Brokers – Digital Finance Analytics (DFA) Blog

Mortgage fraud ‘systemic’ in Australia, UBS survey shows

The ABC reports that mortgage fraud is “systemic” in Australia, with more than a quarter of recent home buyers admitting they misrepresented some information on their loan application.

The disturbing results come from a survey of 1,228 people who had taken out a mortgage over the past two years, conducted by investment bank UBS.

The key finding was that 28 per cent of people surveyed said their mortgage application was not totally factually accurate.

Of those who admitted misstating information, the bulk said their application was “mostly factual and accurate”.

However, one-in-20 mortgage applicants admitted that their loan application was only “partially factual and accurate”, while 2 per cent “would rather not say”.

Out of the people who misrepresented parts of their application, 14 per cent said they overstated household income, 13 per cent overstated asset values, 17 per cent understated their debts, more than a quarter understated living expenses, while over 40 per cent said “other” or would not say what they had lied about.

Around 12 per cent admitted to misstating information in multiple areas of their application.

“However, there was a correlation between borrowers who misrepresented their application and: those whose expenditure was broadly equal to their income; stated they are under financial stress; or have missed a debt payment.”

UBS added that, if anything, the survey was likely to understate the proportion of people who had fudged some part of their application.

“It is difficult to reject these findings, in our view,” argued the UBS analysts.

“If anything, we believe it is more likely these figures may understate the level of misrepresentation in mortgage applications as some respondents may not want to state they were less than completely accurate despite anonymity.”

Mortgage misrepresentations more prevalent with brokers

While the overall proportion of people who misstated information on their loan application was high, an even greater proportion who applied through a mortgage broker misled their lenders.

Almost a third of people who got their mortgage via a broker admitted they were not “completely factual and accurate” with their details. That compared to 22 per cent who applied directly through the lender.

Embed: Accuracy of mortgage applications, bank v broker

The rate of applicants who admitted to being only “partially factual and accurate” was twice as high among mortgage broker customers as with direct bank applications.

While only 13 per cent of loan applicants who went through a bank and had misstated their details said their banker suggested doing so, the result was vastly different for mortgage brokers.

There was also evidence brokers were becoming more likely to advise clients to make misrepresentations.

“This was statistically significantly higher than the 24 per cent of respondents who had misrepresented an application on the broker’s suggestion in 2015,” UBS added.

The detailed study undertaken by UBS backs a report based on shadow shopping in western Sydney by Variant Perception’s Jonathan Tepper and covered in the Financial Review earlier this year, entitled The Aussie Big Short.

UBS said this should trigger alarm bells within the banks.

“We believe banks need to tighten underwriting standards via the broker channel, even at the expense of near term market share,” it warned.

The End of the Commission Remuneration Model In Financial Services?

The wind of change seems to be blowing though the financial services sector as the focus on doing the right thing for customers increases. The industry’s dirty secret is that many in the sector are rewarded on a commission basis for selling products and services, irrespective of whether they are right for the customer concerned. Recent scandals have been all about the interests of the industry coming ahead of consumers, whether employed by the firm, or an “independent” advisor.

This entrenched practice took root as players sought to boost profit by cross selling and up-selling more products to their customers, and targets, plus commissions became a pretty standard, if undisclosed, practice when working with third party advisors.

Whether a bank teller, a financial advisor, a mortgage broker, or other bank employee; behaviour is likely to be influenced by expectations of personal remuneration. This is not transparent to the consumer, who relies on the advice.

But this week we may be seeing signs of a new set of practices emerging. Westpac has said it will no longer pay sales commissions to bank tellers, but performance will be assessed by customer satisfaction. Changes are also afoot in the sales force too.

From next month we’re planning to remove all product related incentives across our 2,000 tellers in the Westpac branch network. Rather, their incentives will be based entirely on customer feedback about the quality of service they received in the branch.

We have also revisited the way we reward specialised sales roles in our network. We will no longer vary reward values based on different products; but rather our people will be rewarded for meeting the full range of our customers’ needs.

The Hansard record of the new RBA Governor’s comments this week made some interesting points about remuneration in financial services and the cultural issues arising.

