors due diligence and the only way to really have that, is to experience it. So don't lament it, embrace it and lean into the process. You will learn far more about the company you are joining and find that as a result your confidence in the business, and the abilities of the franchisor, are higher.
Also, remember that the franchise sales process does not end when you write a cheque. The sales process you experience is going to directly reflect on your experience as a franchisee. It will give you evidence of how strong the on-boarding process is to get you ready to open, and the ongoing support you can expect.
Are you provided with clearly defined steps and a manual that supports what you are told? How engaged is the franchisor with you from the start? (It will speak to what you can expect throughout the relationship). Does the franchisor conduct compliance audits on their franchisees and assist them in staying on top of regulatory guidelines? Do they offer a comprehensive Franchise Operations Manual, and the support, to help you deal with challenges should they arise? These are just a few of the questions you need to ask yourself to make an informed decision.
The demand and drive for volume is a reality that all mortgage brokers, agents, franchisees, and brands need to deal with. However, when you are joining a brand as a franchisee it is an investment in your future and both you and the franchisor need to take that very seriously. If it is all about volume, you might want to take some time to really think about it and consider your options lest you find yourself tied up in something unsavoury down the road because of the actions of another.
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