Time's up for unlicensed mortgage brokers
The build-up to a new national licensing regime for mortgage brokers has contributed to an exodus of one in five practitioners as ASIC starts to crack the whip.
From July 1, 2011 all mortgage brokers must either hold an Australian credit licence, be a licensed credit representative or cease trading.
Brokers who operate without a licence or that do not comply with responsible lending obligations (in place for a year now) aimed at ensuring consumers are not recommended unsuitable mortgages risk heavy fines of up to $220,000 ($1.1 million for corporations) and up to five years’ imprisonment.
To date 6,800 licences have been issued by ASIC, the industry watchdog.
Phil Naylor, CEO of the Mortgage and Finance Association of Australia, the peak industry body, says the vast majority of these were issued to mortgage brokers.
No toothless tiger
ASIC has already shown it means business, issuing its first credit infringement notice on June 28, just days before the new regime is set in stone.
The offender was an unnamed Sydney-based mortgage broker, who was hit with a penalty of $27,500 because the company continued to advertise it provided credit services on its website in contravention of consumer protection legislation.
In issuing the notice, ASIC chairman Greg Medcraft made it quite clear that while the decision to issue such notices was not be taken lightly the watchdog will be no toothless tiger:
“The issuing of an infringement notice should send a clear message to traders that we are prepared to take action for the alleged breach,” Medcraft says.
“Mortgage brokers are the gatekeepers between consumers and lenders, and they have an obligation to act in accordance with the law.”
Others to have felt ASIC’s wrath include mortgage broker Moshe Yair Mordechai, formerly of Glenwood, NSW, who was permanently banned by ASIC on June 10 from engaging in credit activities and financial services as a result of a history of serious fraud offences. ASIC also cancelled the credit licence issued to Mordechai’s Australian Lending and Finance Corporation on the grounds that the application was false or misleading.
Industry exodus
Rather than face ASIC scrutiny and a tougher operating environment, many have decided on a career change instead.
The Mortgage and Finance Association of Australia is losing about 200 to 250 members per month. Its current membership sits at 12,000.
This exodus comes on top of a 20% drop in member numbers over the last three years as a result of commission cuts and major bank dominance of lending in the wake of the GFC.
Former mortgage broker Corinne Coombs saw the writing on the wall in 2007.
The effects of the GFC had just started to hit Australian shores, and Coombs says she was frustrated by the major banks, which were dragging out processing times on broker-introduced home loans and threatening to cut their commissions.
“It really affected my health, as I was stressed to the max,” she says.
After six years in the industry, she quit.
The credit crunch led to an almost complete withdrawal of the non-bank sector, a sector previously reliant on brokers for distributing its mortgage products.
This gap was readily filled by the major banks.
Former Competition and Consumer commissioner Stephen King noted at the time that the previous 18 months reversed a 20-year trend in banking competition.
With a near-complete stranglehold on the mortgage market, banks cut broker commissions by about 35% in 2008, blaming higher wholesale borrowing rates for their decision to decrease payments.
In many cases, the cuts were accompanied by the introduction of “quality metrics” – a complicated payment system that rewarded brokers for cross-selling and achieving higher conversion rates.
In short, brokers were suddenly required to do more work for less money.
At the time, the MFAA issued a statement bemoaning the commission changes.
“Time and time again, members have said to me, ‘Why are mortgage brokers, which are for the most part small businesses, being singled out for 35% remuneration reductions in order to boost bank profit margins?’,” says MFAA chief executive Phil Naylor.
Although high property prices in Australia’s major cities mean some brokers have the potential to earn six-figure salaries, the majority sit well below that. According to PayScale, the average mortgage broker brings home $64,000.
Cuts to commissions have been compounded by lender clawbacks.
Clawbacks were initially introduced by banks as a method to deter customer churn – but the government’s recent decision to ban exit fees has prompted an even greater number of players, particularly in the non-bank sector, to introduce clawback measures.
Clawbacks essentially mean brokers who receive a commission for placing a loan with a lender could have to forfeit part or all of that commission should the borrower refinance within two years.
Home Loan Experts director Otto Dargan calls the situation with commission cuts and clawbacks “madness”.
“Brokers’ profit margins are very slim considering we now do online lodgment, need to meet conversion and quality requirements and comply with new regulations. If we don't focus on profitability then we will not be around in the future. I strongly believe that the banks need to increase commissions for brokers to ensure that the good brokers stay in the industry. There has already been a significant loss of talent from the broker market and the retail banking market to other industries.”
Loan minimum volume requirements are another area of angst for brokers. Commonwealth Bank, for example, informed brokers they must submit a minimum of four home loan applications with a minimum of three home loans settled within a six-month period. Brokers who failed to meet the criteria would be required to attend a reaccreditation workshop for a fee of $500.
Effect on consumers
So what do the changes to the mortgage broking industry mean for consumers? Borrowers can also expect to experience a flow-on effect from the commission cuts.
Many brokers are looking at diversifying their service in an effort to boost their bottom line. As result, consumers can expect to be offered insurance, credit cards or personal loans when making a loan enquiry.
According to 1st Street principal Jeremy Fisher, “brokers are looking for a more holistic service offering and are now looking to include the cross-sell more than before. Personally I am not looking to cross-sell to make up for commission cuts, but more so to ensure I am offering my clients the complete service proposition to ensure a long-term relationship with the client.”
Vow Financial’s Brown believes less than 5% of brokers are currently offering a diversified service, but expects we’ll see that increase to 20% over the next 12 months.
Another possible outcome for borrowers could be the introduction of a “fee for service”. The fee for service issue has become a hot topic in broker circles as many look to charge clients a consultation fee in addition to receiving a commission from lenders.
According to Busby, “there is a place for fee for service when you are going beyond a standard transaction. This could be for service, structure, planning or advice that you will not be paid for your service and time.”
Some brokers have already successfully introduced a fee, but whether consumers as a whole are ready to pay for a service that was formerly free remains to be seen.