Mr THISTLETHWAITE: You mentioned earlier your mandate in terms of financial systems stability. There has been a whole host of scandals in recent years with the banks, particularly with their wealth management arms. It is an issue that this committee is going to inquiry into in the coming months. This is a bit of a left-field question, but, from a regulatory perspective, if you were redesigning our financial system regulation in Australia what would you change?
Dr Lowe: I do not think a whole redesign is required.
Mr THISTLETHWAITE: Would you change anything?
Dr Lowe: APRA is the financial regulator, so it is not the Reserve Bank. And APRA has made many changes to the nature of financial regulation recently—really around capital and liquidity. So I think the finance sector feels like it has gone through a period of very accelerated regulatory change. It is best, probably, to kind of let that settle and see how the system adjusts to it. I sense that you are asking about other types of regulation that really go to the issue of bank culture.
Mr THISTLETHWAITE: Is there anything you want to say about that?
Dr Lowe: I cannot help but agree with you that there have been too many examples of poor outcomes, particularly in the wealth management and insurance industries. That is disappointing to us all.
Maybe I can make two other remarks—and, again, a broader perspective. The Australian bank system has performed well over a couple of decades. We did not have the excessive risk-taking culture in the lead-up to the financial crisis. I think that is really important. If we had a really bad risk-taking culture, we could have ended up in the same situation as many other countries did. Part of it is due to APRA’s good regulation, but the banks did not develop this culture that we saw overseas. So that has given us more stability. Again, that is a first-order point.

In terms of behavioural issues—it is hard. I think it comes down to incentives within the organisations, and that is largely remuneration structures. That is a responsibility of management. And, probably, APRA can play some constructive role in encouraging remuneration structures that create the right incentives within organisations. If there was one thing that I could focus on—it is not my responsibility; it is not the Reserve Bank’s responsibility—is making sure that the remuneration structures within financial institutions promote behaviour that benefits not just the institution but its client.
What I would like to see is, really, banking return to be seen as a strong service profession. I do not know how far away from that we are. Banking, historically, has been a profession—a profession of stewardship, custodians, service, advisory, counsellor. Is not a marketing or product-distribution business; banking is a profession.

I like the Banking and Finance Oath. I do not know whether you have seen this, but a number of people have signed up to this, including me, and I encourage others to do it as well. Its first line is: ‘Trust is the foundation of my profession.’ We have got to move beyond people just signing this oath to actually making that in practice. I do not run a commercial bank. I do not know how to embed within a commercial bank the idea that trust is the foundation of the noble profession that we do. It is largely about incentives and remuneration.

The Australian Bankers Association had previously announced a Independent Review of Product Sales Commissions and Product Based Payments

The final report is expected to provide an overview of product sales commissions and product based payments in retail banking and other industries, identify possible options for better aligning remuneration and incentives so that they do not result in poor customer outcomes and set out actions which may be considered by banks and the banking industry to implement the findings.

This puts the current ASIC remuneration review of mortgage brokers in a new light perhaps. The outcomes are expected in December. However, this review is being done in secret. As we said in an earlier post:

ASIC has evidently released the final scope of its review of remuneration in the mortgage broking industry – but only to industry insiders. According to media, the corporate regulator has confirmed it will review the remuneration arrangements of “all industry participants forming part of the value distribution chain”. This includes lending institutions, aggregation and broking entities, and associated mortgage businesses – such as comparison websites and market based lending websites – and referral and introducer businesses.

But why, we ask, was the scope not publicly disclosed? Why are ASIC seeking input only from industry participants? We agree the remuneration review is required – but the lack of transparency is a disgrace.

Our guess is that commissions will not be banned, and the findings will focus more on better disclosure.

It is worth remembering that before that the changes to FOFA were disallowed in the Senate in late 2014. The changes would have made if easier for employees to receive incentive payments for product sales.

So now the climate appears to be changing. Will other banks follow Westpac’s lead? Will the remuneration review lead to changes to commission structures (especially trails) or a ban? Could we be seeing signs of fundamental cultural change in the industry? And will consumers be better off?

Worth reflecting on the changes which have emerged in the UK.

