[Author – Tim ODwyer]
It has been almost two years since the release of the Ministerial Council of Consumer Affairs’ Discussion Paper detailing options for a national regulatory scheme for finance and mortgage brokers.
Easy money and climbing interest rates had combined to deliver unprecedented rates of mortgage foreclosures, amid stories of locked-out homeowners and thousands of others hovering on the brink of losing their dream. One Western Sydney real estate agent spoke of loans being pushed: “You’ve got your no docs, your low docs…if you’ve got bad credit, don’t worry, come and see us, all those things.
And we’re seeing quite a few where the people just shouldn’t have been borrowing the amount of money that they’ve borrowed.”
The next day on the same programme the Chief Executive of the Mortgage Industry Association conceded there were crooks working in the loan market. He claimed that his association had been urging governments for national uniform legislation to regulate the industry and rid it of these sharks. The governments, he said, “all agreed that they will enact the same legislation in each State and Territory, and that’s the current project to get that up and running within the next 18 months to two years.”
Meanwhile the Ministerial Council’s Discussion Paper was pretty frank (and prophetic) about the finance and mortgage broking industry and its various players:
- As banks, credit unions and building societies increasingly use brokers to source loan applications, fifty new brokers enter the market each week.
- Because the nature of the broking industry does not lend itself to improvement through competition, the increased numbers in the market has led not to improvements but rather to an increased incidence of consumer detriment.
- The use of brokers can leave lenders exposed to a higher risk of defaulting borrowers and susceptibility to mortgage fraud.
- Commission-based remuneration creates the possibility of conflicts of interest between brokers and consumer clients.
- The minimal barriers to entry to the broking industry as well as minimal capital requirements have encouraged fly-by-night operators and some who run significant phone/fax practices without even meeting clients.
- The market is open to operators who seek only to defraud or exploit vulnerable or unsuspecting consumers dependent on them for advice.
- One fraudulent broker who was prohibited from trading in New South Wales has been operating in Queensland.
- Consumers can suffer financial loss when refinancing, while refinancing with “equity skimming” can involve conduct which is deliberate, systematic and designed to exploit, rather than to assist, consumers in vulnerable situations.
- Brokers in any sector will always have some propensity for fraud and improper practices.
- Unscrupulous brokers can cause people to enter transactions that are potentially hazardous and likely to transfer wealth from consumers to brokers or to third parties.
- State Fair Trading agencies may act against dishonest brokers under their Fair Trading laws, but only major scams are likely to be pursued – leaving most consumers to fend for themselves.
- Some brokers, although intending to act honestly, simply lack appropriate skills or knowledge.
- In any case consumers are unable to readily distinguish between unscrupulous brokers and those acting ethically.
- There is no general obligation on brokers to provide up-front disclosure on their role to consumer clients.
- Brokers have no statutory obligation to undertake enquiries and research to have a reasonable basis for recommending a particular credit product.
- Because brokers access a limited number of lenders they are not necessarily sourcing the best loans available for consumers.
- Some broker-arranged loans will be more expensive than those arranged directly with lenders.
- If no commission is paid, consumers may not be directed by their brokers towards cheaper or competitive loans.
- The size of the up-front commission is likely to be the major influence on a broker’s choice of loan.
- The fractured nature of the broking industry militates against effective self-regulation.
- Any self-regulation of brokers to date has not led to universally high levels of disclosure, and only New South Wales has comprehensive statutory requirements for brokers to disclose their fees.
- Attempts at improving industry standards through self-regulation are relatively undeveloped with a generally limited impact.
- Brokers’ payments to third parties for referring potential clients are widespread.
- Brokers are generally characterised in law as agents for borrowers and not lenders.
- Lenders have minimal incentives to maintain vigorous and regular supervision of the conduct of brokers.
- The current means of obtaining redress against brokers are largely inadequate to offer timely and effective remedies for consumers.
- It is not easy to evaluate the prospects of success of any court action against a broker given the lack of clear industry standards on acceptable broker behaviour. Courts have been extremely conservative in their application of contract law, and in their assessment of damages against brokers.
- A competitive and fair finance broking market would ideally provide consumers with sufficient information to secure the cheapest available broking advice which would be sought to choose the best available loans for consumers’ circumstances.
- Because the finance broking market does not operate like this, government intervention would assist in bringing about these ideal conditions of operation.
- Such government intervention should enable consumers to choose finance brokers who will act in their best interests and be competent to recommend suitable loans; require brokers to demonstrate their recommendations are appropriate for consumers’ circumstances and, where possible, the best available; empower consumers to influence broker behaviour through effective remedies against those who act unfairly or incompetently; and reassure lenders that the incidence of brokers’ mortgage fraud would decline with offending brokers being excluded from the market place. (What a wish list!)
- The “emerging” and proposed option for government action is nationally uniform or consistent “broker specific” legislation.
- Such legislation would include broker licensing with a required training component.
- National finance broking legislation would also require brokers to have written contracts with consumers before acting.
- Such contracts would detail brokers’ access to credit providers and specify the credit required by consumers.
- Brokers would be required by law to provide consumers with written explanations on why recommended credit products are the most appropriate for the consumers’ circumstances.
- Brokers would be required to have reasonable bases for recommending or obtaining particular loans for clients. (The legislation would stipulate that a reasonable recommendation must take into account whether a client can repay the loan without substantial hardship.)
- It is proposed that brokers must hold professional indemnity insurance, with a possibility that brokers might have to contribute to a fidelity fund.
Don’t hold your breath. This week The Courier Mail newspaper reported that Queensland home buyers may finally have “some protection” from shonky mortgage brokers under new laws “being considered” by the State Government.
The Fair Trading Minister said that the Government was “pushing ahead” with plans to regulate the broking industry. The Courier Mail however pointed out that any local “crackdown” would be designed to complement the “long-awaited” national legislation, which had “been under discussion for more than two years.”