Mortgage fraud increasing year on year

From Australian Broker.

The number of cases of mortgage fraud has been on the rise, with brokers warned to look out for falsified documents supplied by clients seeking unsuitable loans.

 

“Unfortunately, fraud continues to increase year on year,” said Paul Palmer, Connective’s compliance support manager, at the aggregator’s professional development day in Sydney on Thursday (23 March).

“The technological advancements of digital applications enable people to create documents or change existing documents to be more and more authentic looking.”

The aggregator has seen statements that lenders could only identify as fraudulent because they had no record of issuing them, Palmer said.

“Obviously, you can’t expect brokers to pick that up. Fortunately for us, most people trying to commit fraud aren’t that good. They always make spelling mistakes, a typo, or they get their mathematics wrong.”

As fraud investigations are inherently unpleasant for both broker and aggregator, Palmer urged a proactive rather than reactive approach.

To do this, he suggested brokers undertake all due diligence, meet required responsible lending obligations, cross check & verify all documents provided by the customer, and look for inconsistencies.

“We see a lot of differences in fonts, in key financial data, and also, as I said, a lot of mathematical areas. Run their payslips through the pay calculator and you’ll be amazed at how often that finds something.

“One of the biggest ones I found over the past 12 months is where there were two payslips and they forgot to change the accrued annual leave entitled from payslip to payslip; which we would expect to change. It’s a very common mistake.”

If it is impossible to meet the customer face-to-face, Palmer encouraged brokers to mitigate any risks by becoming familiar with conditions that lenders set up to accept remote broker-client meetups.

“From our perspective, a good thing is to get certified ID. Through Skype or Facetime conversations, get a snapshot of their ID. It fulfils an obligation to show you actually know who you’re dealing with.”

Finally, Palmer warned brokers to put themselves in the right mindset when it comes to fraud.

“Don’t think that you can’t get caught,” he said. “Unfortunately, there’s been a significant increase in the amount of referrals looking to give loans to mortgage brokers. In particular new-to-industry brokers have been targeted by people who have clients that can only service or get a loan through submitting fraudulent documentation.”

He urged brokers to do due diligence on their referrers as well.

“Make sure you’re comfortable with them as people, make sure they’re people you do your own business with yourself, and don’t trust anything they give you more than anything provided by your clients. In some ways, you need to be more skeptical.”

Consumer advocates call for further ASIC reviews into brokers

From Mortgage Professional Australia.

ASIC’s Review into mortgage broker remuneration does not go far enough, according to consumer advocacy group CHOICE. In a panel hosted by ASIC at their 2017 Annual Forum, CHOICE’s head of campaigns and policy Erin Turner argued, “we can’ just settle for tweaks to the system…I hope this is the first report of many”.

Turner highlighted three issues in mortgage broking: a gap between consumer expectations and reality; conflicts of interest; and the need for system wide reforms beyond commission. In particular she criticised the current regulation for its stipulation on providing ‘not unsuitable’ advice. Mortgage brokers who provide advice on investments, tax and SMSFs should be ASIC’s next target, Turner said.

Turner’s comments did not go unopposed on the panel. Sitting with her was the MFAA‘s Cynthia Grisbrook, NAB’s Anthony Waldron and AFG‘s Brett McKeon. One awkward encounter saw Turner use an extravagant broker conference on a cruise ship as an example of banks’ soft dollar benefits, only for McKeon to explain that in fact it was AFG who ran the cruise.

One point that most parties did agree on (NAB excepted) is that the ongoing Sedgwick Review by the Australian Bankers Association should not be allowed to determine changes to commission. This was despite ASIC’s report referring to the Sedgwick Review at several points, and Stephen Sedgwick himself moderating the panel.

Mortgage Brokers Are Essential To The Home Loan Industry

It has been interesting reading the media coverage of the recently released ASIC report. Some suggest brokers have been “slammed”, others suggest its  more a touch on the tiller in terms of commission models. Having read the ASIC report in full – more than 240 pages, I think there are three points worth making.

First, around half of mortgages are originated via the broker channel, it varies by lender of course, but consumers get more responsive assistance and access to industry knowledge via a broker, and our surveys indicate much higher satisfaction ratings than those going direct to a bank. Because brokers look across lenders, they should have access to a wider range of options, and (perhaps) better pricing. Different types of customers use brokers differently.  But there is a valid and important role for brokers.

Broker originated loans may be more “risky” but this is more to do with the types of consumers who choose to use them.

Second, the current commission models are complex and not transparent, especially as it relates to soft commissions, incentives and other elements. In addition, the ownership of brokers is unclear. As a result consumers cannot be sure they are getting unbiased advice, and it may be the ownership structures and commissions get in the way.  As ASIC says:

Remuneration and ownership structures can, however, inhibit the consumer and competition benefits that can be achieved by brokers.