From April 2016 investment middlemen, including financial advisers and do-it-yourself investment brokers, will no longer be able to accept commission payments from fund companies.

The changes coming into force are the final phase of a series of new rules that started to apply at the start of 2013, which stopped advisers receiving ongoing, or “trail”, commission on new investments.

This rule has applied to brokers since April 2014. Since this date brokers have not been able to receive ongoing trail commission on new businesses, due to the legislative changes.

But until April 2016 commissions could still be deducted from earlier investments. And it is that backlog of investment which, for many, will soon become cheaper.

From April, instead of taking commissions, all middlemen will have to charge an explicit fee, expressed either as an hourly rate or as a percentage of savers’ investment pot.

The new rules were ushered in to remove any potential bias. But – and this is the catch – these old-style payments will not cease for some investors, such as those who went direct to the fund provider, or invested through a bank.

Suncorp Launches Online SME Loan Lodgement For Brokers

From Australian Broker.

Non-major lender Suncorp Bank has launched online submissions for small business lending, in a move which it touts as an “industry first”.

Brokers lodging small business loan applications to Suncorp will now be able to do so electronically via NextGen.Net’s ‘ApplyOnline’ system. The non-major says this will translate to increased efficiencies, faster turnaround times and improved functionality for brokers.

Suncorp’s national small business manager, Robynne Frost, said the new process is one the solutions Suncorp is offering as a part of its commitment to support brokers diversify into small business lending.

“Suncorp Bank is committed to investing in technology to improve the lending experience for brokers and their customers,” she said.

“The addition of small business lodgement through ApplyOnline enables brokers to easily transition from home loans to small business with a streamlined ‘combination’ application.”

The non-major is also offering SME Masterclasses, BDM support and improved commissions for brokers operating in the SME sector.

“The SME sector represents a significant opportunity for our broker partners and Suncorp Bank is committed to supporting them as they look to expand and diversify their businesses,” Frost said.

NextGen.Net sales director Tony Carn said this announcement is market leading.

“Suncorp Bank has again shown market leadership in the broker channel through the rollout of ApplyOnline electronic lodgement for small business loans.

“In such a competitive and ever-changing market it is great to see Suncorp Bank going above and beyond to meet the needs of Australian brokers.”

Home Loan Churn Up, But Not Away

Currently more than 26 percent of the home loan lending book is being churned each year, reflecting strong refinance demand, low rates and massive marketing campaigns. So it is interesting to look at the trend data, especially in the light of the New Zealand Reserve Bank data we discussed yesterday, which indicated 35 per cent of loans there are churning annually.

Data from the ABS enables us to analyse the proportion of the home loan book which, by value is churned each year. To do this we compare the loan stock data, with the loan flow data, by total value pools. Here are the result for the ADI’s.

The stock figure takes account of new loans written, refinanced and repaid. The flow data shows us the new loans written. So we see a rise in churn from 2012, moving from about 20 per cent to more than 26 per cent. We also see a slowing turn in recent months, suggesting perhaps that the refinance drive has peaked. That said, there are a number of marketing campaigns suggesting that borrowers should refinance now if their mortgage rate does not have a three in front of it! On average, households with a loan of more than a year old would do well to check their rate.

All things being equal, you could say that the average loan is under four years, though in the real world, there is diversity, with some loans turned over every one to two years, and others retained for a much longer term.

What is also striking though is that in the 2000’s churn moved up from around 13 per cent to reach a peak of 39 per cent prior to the 2007/8 GFC. This rise in churn can be mapped to the rise of mortgage brokers in Australia (whilst the correlation could be coincidence, we suspect there is a link) as many brokers were on commission structures without claw-backs, with upfront commissions more generous that tail commissions. Changes in regulation and commission structures made the churn harder to execute later.

Still a quarter of the book turning over annually is pretty amazing, considering all the activity (and fees etc.) which are generated. It also suggests to me that bank’s should be thinking much harder about retention strategies.

Are Broker Commission Trails At Risk?

From Australian Broker.

Banning trail commissions would have dire consequences on the mortgage broking industry, brokers have proclaimed, with some admitting they would consider leaving the sector.

