Consumer-driven reform needed for mortgage brokers: Customer Owned Banking Association
The Customer Owned Banking Association (COBA) has outlined three specific areas of banking reform that would allow customer owned banks to serve the needs of more Australians in its submission to the House of Representatives Standing Committee on Economics Inquiry into Home Ownership.
The three areas are: improving banking competition, making it easier for Australians to save for a deposit, and consumer-empowering reform to mortgage brokers.
COBA has many concerns about the current arrangements in the mortgage broker market.
"A number of consumers incorrectly believe that mortgage brokers have access to the products of all lenders. They don’t. A significant number of banking institutions, including many from the customer owned sector, do not make use of broker channels.
"Brokers are only required to recommend a loan that is ‘not unsuitable,’ a far cry from the best home loan for the customer, and possibly not even a particularly good product for the individual.
"COBA is also concerned about the lack of disclosure regarding the level of vertical integration within the finance industry. According to the Mortgage and Finance Association of Australia, aggregation/broking groups that are owned by the big four banks, totally or substantially, comprise an estimated 40 per cent of mortgage brokers.
"COBA notes the current arrangements adopted around mortgage brokers can create an incentive for them to optimistically assess loan serviceability (i.e. the capacity of the customer to meet regular repayments).
"Often, a mortgage broker has an incentive to advise a customer to take out a larger loan, rather than the loan that is in the customer’s best interest.
COBA suggests that the Economics Committee Inquiry into Home Ownership supports the FSI’s findings about regulators and competition.
"The Financial System Inquiry (FSI), chaired by David Murray, has delivered a blueprint for a more competitive banking market, which would benefit home buyers through increased choice, greater bargaining power, downward pressure on loan pricing, and product innovation."
"A more competitive banking sector will deliver sustainable positive outcomes for all banking customers, including home loan customers.
"Customer owned banking institutions were strong supporters of First Home Saver Accounts (FHSAs), and were disappointed to see this initiative abolished in 2014. While the product had some limitations and significantly underperformed in terms of uptake, COBA believes that a better targeted product could deliver significant benefits to aspiring FHBs [first home buyers].
COBA recommends that consideration be given to introducing a scheme designed to assist first home buyers to save a home deposit.
Another recommendation is that the tax rate applied to deposits be reduced to place them on a more equitable tax footing relative to other investment options.
"Stamp duty represents a significant additional upfront cost to home buyers, and is a further barrier standing between FHBs and their first home. While State and Territory governments do provide stamp duty relief in some circumstances, the eligibility requirements are often quite restrictive.
"COBA is also concerned about the level of concentration and vertical integration within the broker market. We believe consumers deserve clearer information so they know who they are dealing with, without having to wade through fine print to uncover ownership structures.
"[COBA recommends] That the Committee consider reforms designed to improve transparency and the level of consumer education about mortgage brokers.
"COBA believes that the implementation of these recommendations would improve the operation of the home finance market, and help customer owned banking institutions help more Australians.