ASIC also says:

Brokers almost universally receive commissions paid by the ‘supply side’ of the market (i.e. the lender or aggregator), rather than by the consumer. Our review identified significant variability and complexity in remuneration structures between industry participants. The common element across all remuneration structures for brokers, however, was a standard commission model made up of an upfront and a trail commission.

ASIC are not suggesting the removal of the commission model, but they are suggesting significant changes to it. There will be ongoing consultation on the nature of those changes. But I think the enhanced requirements for disclosure of ownership structures is as important. Transparency is good. Better transparency is better.

We did a piece on brokers on our video blog (in 2016) – in the Truth About Mortgage Brokers.

But third, there is something which continues to bug me. Financial Advisors have a requirement to provide “best interest” advice (see ASIC’s report today), whereas Brokers and Lenders dealing with often the largest transaction a household will undertake have a lower hurdle of “not unsuitable”. This bifurcation of the supervision regime makes no sense.

Both advisors and brokers should be clearly working in the best interest of the clients. So why not create a standard and unified regulatory framework, covering all product and financial advice?  Now, I understand ASIC has two departments, separately looking at financial advice and mortgage lending but this is not a good enough reason. Time to put all advice, whether for wealth or lending, under the same regime. Not least because investment property loans are actually about wealth building, and should be considered as part of a wealth management strategy.  One third of mortgages are for investors, and our research highlights investors are more likely to access brokers.

The requirement for transparency, quality of the advice, and consumer outcomes should be the same. Far fetched? No.

The Financial Markets Authority in New Zealand says:

Financial advisers are people who give advice about investing and other financial services and products as part of their job or business. They include financial planners, mortgage and insurance brokers and people working for insurance companies, banks and building societies that provide advice about money, financial products and investing.

They do not have this bifurcation.

All financial advisers must exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. In determining what a reasonable financial adviser would do, the following matters must be taken into account:

  • the nature and requirements of the financial adviser’s client or clients
  • the nature of the service and the circumstances in which it is provided
  • the type of financial adviser

See more in section 33 of the Financial Advisers Act 2008. See examples below of how these obligations apply to advice on insurance and credit products.

ASIC Review of Mortgage Broker Remuneration Released

The Treasury has released the ASIC review on mortgage broker remuneration, together with two info-graphics on the industry. The findings will shape the future of the mortgage industry, and are now open for consultation.

Importantly, ASIC says the standard model of upfront and trail commissions creates conflicts of interest.

There are two primary ways in which these conflicts may become evident. Firstly, a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment. This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow (e.g. through the choice of an interest-only loan). In this report, we have referred to this as a ‘product strategy conflict’. Alternatively, a broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer. We refer to this as a ‘lender choice conflict’.

ASIC has put forward six proposals to improve consumer outcomes and competition in the home loan market:
(a) changing the standard commission model to reduce the risk of poor consumer outcomes;
(b) moving away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes;
(c) moving away from soft dollar benefits, which increase the risk of poor consumer outcomes and can undermine competition;
(d) clearer disclosure of ownership structures within the home loan market to improve competition;
(e) establishing a new public reporting regime of consumer outcomes and competition in the home loan market; and
(f) improving the oversight of brokers by lenders and aggregators.
ASIC consider that these proposals should be implemented before a further review of the market is conducted in three to four years to determine whether additional changes are required.
They also propose to conduct a targeted review of the suitability of advice
provided by brokers (including through a shadow shopping exercise)
commencing in 2017.

Here is the Treasury release.

As part of the Government’s response to the Financial System Inquiry (FSI), Improving Australia’s Financial System 2015, the Government requested ASIC undertake an industry-wide review of mortgage broker remuneration.

The Review found that the current mortgage broker remuneration and ownership structures create conflicts of interest that may contribute to poor consumer outcomes.

The Review outlines a number of proposals for industry aimed at improving consumer outcomes, including:

  • improving the standard commission model for mortgage brokers;
  • moving away from bonus commissions and soft-dollar benefits;
  • increasing the disclosure of mortgage broker ownership structures; and
  • improving the oversight of mortgage brokers by lenders and aggregators.

The proposals outlined in this paper are intended to elicit specific and focused feedback, and should not be viewed as a statement of the Government’s final policy position.

The Government invites all interested parties to make a submission on the proposals outlined in this paper. Closing date for submissions: Friday, 30 June 2017

Broker clients have ‘extreme’ sensitivity to rate changes

From The Advisor.

A JP Morgan report into the mortgage industry has found that customers who obtained a home loan through a broker are far more sensitive to rate changes than those who visited a bank branch.