Kim Hall, director of Smart & Simple Mortgage and Finance Consulting on NSW’s Central Coast, who attended the FBAA National Tour yesterday, told Australian Broker she is concerned by Steve Weston’s caution that trail commissions could be banned under ASIC’s remuneration review. Especially because she doesn’t believe upfront commission will be adjusted as a result.

“At present, broker remuneration is a mix of upfront commission and trail commission. Abolishing trail commission would essentially be a cut to total remuneration, as I don’t believe there is any proposal on the table to increase upfront commissions to compensate for the amount of trail that would be lost if it were banned,” Hall said.

“I think it’s fair to say that an overall cut to remuneration would be a concern for anyone regardless of which industry they’re in.”

Mardee Thomas, mortgage broker at 1st Street Home Loans in Sydney said axing trail commissions would have harmful effects on consumer outcomes.

“I think the biggest issue will be that it will promote mortgage churning, whereby brokers will move a client from one lender to another for the purpose of obtaining additional remuneration, with little-to-no regard for what is in the client’s best interests,” she told Australian Broker.

But because of this, however, Thomas said she doesn’t believe ASIC will ban trail.

According to Hall, there is a false perception that trail commission is income for nothing.

“Unfortunately there is a perception that trail is money for nothing, it’s not, it’s deferred remuneration paid on a monthly basis for continuing to look after that client on an ongoing basis.

“Good brokers invest a lot into the ongoing client relationship, they are often at the client’s beck and call well after the loan settles, and they also invest a lot into their business to continually improve the client experience.”

Hall told Australian Broker she would even consider leaving the industry if there were any drastic changes recommended by the review.

“Depending on the actual outcome of the review, exiting is a possibility if the numbers no longer stack up. But that’s the same as any industry; people do not stay in business if it’s no longer viable,” she said.

Thomas told Australian Broker that she would consider adopting a fee-for-service model to remain in the industry.

“I definitely wouldn’t consider leaving the industry as I really enjoy what I do and work with a wonderful group of people, though I believe we would then have to implement a fee-for-service for our clients’ requirements regarding ongoing support.”

Brokers to be summoned by ASIC

From Australian Broker.

ASIC has revealed it will be serving notices to brokers to provide data, as a part of its fact find for the mortgage broker remuneration review. However, the FBAA is assuring that brokers should not be worried.

The FBAA’s Peter White, who met with the ASIC team heading up the review in Melbourne yesterday, said the corporate watchdog will be calling on brokers to provide data, following its data collection from lenders and aggregators.

“What will happen as of next week is notices will be served on the lenders for the data collection. The week after that the notice will be served on the aggregators. Brokers will be last on the list to get notices served on them,” White told Australian Broker.

“That will be about two to three weeks away before that happens.”

According to White, ASIC was vague on the specifics of what data they will be seeking, however he told Australian Broker it will be focussed on “drilling down on the borrower profile”.

White also said one “significant sized” lender – he could not reveal who – told him that there could be as many as three million transactions involved in the fact find.

Some aggregators have already submitted data to ASIC as a part of their cooperation with the review. AFG told brokers at its Masterclass in Sydney this week that it has already submitted a significant amount of data to the regulator, proving commissions are not a form on conflicted remuneration.

However, when brokers are summoned by ASIC in the coming weeks, White is assuring them they should not be worried.

“The big thing is that this is not anything to be scared about,” he told Australian Broker.

“The actual sampling of brokers is very small. I’m not allowed to divulge how many but it will be significantly less than 1,000 brokers. Most of the market won’t even know it’s happened.

“But those that do get served notices, ASIC are very keen to let them realise that selection doesn’t mean there is an issue with what they are doing or that they’ve been targeted for anything. It isn’t being done on alpha order either – it is just a random selection.”

ASIC will be calling the brokers selected prior to sending notices requesting the data.

Mortgage brokers: ASIC goes fishing

From The Conversation.

The Australian Securities and Investments Commission (ASIC) inquiry into the way mortgage brokers are paid may uncover some isolated shady dealings but the system of remuneration for brokers is already regulated well enough by intense competition.

