ASIC report slams mortgage brokers

The mortgage broking industry is scrambling to explain a scathing review by the corporate watchdog.

Financial Services Minister Kelly O’Dwyer.

The mortgage broking industry is scrambling to explain a scathing review by the corporate watchdog which found commission structures riddled with conflicts of interest, a lack of oversight of problem brokers, and borrowers slugged with bigger loans with higher interest rates.

The Australian Securities & Investments Commission review of mortgage broker remuneration has proposed a move away from bonus commissions, a crackdown on commissions for third-party referrals and increased disclosure of which big banks own particular brokerages and mortgage aggregators.

Financial Services Minister Kelly O’Dwyer, who released the review yesterday, has called for consultation after ASIC implored lenders and aggregators to improve governance standards after finding a “lack of measures to deal with misconduct and poor practices” of brokers and staff.

ASIC executive Michael Sadaat found the major lenders also had little idea of what individual brokers or businesses were doing, which left banks with “little visibility of patterns of poor loan performance” linked to certain brokers.

The review of 17 lenders, 14 aggregators and more than 40 broker businesses found the structure of commissions could be pushing customers into loans that exaggerated their needs and on to particular lenders that offered greater bonuses.

“In general, because commissions are linked to the size of the loan, the more that a consumer borrows, the more the broker will be paid,” the report said.

ASIC found broker loans were on average larger and had a higher loan-to-valuation ratios (which require smaller deposits) than loans provided directly through banks. The use of mortgage brokers has significantly increased in recent years, and now more than half of all loans are written through a broker. It is a lucrative source of business for the major lenders, many of which own brokerages.

Commonwealth Bank controls Aussie Home Loans and holds a large slice of Mortgage Choice. NAB owns three large aggregators, and Macquarie has significant investments in Yellow Brick Road and others. ASIC said brokers owned by major banks were more likely to write loans for the parent bank.

Volume-based commissions, which pay an extra bonus to brokers for reaching a targeted amount of lending, were found to drive up conflicts of interest and “increase the risk of poor consumer outcomes”.

The closer mortgage aggregators got to the target the more it influenced what products brokers recommended.

ASIC found the volume of home loans written “increased by a factor of over four” for one lender when it offered higher commissions for a limited period.

Most commissions are made up of an upfront sum and a trailing commission payment. About $350 million was paid in commissions last year.

Usually, a typical upfront commission earns a mortgage aggregator $3100 for writing a $500,000 loan, plus a trailing commission worth around $900 for the first year, which declines as the borrower pays down their loan. Individual brokers receive the lion’s share of these commissions.

ASIC said this model created “conflicts of interest” as brokers could write a loan “larger than the consumer needs or can afford” to maximise commissions or write loans for a particular lender that pays a higher commission “even though that loan may not be the best loan for the consumer”.