In support of mortgage brokers

There’s been a lot of media scrutiny over the home loan system ever since the opening statements of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (also referred to as the Productivity Commission).

And rightly so. With the Australian Dream still tied to owning your own home, many Australians either want to or already have a home loan, so everyone has a stake in the story. But the media circus has only given voice to the already-vocal banking industry; little has been said on behalf of those who act as intermediaries between the general public and the lenders: mortgage brokers.

Mortgage brokers introduce choice, competition and service into the home loan industry. Without mortgage brokers, the major lenders would have no incentive to offer innovative lending products or better interest rates; the non-major lenders would be shut out of the industry due to their lack of retail network which is essential for customer engagement; and customers would have to work directly with a single lender to get a home loan and just accept whatever that one lender tells them is the best rate – the CEO of HashChing, Mandeep Sodhi, was a bank executive who received a ‘staff discount’ on his home loan that turned out to be a higher rate than what his friend got from a mortgage broker.

I support mortgage brokers. I support the mortgage broker industry. I work with mortgage brokers every day, as I have for years, and I know what they’ve faced, what motivates them and what regulates them.

The ASIC Review and the Productivity Commission

It’s unjust to imply that mortgage brokers have been running around unregulated and unquestioned. Mortgage brokers have only just emerged from their own period of direct scrutiny under the ASIC Review of Mortgage Broker Remuneration.

After ASIC was ordered to review the mortgage broker-consumer relationship in 2015, they gathered 4 years of data for over 1.4 million home loans. They surveyed 3,000 consumers to learn their perceptions and experiences with brokers and analysed $550 billion in new loans to see where brokers sent loans and how much they got paid. The review took two years to complete.

On the back of the review, representatives of the industry came together to release a landmark reform package to improve consumer outcomes and confidence in the mortgage broking industry. 

That was in December 2017. Then the Royal Commission began, and after two years of investigation, as they are trying to apply the reforms and recommendations that experts have spent years painstakingly working out, brokers have been pushed into the spotlight again.

The chairman of the Productivity Commission, Peter Harris, said: “You would expect that when you go in to see a broker, [they are] working for you, but the brokers themselves say they’re paid by the banks and they see themselves as working for the banks.”

A conflict of interest?

That’s just not true. It might be the case for mobile lenders, who are directly aligned to a bank, but a mortgage broker has no such ties. A broker, who has access to 20+ lenders, acts as a consumer advocate and assists customers through the home lending journey. 

Once a mortgage broker has completed a detailed and complex consumer ‘fact find’ and successfully reviewed all the supporting documents, they are then in a position to provide the right lender options to their customer. As the majority of lenders pay approximately 0.65% upfront and 0.15% trail commission to brokers via industry aggregators who are another chain in the link between the customer and the lender, there is little incentive to select one lender over another.  In fact, lenders that have traditionally paid a slightly higher upfront commission to brokers did not successfully generate the highest volumes.

A broker is only remunerated if the loan settles – no matter which lender provides it.

Furthermore, a broker provides personalised service and advice over the life of the loan, utilising their years of experience and everyday involvement in the industry to ensure the customer doesn’t fall out of the loop on one of the most important financial investments of their life.

Let’s be honest: any concern regarding a perceived conflict of interest could be mitigated by lenders divesting their ownership of mortgage broker channels as the FSA required UK lenders to do. Even more than that, the current rate at which technology in the financial services industry is improving will be a powerful catalyst for increased consumer confidence and channel strength.

Tech platforms that provide brokers with tools to access their consumer’s detailed income and expenses as part of the loan application process can only enhance the current confidence lenders and consumers place on mortgage brokers to complete this analysis. With the advent of open data, lenders would be better positioned to work closely with fintech companies and industry participants to ensure that mortgage brokers analysis is comprehensive and aligned to their lender policies, and the best interests of the consumers at the same time.

Let’s not forget the existing regulators: aggregators and the NCCP

Mortgage brokers cannot easily directly accredit themselves with lenders due to minimum lodgement volumes, which are a significant hurdle for a single broker. As a result, they are required to select an industry aggregator as a business partner. Each aggregator offers brokers a discrete lender panel to their mortgage brokers (around 20-33 lenders for each aggregator). 