Assistant Treasurer Kelly O’Dwyer announced the inquiry last year in line with recommendations from the Financial System Inquiry and ASIC recently commenced the inquiry with a scoping paper. The focus is likely to be on whether the advice of brokers is in the best interests of the customers.

As always, there are questions about whether the remuneration incentives for brokers distort their advice. And, again as always, there are questions about whether the fact that big banks own some brokers leads these brokers to favour the products of their owners, and not necessarily to offer the products most appropriate to the customer.

In many ways, the inquiry is just part of the ongoing reviews of different parts of the finance sector. The same arguments are likely to be rehashed.

In announcing the review, ASIC Commissioner Peter Kell was clear that:

“We are focused on consumer protection issues in the context of personal credit products, ranging from small amount credit contracts through to home loans.”

There has been some discussion in the press that loans organised by brokers default at a higher rate than loans written by banks. The Australian Prudential Regulation Authority (APRA) might regard this as a concern for financial stability, but ASIC will be concerned with whether people are getting loans they really should not be. The focus will clearly be on consumer outcomes.

It’s worth looking at the mortgage broking sector mainly because it has been growing rapidly and is now quite big. About half of all mortgages are provided through brokers, up from 40% a decade ago. The upfront commissions for brokers are about 0.5%, which yields annual revenue of close to A$2 billion.

So it is a big and rapidly growing financial sector and ASIC has duly been charged to have a look around for problems. Australia already has laws addressing any concerns. The National Consumer Protection Act has, since 2011, put the onus on providers to act in the best interests of customers. ASIC is really just checking up that the law is being complied with.

While there may be some bad behaviour, it is hard to see what the concern is. People have a choice.

They can go to their own financial institution and buy a mortgage direct from the manufacturer. Alternatively, they can look around among financial institutions to find the mortgage that works for them.

Now they can also go to one of the dozens of mortgage brokers to see if one of them can find a better deal. From the customers’ point of view, there are hundreds of retail outlets (banks and mortgage brokers) offering mortgages.

The fact that mortgage brokers are taking market share away from the banks suggests that customers really appreciate the mortgage broker effectively cutting the buyer’s cost of searching.

There shouldn’t be a problem with the banks paying the broker for delivering the customer, as there is a clear cost saving to the bank. It does not need to have as many branches or as many staff.

Seen from the bank’s point of view, it can originate the mortgage through its own branch and incur some overhead and running costs, or initiate the loan through the broker channel and pay the broker for its overhead and running costs.

Ultimately, the client is buying a product, in this case a mortgage. The price the customer pays is transparent, as are the terms and conditions.

If brokers were not providing a good service, customers could easily swing back to searching for their own mortgage among the banks, or simply walk down the street to another broker. Smart customers will thus keep the providers honest and make sure competition works as it should.

There is a not a lot of academic research into the issues associated with remunerating mortgage brokers. What there is tends to be from the US, which has not had a good record in managing mortgages over recent years. The most relevant paper suggests that loan quality can be improved though requiring registration, higher education standards and continuing education and/or by requiring brokers to post bonds.

The ASIC inquiry will uncover more information about the sector. It may also find some people have behaved badly (as in any area of human endeavour), but it’s hard to see a significant structural problem in a very competitive market.

Author: Rodney Maddock, Vice Chancellor’s Fellow at Victoria University and Adjunct Professor of Economics, Monash University

Unqualified advice a growing problem, warns FBAA

From Australian Broker.

The Finance Brokers Association of Australia (FBAA) is warning brokers about offering unqualified advice which isn’t covered by their Professional Indemnity (PI) insurance.

The FBAA has cited a recent case in which a broker was found to have breached his duty of care by the Credit Ombudsman Service and forced to pay more than $115,000. The Ombudsman claimed the broker had given incorrect and unqualified advice.

In addition, the client – who was forced to sell an investment property at a substantial loss – took the legal action against the broker.

The chief executive of the FBAA, Peter White, says in this instance the broker went outside the bounds of his role by providing property advice and acting as a real estate agent when he did not have a licence to do so.