The latest Australian Mortgage Industry Report – Volume 24, released yesterday, explores the potential impact on borrowers of significant mortgage repricing as Basel 4 capital requirements loom for Australia’s biggest mortgage providers.

When it came to sensitivity to higher rates, the report found that loans originated by third parties have a substantially higher sensitivity to rate changes. The report noted that this is likely due to larger loans being written by brokers and that broker usage is higher among interest rate sensitive borrowers.

Interestingly, the report noted that interest rate sensitivity is relatively consistent across interest only and principle and interest loans.

Digital Finance Analytics principal Martin North, who collaborated with JP Morgan on the report, said these findings reflect the different mix of customer behaviour and customer types who visit brokers.

“One of the critical things that we look at is whether people are ‘soloists’, meaning that they want the lowest price they can get, or whether they are ‘delegators’, meaning they are more worried about customer experience and the whole package rather than the price,” Mr North explained.

“Price sensitivity is much more extreme for people who go via brokers. There is already an urge to find the best deal if you go to a broker. Secondly, brokers have the ability to look across the market and across multiple lenders and they know from their experience where the best deal might be for a particular borrower at a particular point in time,” he said.

“The net result is that there is a higher risk footprint in loans written via third-party than first-party, and that is something which needs to be recognised in terms of how pricing is done and also how risks are managed.”

ASIC briefs O’Dwyer on remuneration review

From Australian Broker.

The Australian Securities and Investments Commission (ASIC) has briefed Financial Services Minister Kelly O’Dwyer about its broker remuneration review, suggesting a shift away from volume-based commissions and soft dollar incentives.

 

As reported by the Australian Financial Review, the regulator also recommended increased disclosure by banks with vertically integrated business models.

ASIC handed the report over to O’Dwyer on Wednesday (15 March).

The regulations are likely to eliminate volume-based incentives from the industry as they have the potential to encourage brokers to write more loans then necessary.

Soft incentives such as sponsorships, overseas trips and prestigious industry events for high end brokers will also be on the chopping block.

Despite these recommendations, AFR said that the ASIC report endorses the core commission-based remuneration system used by brokers.

Some Majors Walk Away From Brokers

Further evidence of some majors deliberately dialing back their home loan origination via the broker channel is provided by data from AFG who reported in their latest Competition Index that the majors’ share of the market dropped again to 65.25% to continue the trend of the last six months. This is of course based on data though their books, so may not reflect the overall market, but is a fair indicator nevertheless.

Significantly, we see a fall by CBA and a rise by ANZ, both policy directed decisions.  Some of the slack is being taken up by smaller lenders.

The major banks dropped their share of fixed rate mortgages at 56.66 per cent, down from 64.98 per cent on the quarter ending January 2017, and a significant 12 per cent down on a year ago.

Also, refinancing through the majors dropped to 54.93 per cent of market share, and investor mortgages to the majors fell to 67.56 per cent of market share, around 7 per cent lower than the same period last year.

The recent political spotlight on the major lenders may encourage them to assess their competitive position as they once again fall out of favour with consumers. The non-major lenders have increased their market share to a post-GFC high of almost 35% across the quarter.

“The non-majors have continued to take market share from the majors this quarter, particularly among those seeking to refinance. Their share of the refinancing market grew by 6.5% with the big winners being AMP and ING,” said Mr Hewitt.

The non-majors also gained ground with those looking to fix their interest rate. Non-majors recorded an 8% lift in market share for fixed rates with ME Bank and ING leading the way.

First home buyers were also drawn towards the non-majors with a 2% gain in non-major market share evident from this group.

“Recent changes made by the Victorian state government to exempt first home buyers from stamp duty if they are purchasing a property for less than $600,000 will make this segment of the market one to watch,” said Mr Hewitt.

This latest move comes on top of a doubling of the first home buyers grant for regional purchases in that state and news of a $50 million pilot program designed to help people co-purchase a dwelling with the Victorian government set to launch next year.

Brokers write $339m in loans for CUA

From Australian Broker.

Credit Union Australia (CUA) has issued $1.06bn in mortgage lending for owner occupiers and investors in the six months prior to 31 December 2016.

Talking about the firm’s half yearly financial results released yesterday (8 March), Natasha Kelso, CUA national manager for broker, said that 32% of all mortgage lending during this period – around $339m – was via the broker channel.

This was down slightly from the share of broker-originated lending in the previous half yearly period which equated to around 40%, she said.

“It’s important to CUA that we provide new and existing members with a choice of channels in which to obtain a home loan. Brokers are an important part of that mix and CUA is exploring opportunities to increase our third-party relationships in 2017.”

