Mortgage brokers fearful new requirements will be too costly
Yesterday we looked at how the mortgage broking industry has consolidated with around a fifth of practitioners leaving the industry.
The consolidation has come about partly in response to the compliance costs associated with new licensing requirements.
Mortgage brokers must pay both an application fee and an annual compliance certificate fee that ranges from $450 to more than $26,000 depending on the type of business and number of loans written a year.
Besides the fees, brokers must also invest in staff training and have adequate financial resources to meet ASIC requirements
All these requirements are contained in the National Consumer Credit Protection Act, which replaced a patchwork of state laws.
The regulatory transformation and ASIC’s emphasis on compliance puts a greater onus on all individuals engaging in credit activities to keep the borrowers’ best interests at heart.
“You could argue that we’ve always operated that way, but the important thing now is that it is enshrined in legislation,” says Mortgage and Finance Association of Australia chief executive Phil Naylor, who estimates that 40% of borrowers use the services of mortgage brokers to secure a home loan.
What’s changed?
The NCCP Act is 450 pages long, but the biggest single change to consumers is the awkwardly worded “not unsuitable” clause.
Under the new laws, it’s not enough for mortgage brokers to help customers find a loan – they must ensure that the loan is ‘”not unsuitable”.
Unsuitable loans include contracts where borrowers are unable to make repayments or can only do so with substantial hardship, or contracts that do not meet a borrower’s requirements or objectives.
As a result, brokers must make reasonable enquiries about a borrower’s financial situation, as well as their requirements and objectives. In addition, they are required to make reasonable efforts to confirm a borrower’s statements.
Using this information, mortgage brokers must then determine if the loan product recommendations are “unsuitable”. If deemed that the credit products are “not unsuitable”, the broker can proceed with the recommendations. A broker must also give customers a copy of the assessment if requested.
“The biggest advantage to borrowers is that onus is not just on the lender, but on the broker as well,” says Tim Brown, CEO of Vow Financial, the fifth-largest mortgage aggregator in Australia.
Strings attached?
Some industry observers argue the legislation tips the scale too far in favour of the consumer, taking away borrowers’ responsibility when it comes to credit contract obligations.
Kym Dalton, principal at mortgage industry consultants SAKS Consulting, believes the act will lead to a more litigious environment, as consumers seek to use it to their advantage.
He charges that borrowers facing mortgage stress will be more inclined to blame lenders and brokers for their situation.
According to Dalton, brokers are “putting too much emphasis on what ASIC will do as a regulator and not looking at the consumer end of it – it’s called the ‘National Consumer Credit Protection Act’ for a reason”, he says.
Some brokers warn access to credit will be increasingly difficult for consumers as lenders struggle to define what “responsible lending” really means.
In a client email, Smartline mortgage broker Kevin Lee stated the “knee-jerk reaction” from lenders to the act has been “nothing short of amazing”.
“Each one has their own interpretation of what responsible lending means, and each has introduced more requirements on you and I. Some institutions have covered it off with a half page of extra questions, whilst others have created literally pages and pages of extra compliance.”
One the biggest casualties of lender caution is low-doc loans, according to national mortgage broker Loan Market, part of the Ray White Group.
The company released research in February that noted low-doc applications have fallen by half – from 10% to just 5% of overall loan lodgments – following the introduction of NCCP regulations.