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Mortgage brokers 'create risks' for smaller lenders: Moody’s

by James Mitchell4 minute read

A new report by Moody’s Investors Service claims that third-party channels create risks for Australia’s mutual lenders by burdening them with systems and resources to control underwriting quality.

Released this week, the report entitled Australia's Mutual Financial Institutions: Rising Competition to Challenge Growth found that the proliferation of online and broker channels has "shifted customers’ focus towards convenience and price".

Mutual lenders such as credit unions and building societies are increasing their lending via third-party channels as they look to grow beyond their limited distribution networks and core customer sets, the report said. 

“The credit implications are mixed,” it said. “Whilst these third-party channels could help diversify mutuals’ loan portfolios, they also create risks, given that a mutual’s knowledge of, and relationship with, customers sourced from third-party channels may not be as strong as those sourced through its proprietary channels.

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“Furthermore, it can be difficult to control underwriting quality when lending via third-party channels, which places a greater burden on mutuals to ensure the adequacy of systems and resources to manage risk.”

Last week, Tasmania-based lender MyState Bank – which sources more than half of its home loans through the third-party channel – admitted that its broker strategy carried risks.

“There is no doubt that greater use of the broker channel to generate growth and increased exposure to non-traditional markets involves an element of increased risk,” MyState chairman Miles Hampton said.

“However, loan quality remains strong, and we have made changes in our product offerings specifically targeted at minimising risk.”

Industry bodies reacted vehemently when APRA chairman Wayne Byres claimed in a speech last month that broker-originated loans tend to have a materially higher default rate compared to loans originated through direct channels.

“This does not mean third-party channels have lower underwriting standards, but simply that the new business that flows through these channels appears to be of higher risk, and must be managed with appropriate care,” Mr Bryes said during a speech at the Australian Business Economists Lunchtime Briefing in Sydney on 27 August.

FBAA chief executive Peter White responded by stating that he will work with APRA and lenders to ensure the channel is managed appropriately for the benefit of customers, banks, brokers and the Australian financial system.

“If the regulator starts pointing the finger at brokers, it has to be said there are three more fingers pointing back at the banks,” he said.

MFAA chief executive Siobhan Hayden called on Mr Byres to share the data that led to his opinion, as the association is yet to see any information that supports his view.

“In fact, I advocate that the broker channel delivers a higher standard of compliance and assessment than the propriety channel, and some major lenders have confirmed my view,” she said.

[Related: MyState admits 'increased risk' of broker strategy]

Mortgage brokers 'create risks' for smaller lenders: Moody’s
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James Mitchell

James Mitchell

AUTHOR

James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.

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