Moody’s has told AB+F that third-party originated loans are increasingly a point of focus for ratings agencies as much as a pressure point for lenders, following the release this month of ASIC’s recommendations on the troubled industry.
Among six core changes as part of the ‘Review of mortgage broker remuneration’, the securities regulator advised that the entire mortgage broking sector needs to decouple itself from potential conflicts of interest inherent in volume-based commissions.
The regulator’s pillar recommendations will likely be felt throughout the mortgage industry and place a curb on volume-based incentives, which the regulator said can motivate mortgage brokers to over-lend to individuals in a race to hit loan volume targets.
Non-bank finance group Chifley Securities last week announced $1.1bn of loan applications across the 2016 calendar year, almost entirely through third-party channels.
Tim Roche, senior director financial institutions at Moody’s, told AB+F that while the referral loans merit close scrutiny, the agency has not been detecting a flood of defaults.
“Third party originated loans are an area of focus for us as well – we expect them to have weaker performance through a cycle despite the banks maintaining underwriting control given the incentive structures for brokers," Roche said.
“We don’t agree with the categorisation of underwriting being ‘lax’ for these loans though – not to say some haven’t slipped through but on the whole standards appear to have held up reasonably well,” he added.
About 50 per cent of Australia’s $106 billion in owner-occupier / residential investor loans are written by mortgage brokers, according to the RBA, which implies more than $335 million in commissions was paid to mortgage brokers in the year to January.
ASIC also flagged the use of value-added (soft dollar) incentives - sponsorships, paid trips and complimentary industry events - as an added filip for brokers that have, or are on their way to attaining performance-based ratings that include privileged status settings like "diamond", “gold" and “platinum".
However, Fay Wood, associate director at Sydney boutique brokers Mortgages&Co, said the regulator would have a hard time chasing disguised commissions, but that any changes “in the interest of consumers” would be welcomed.
“I was anticipating this result and I think it's the right decision and serves the interests of consumers," she said.
"However, I think we need to be wary that we don't see a move to using 'submission quality incentives' (which reward brokers for compliance and 'first-time right' applications), to in fact disguise what are actually just volume-based incentives."
Wood said some banks and lenders also anticipated the findings and consequently made an early move to 'submission quality' incentives.
“However, they only offer these incentives to brokers who put high volumes through - so the net effect is the same,” Wood said.
ASIC has also recommended increased disclosure by banks with vertically-integrated business models, including the Commonwealth Bank of Australia, which owns Aussie, and National Australia Bank, which owns three mortgage aggregators.
ASIC proposed six recommendations to government to “improve consumer and market outcomes". These are:
Changing the standard commission model; moving away from bonus commissions and bonus payments; moving away from soft dollar benefits; clearer disclosure of ownership structures within the home loan market; establishing a new public reporting regime of consumer outcomes and competition in the home loan market; and improving oversight of brokers by lenders and aggregators.
According to the report, to reduce the risk that remuneration structures may result in poor consumer outcomes and inhibit competition, “there is a need for all industry participants to place greater importance on fostering a consumer-centric culture and take more care in the design and monitoring of remuneration structures.”