Home Loan Experts has extended an “open invitation” to the Productivity Commission, ASIC and APRA to its mortgage broking training course, adding that “grassroots exposure” is required to make “an effective recommendation to government”.
In his response to the Productivity Commission’s (PC) draft report into competition in the Australian financial system, Home Loan Experts managing director Otto Dargan said that the mortgage broking industry is “extremely well run with very few problems”, adding that bringing in more regulations is “likely to do more harm than good unless it is very well considered”.
He therefore invited the commission and regulators to “get involved” in the brokerage’s mortgage broker training “to get a better understanding of what our industry is like and the challenges that we face in originating mortgages”.
“We believe this ‘grassroots’ exposure is required to make an effective recommendation to [the] government,” the MD said.
According to Mr Dargan, the commission was “incorrect” in some of its draft recommendations and findings regarding mortgage broking and overlooked other areas of discussion that, he believes, warranted consideration.
For example, the brokerage MD said that “the number one problem faced by the industry and borrowers” is difficulty in actually obtaining a loan.
Mr Dargan explained: “The complexity and documentation required to obtain a home loan is now at a level that is maddeningly inefficient. This causes cost increases for lenders and mortgage brokers as well as frustration for customers. This is the root cause of many other issues such as new brokers failing to last more than a year in the industry and customers refusing to switch loans despite seeing constant advertising for lower rates.
“A focus on why getting a home loan is now so difficult, and if the reasons behind these barriers are genuine or not, should be the true purpose of the PC,” Mr Dargan said.
“We believe that this is the number one problem faced by the industry and borrowers and yet it is not addressed in the draft report.
“The recommendations made to [the] government need to consider what should be eliminated, such as comparison rates, and this should in fact be the main focus of the report.”
Response to draft recommendations and findings
Referencing the PC’s suggestions that trail commission provides “perverse incentives for mortgage brokers by rewarding them for keeping customers in their existing loans”, Mr Dargan said that this finding was “incorrect”.
“The purpose of trail is to incentivise brokers to stay in contact with their customers and to service their needs for many years after the mortgage is set up,” the MD explained.
Mr Dargan then went on to outline a list of services that his brokers provide in return for trail, including post-settlement follow-ups, annual reviews for the first four years (and biannual reviews thereafter), regular communication on interest rate changes, and notification of any loan changes and term expiries.
“It’s actually short-term incentives, such as upfront commission, that promotes churning, which is often unnecessary when a customer’s interest rate can simply be renegotiated without refinancing,” Mr Dargan said.
“Mortgage brokers that do not remain in contact with their past customers are likely to lose those customers and, therefore, lose their trailing commission. Hence, there is a strong incentive to provide post-settlement customer service.
“Trail supports long-term mortgage brokers rather than people who just try for a few years and then change careers.”
Touching on clawback, Home Loan Experts’ submission suggested that an “unusually high” level of clawback has been experienced recently, as a result of banks repricing investment and interest-only loans to remain within prudential controls.
He said that it was “rare” that a customer should need to change their loan in the first two years in normal market conditions and suggested that the flow-on effects of abolishing clawback would need to be considered with input from industry stakeholders.
“We, as a mortgage broker, would benefit from clawback being abolished; however, we can see there is the potential for new problems to be created and so we urge caution,” Mr Dargan said.
Time to process a loan has more than doubled
Considering the PC’s draft recommendation to potentially impose upon lender-owned aggregators (and their brokers) a legal duty to act in the best interests of consumers, Mr Dargan said that if such a change were to occur, “commissions would need to increase to account for the increase in compliance costs”.
“We estimate that the time taken to process a loan has more than doubled in the last three years due to APRA’s influence on the banks,” the brokerage MD explained.
“These additional costs have not been offset by increases in commissions and have only partially been offset by increases in average loan sizes.”
He concluded, however, that he “see[s] no evidence of an actual problem that needs to be fixed, and so, the best course of action is to do nothing”.
Touching on LMI, Home Loan Experts said that borrowers do have an element of choice in the decision of LMI as “if the customer wants a different LMI premium, they can certainly shop around by choosing another lender.
“As mortgage brokers, we’re already helping our customers to do this because we consider the LMI premium as part of our recommendation,” the company said.
Other areas that Home Loan Experts suggested the PC look at include:
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