The credit union’s focus on improving relationships with brokers throughout the latter half of 2016 included a national roadshow to educate brokers about CUA and its recent lending policy changes, she told Australian Broker.

“Following this roadshow, we’ve seen an increase in applications through the broker channel since November. This is now flowing through to higher volumes of new loans being settled in the first few months of 2017.”

CUA has also trialled a program to speed up the ‘time to yes’ for applications submitted through the broker channel, she said.

Furthermore, the credit union has also been progressively rolling out its new home loan origination platform to all CUE lenders and branches nationally since July.

“[This platform] is yet to be made available to the broker channel – this phase of the rollout is scheduled for early 2018, which will deliver a more streamlined, digital process for borrowers.”

Expect Irresponsible Lending Complaints To Rise

From Australian Broker.

A number of consumer advocates have predicted that complaints about irresponsible lending by brokers will trend upwards in future.

Speaking to Australian Broker at the Responsible Lending and Borrowing Summit in Sydney, Alexandra Kelly, principal solicitor at the Financial Rights Legal Centre of NSW said that while she had not seen any evidence of a “systemic problem” with fraud in the broker channel at present, more consumer claims could emerge once rates start rising.

“We’re still in the stage where some consumers haven’t gotten into trouble yet so we’re not necessarily seeing any issues yet because interest rates are very low,” she said.

If interest rates did start rising however, some consumers would feel the pinch, lead them to wonder whether the information supplied by the broker in their loan application was entirely correct, and approach their nearest consumer advocacy group.

“We’ve seen some very tightly wound consumers,” Kelly said. “That’s going to be the issue when there’s an increase and their mortgages start rising.”

Gerard Brody, CEO of the Consumer Action Law Centre in Victoria, agreed that there was going to be a spike in complaints.

“I think that a lot of loans – particularly broker loans – are generally higher amounts,” he told Australian Broker. “They encourage people to get bigger properties and that stretches people if interest rates go up.”

An increase in consumer complaints as a result of rate increases in the future was realistic, he said.

However, he noted that the lenders could do more to fix this issue now.

“At the end of the day, the lender has also got the same responsible lending obligations when it comes to requirements objectives, enquiries about affordability, and verification.”

CBA Prunes Brokers

From Australian Broker.

The Commonwealth Bank of Australia (CBA) has sent out a note giving certain brokers two weeks’ notice for the revocation of their accreditation.

The note was sent out to a segment of accredited brokers which CBA had identified as being “inactive” with the bank for quite some time, a bank spokesperson told Australian Broker. This was part of an ongoing review of CBA products and services.

“To ensure we uphold the highest level of professional standards, and continue to meet the needs and expectations of our customers, those mortgage brokers who have been inactive will no longer be accredited with us,” they said.

Brokers were deemed inactive if they had not written a CBA home loan in the past year or if they had only written a single mortgage. Once identified, brokers are notified that their CBA accreditation will be resigned following the bank’s agreement with the broker’s head group.

The letter provided recipients with 14 days’ notice, starting from the date the letter was sent, in which the bank would revoke the broker’s authority to act.

“This means you will no longer be able to submit home loan applications to the Commonwealth Bank. Please be advised that effective immediately, we will not accept any new home loan applications from you,” the note said.

By freezing loan applications, this stops new loans from being written by brokers about to lose their accreditation which could cause issues for the customer.

Brokers who want to appeal this decision can contact their relationship manager or head group representative.

The note brings into question how independent brokers are from the banks, Mark Harris, director and owner of THE Home Loan Broker, told Australian Broker.

“What does this say? If I don’t believe that CBA is the best fit for my client, are they essentially trying to force me into making them a choice?”

“This is a very big heavy stick to say, ‘Well, you’ll use us anyhow’. I really wonder how interested ASIC would be in this. It sends a very bad message about the industry by taking our entire independence away.”

The note also shows “absolute disrespect” to brokers and potential clients, Harris said. While he understands that CBA has every right to make a decision like this under their business, he would not be encouraging the six brokers under him to use the bank.

“The main reason for this is what if a broker was talking to someone today and decided to do an application with Commonwealth Bank tomorrow and then tomorrow night before they got to lodge that application, the bank cancelled their accreditation?”

“I think it’s appalling. They’re not giving any notice. The note states that you can’t lodge any more loans as of now and you’ve got two weeks to settle anything that’s in the system.”

The decision was “kind of odd” given that brokers use different lenders at different frequencies, Harris said.

“The email was obviously alluding to their belief that if you aren’t actively giving them business that the customers aren’t going to get best practice customer service.”

“I find that very hard to believe. No other lender believes that because no other lender does this sort of thing.”

Over the past two years, Harris acknowledged that he had only used CBA once when he sent through a $900,000 loan last October. The application “flew through with no problems,” he said.