“This should serve as a warning to brokers. If you give unqualified advice, your Professional Indemnity insurance won’t cover you,” he said.

White is now urging brokers to educate themselves and update their knowledge of PI insurance.

“I would plead for any broker who may have let their education slide to update their knowledge on the rights and wrongs when it comes to advice and insurance.”

According to White, unqualified advice is potentially a growing problem as the line between financial planners and real estate property sales and other arms of the broking industry become blurred in an endeavour to diversify revenue streams.

“If you are only a qualified finance broker, act as a broker and do your best to meet your client’s needs. If you also want to assist a client in other areas like property purchasing, get the necessary qualifications and training otherwise you may be at risk of a life changing personal pay out,” White said.

Further Insights Into Mortgage Brokers Via LTI and LVR

My post yesterday “The Truth about Mortgage Brokers” created quite a a number of requests for more information, especially around my comment that broker originated loans tend to have higher loan-to-income and loan-to-value ratios compared with bank originated loans.

So today, I am posting further data on these two dimensions, drawing more data from our household surveys.

First, here is a plot of the average loan to income (LTI) bands separated by bank direct and broker channels of origination, which clearly shows that broker loans have a relative distribution of higher LTI loans.

Running the same analysis on loan to value (LVR) bands, we also see a higher distribution of broker loans above 85%.

We can take the analysis a little further by comparing interest only loans and principal and interest repayment loans. The LVR distribution analysis shows that interest only loans have a higher LVR, and those with a third party channel of origination are the highest.

The LTI picture is not so clear cut, though there is a slightly higher distribution of interest only loans via brokers across the LTI bands.

It is worth thinking about what may be causing this. First, we know that different customer segments have different propensities to use brokers, and possibly those looking to borrow more, at higher LVR and LTI are more naturally inclined to go to a broker. Interest only loans have lower repayments, so for a given level of income, should allow access to a larger loan amount as the repayments only cover interest (though of course the principal will need to be repaid eventually). In addition, brokers will know from their panel lists where the higher LVR and LTI deals can be done. The data in the surveys includes bank and non-bank lenders.

However, irrespective of the channel of origination, lenders still need to complete their underwriting analysis. So it would seem different criteria are being applied depending on the origination channel.

Also, we should say that the data in the survey comes from loans written in the past 12 months, and there have been some changes to underwriting in that time.

Nevertheless, the additional analysis reinforces the view that broker originated loans are on average more risky, supporting APRA’s statement.

The Truth About Mortgage Brokers

Recent media coverage about mortgage brokers has been quite negative, with allegations of poor ethical standards and false application data being used by some to bolster loan applications. So in this post and in our latest video blog we look at data from our household surveys to portray the current state of play.

To begin, mortgage brokers have become a significant feature in the mortgage industry landscape. Indeed almost half of new loans are now originated by brokers. Different household segments have different propensities to use brokers. Those seeking to refinance, first time buyers and property investors are most likely to use a mortgage broker.

We expect this growth to continue, thanks to the current appetite for refinancing, and the broker focus now apparent among major banks. For example CBA, in their recent results reported to December 2015 that 45% of their loans came via the broker channel, up from 40% a year earlier. In addition regional players and credit unions are using brokers, alongside foreign banks operating here and the non-bank sector.

Commissions have been tweaked recently, and the industry commission take is now back up to pre-GFC levels, (after adjusting for inflation) because whilst overall commissions were trimmed, volumes have grown.

Remember that brokers get a commission payment at the start of the loan, as well as a trail paid in subsequent years. The bigger the loan, the bigger the commission. Very few aggregators normalise actual commissions paid – although Mortgage Choice does, so they claim their brokers are less influenced by commission structures.

“At Mortgage Choice we pay your broker the same rate, no matter which home loan you choose from our wide choice of lenders. That means you can tap into a Mortgage Choice broker’s expertise at no charge, with peace of mind that they have your best interests at heart”.

