Came across this story in this morning’s business mail. Yet another example of how the finance industry, and particular the mortgage broking marketplace is continuing to evolve in this country.
Refund Home Loans, MrMortgage, and probably a couple of other brokerages which don’t immediately come to mind source their business primarily through promotion of the supposed benefit that give to their customers following settlement. That is to say, they ‘refund’ a part of the fee structure of the funder they deal with, or they gift to their clients a share of the brokerage they get from the funder for the introduction of business. Effectively, these introducers are buying business, which to all intents and purposes may appear benificent and generous, but is essentially unethical.
Why, I hear you ask, is it unethical to share the spoils of business with one’s clients? Let me ask you this. Why would you use the services of a finance broker in the first place? I’ll give you a number of reasons:
- Convenience – who has the time to trot into the Bank to talk lending? Who really wants to?;
- Experience – brokers, in the main, have vastly more experience in dealing with financial institutions on a regular basis, than Joe HomeOwner. In may cases, more experience in the lending field than bank staff themselves. It’s that experience you’re accessing;
- Industry knowledge – brokers, like myself, in general have hands-on banking and finance experience. In my own case, in excess of 33 years at all levels. We know how the industry functions, the do’s and don’t of borrowing and just what you, the customer, are entitled to, and we make sure you get it;
- Service – from my perspective the primary driver of business for any finance broker. Or damn well should be. It’s why Banks pay us for the introduction of business. So that they don’t have to feel obliged to pander to the wants, needs and desires of customers we introduce. That’s your broker’s job, to provide service, follow-up of the Banks, information and feedback to the client, and to make sure that things go smoothly where-ever possible.
Would you choose to take your car to a mechanic because he/she offered to refund you half of their profits on parts markups or their per-hour service charge? Certainly not. You take your car to a particular mechanic because they do good work at a reasonable price and offer you service. The exact same ethos applies in my industry. In my game we use a document called a Finance Broking Contract, which is a full disclosure of the transaction between the broker/introducer; the applicant; and the finance provider. The FBC discloses the commission structure payable by the provider to the broker and just what kind of finance arrangement the broker is seeking for the applicant. Not all brokers use these contracts, but I strongly suspect that within 12 months, FBC’s will become a legislative norm across the country, as will licensing of brokers. I’m left to wonder whether these refund brokers use FBC’s. Surely a way of their clients ensuring that they’re getting what they’ve been promised. For example, Refund Home Loans say they’ll ‘share’ the commission with you and give you a ‘cash refund’. I would ask, what’s the ‘share’ and refund of what, exactly? I’m willing to bet they don’t.
I’m not saying that what these refund brokerages are doing is wrong, in law. Clearly, it’s not. However, their actions do serve to place the industry in a less desirable position from a customer perspective. Finance broking is not and ought not be price driven. It is a service industry, and one which I’m sorry to say seriously needs rationalisation. Too many cowboys and too many brokers out for the quick buck. I strongly suspect that refund brokers, despite the fact that they claim to offer part commissions or fees back to their clients, are merely out for the quick buck through a process of sell cheap, but sell more. They’re buying business, and that model, as the ANZ has stated, is not sustainable long term. Not that the ANZ should care either way, but I suspect they too consider the tactic to be unethical in the grander scheme.
The commission structure upon which brokers are paid is public knowledge. In general, banks and mortgage funders pay between 0.77% of a loan approval as an up-front commission, and 0.275% of outstanding loan balances as a monthly trailing payment. Some lenders pay marginally higher, and the majority marginally lower, but those figures are benchmark. There is good money to be made, but it needs to be worked hard for in order that return business and referrals are generated, and sadly, not many brokers are prepared to work hard for their business.
So my warning to you potential borrowers reading this is a simple one. You get what you pay for and when you use a broker, you’re not paying anything anyway so why give your business to someone simply because they say they’ll drop a few dollars into your kick? If you’re of a mercenary outlook, then go right ahead but don’t be surprised if the service you get equates to the end benefit to the broker. If he/she is paying you for your business, they’re not likely to be as dedicated as someone who’s treating you as a customer, rather than a liability.