Although the majority of aggregators share the same key lenders on their lender panels, there are unique lenders to each panel also. Aggregators often provide services to brokers such as software and technology, training, general business support and office administration, and they help brokers navigate the regulatory and legislative landscape and mitigate their risk and compliance.

As mortgage brokers are not allowed to work with more than one aggregator, brokers have a cap on the number of lenders they can access for their client. FinTech platforms like HashChing however are ‘aggregator agnostic’ – we have brokers who work with them all – and therefore provide consumers with the largest volume of pre-negotiated mortgage broker deals in Australia.

These aggregators provide a level of regulation for brokers, and they aren’t the only ones. The National Consumer Credit Protection Act 2009, or NCCP, is legislation that’s designed to protect consumers and ensure ethical and professional standards in the finance industry.

In terms of brokers, both lenders and mortgage brokers must hold a credit license or be registered as an authorised credit representative. This means they’re bound under the law and ASIC to provide consumers with loans that are Not Unsuitable.

That term sounds vulnerable to abuse, but the term ‘not unsuitable’ was chosen because it puts the responsibility onto the consumer to prove that the loan was unsuitable if they choose to sue. The broker’s and lender’s responsibility is to recommend a product after making proper enquiries and verifying the customer’s information: it is then the customer’s choice as to whether a loan really is suitable for them. That element of choice is vital.

The ‘fee for service’ recommendation

The remuneration model applied today ensures that consumers have choice of service channel; direct to branch or via a mortgage broker. As previously outlined, mortgage brokers have successfully delivered much needed competition to the market, especially for the long list of lenders that do not have retail outlets for customers. 

Introducing a ‘fee for service’ in only one channel would effectively decimate that channel. This view has been supported by ASIC. 

Consequently, a fee for service model would reduce market competition and consolidate the flow of lending back to the majors – who openly acknowledge systemic issues with regards to their banking culture. The Royal Commission will no doubt be valuable for reforming those issues, just as the ASIC Review into mortgage brokers has resulted in the CIF’s already well-advanced implementation of key changes.

The fee for service model would almost certainly result in higher interest rates being paid by consumers, as lenders would be reticent to fully discount loan deals due to decreased competition and a focus on profit; mortgage brokers tend to fully discount their rates, thus encouraging greater competition in the market.

Fundamental alterations to the operation of the mortgage broker channel will only play into the hands of the major lenders, who are keen to divert negative attention and attract more business. Mortgage arrears and defaults are at the lowest they have been, and since the ASIC Review, there is greater understanding and transparency in how the broking industry works in the first place.

Serving two masters or twenty?

The Royal Commission wants to know who mortgage brokers work for. They imply that brokers can’t work for two masters – the lenders and the consumers. They imply that brokers must be working for the lenders as the lenders are the ones who pay the brokers.

Yes, the lender who provides the loan pays the broker. But everybody only gets paid if the customer’s loan is settled, and brokers have access to 20+ lenders who are all going to pay relatively similar amounts no matter which one the customer chooses. Most borrowers don’t know that there are over 100 lenders in Australia who can provide great rates and service; how can they access those without brokers?

That’s why brokers work for the customers first and foremost. It’s in the broker’s best interests to ensure the customer is happy with a suitable loan from the right lender, and that the loan settles according to the lender’s usually complex financial and legal requirements.

We’re not the same

The Royal Commission’s recommendations for brokers are surpassed by those already being instituted by the CIF following ASIC’s Review of remuneration. Moreover, the Commission sought to paint all brokers with the same brush, those directly aligned with banks such as mobile lenders and those who work with aggregators, and it’s an unjust comparison, especially when it gets a great deal of attention in the media and leads people to think that all brokers are the same.

We’re not the same. That’s the point. Without the competition, choice, and personalised service that mortgage brokers provide, the Australian home loan industry would look very different. 

For our HashChing brokers: please join us in our Facebook group “Brokers and Business” where I'll continue to share tips, information and assets, news, and support. For those brokers keen to join HashChing, register with us here!

You can follow me on twitter @siobhanonthego. I'd love to hear your thoughts on this there or in the comments below.