Some brokers refund a proportion of the commission from the lender back to the borrower. For example Peach Home Loans says:

“When we arrange your loan we are doing quite a bit of the work that the lender’s staff would otherwise have to do and as a result the lenders pay us a commission on the upfront (loan amount) – this is typically around 0.6% or $600 per $100,000. We try to recover our costs from this commission and then share what is left over with you. Lenders also pay us a small trailing commission typically from 0.15% to 0.25% pa paid on the outstanding loan balance … and this is where we try to make our profit.. after all we are in business to make a profit.”

Consider next who is the broker working for? Whilst some are directly employed by banks or aggregators, others are self employed businesses. They are mostly aligned to aggregators or banks to get access to the lender lists and access to various tools and calculators. As a broker, they want to do a deal and the legislation controlling their conduct says they need to consider the financial status of an applicant to ensure the loan is “not unsuitable.” From ASIC’s responsible lending provisions:

“As a credit licensee, you must decide how you will meet the responsible lending obligations. RG 209 sets out our expectations for compliance. Meeting your responsible lending obligations will require taking three steps:

make reasonable inquiries about the consumer’s financial situation, and their requirements and objectives;

take reasonable steps to verify the consumer’s financial situation; and

make a preliminary assessment (if you are providing credit assistance) or final assessment (if you are the credit provider) about whether the credit contract is ‘not unsuitable’ for the consumer (based on the inquiries and information obtained in the first two steps).

In addition, if the consumer requests it, you must be able to provide them with a written copy of the preliminary assessment or final assessment (as relevant)”.

This is quite weak protection, because suitability may depend on many factors, including financial sophistication of the potential borrowers, income and expenditure assessments and other elements.

The list of lenders a broker may consider will depend on the lender panel they have access to. Most brokers will access a restricted list of potential lenders, and cannot offer a “whole of market” view of options. Quite often they will use on-line tools with a client to come up with the best deals, although often the basis for selection and lender recommendation is vague and is often not fully disclosed.

Some brokers are very proactive when it comes to shepherding the loan application through to funding, others less so. Some brokers will also keep a diary note to instigate a possible refinance conversation down the track.

But, to be clear, whilst many brokers will give good advice, they are in an area of potential conflict thanks to commissions, and limitations thanks to the panel. Brokers should be disclosing potential commissions and also their selection criteria.

The alleged poor conduct where brokers falsify applicant data is in our view a marginal activity of a “few bad apples.” That said, consumers should be using a mortgage broker with their eyes open. Ask yourself if the broker is truly working in your best interests.

APRA recently said that they considered loans written via brokers to be more risky than loans written direct by the banks. APRA chairman Wayne Byres said:

“Third-party originated loans tend to have a materially higher default rate compared to loans originated through proprietary channels.”

So we decided to analyse our current household survey data, looking at relative risks between third party (broker) and first party (bank) loans. We tested risks by asking households about their perceived sensitivity to interest rate rises on mortgage loans. You can read about our approach here.

The results show that households who originated loans via brokers have less headroom and more exposure to potential interest rate rises (should they occur). For example, among owner occupied first time buyers, 28% of those who got a loan direct from a bank said they would have difficulty if rates rose at all from their current levels, whereas for owner occupied borrowers via a broker this rose to 43%, a significantly higher proportion. Further analysis showed that on average loans via brokers was at a higher loan to value and loan to income ratio than those direct via the bank.

There was a similar, though less extreme shift in risk across all owner occupied portfolios, with 40% of borrowers direct from a bank saying they could cope with more than 7% rise, compared with 20% of those via a broker.

Looking at refinanced owner occupied loans we again saw a higher proportion less able to cope with a rise in rates among households who got their loan via a broker channel.

On the investment property side of the ledger, among portfolio investors – those with multiple properties in a portfolio, there was a higher proportion who would be exposed by any rate rise among those going direct to a bank, compared with a broker – but the difference is quite small and combined more than 40% of portfolio investors would have issues if rates rose.

When we looked at all investment loans, we found that households who obtained a loan via a broker were slightly more likely to be under the gun if rates rose, and a significantly higher proportion of borrowers who went direct to a bank were confident of handling a rise of more than 7% from current levels.

Consolidating all the results, we conclude that households who accessed loans via brokers have on average less head room to accommodate rate rises compared with those who went direct. APRA is correct.