Brokers losing thousands a year to restrictive banking clauses
Few matters can elicit more contemptuous groans from brokers than the issue of clawbacks. It’s not difficult to understand why.
Consider the scenario: You, the broker, have spent countless hours securing a home loan for your client, with the expectation of generating a few thousand dollars in commissions for your hard work.
All is well until a few months down the line, when your client gets a divorce and decides to sell the house. As a result, the lender, which has suddenly found itself with one less 30-year mortgage on its balance sheet, snatches your commission back.
It sounds unfair, but this is the reality for mortgage broking in the 2020s.
According to new data compiled by the Finance Brokers Association of Australia (FBAA) and CoreData, eight in 10 brokers were affected by clawbacks in the past year, with nearly half of polled brokers losing over $10,000 each due to lenders’ clawback policies.
Major banks tend to have the strictest clawback provisions, said the majority of polled brokers, although about two in five said all lender types are equally strict.
Clawbacks are also contributing to stress levels among mortgage brokers, said the FBAA. Now, calls for fairer clawback policies are getting louder.
Finding a middle ground
Few are advocating for the complete removal of clawback provisions, since they play an essential role in combating the historical issue of ‘churn’.
Clawback provisions first emerged in the early 2000s in response to rogue brokers unnecessarily refinancing loans in order to pocket a quick commission.
Lenders introduced these provisions, typically valid for 12 to 24 months of a loan being originated, to incentivise long-term customer value rather than quick commission grabs.
While they are largely seen as a positive development for the industry, clawback provisions have had some unintended consequences.
Terri Unwin (pictured), a Mortgage Choice franchise owner, agreed that clawbacks are appropriate if all a broker is doing is refinancing a loan, “but I think there has to be some leniency in cases of a divorce or a death, or something a broker has absolutely no control over”.
“I agree that clawbacks have stopped the churning and in a way, they've stopped brokers from potentially targeting other brokers’ clients because they know what it's like to do all the work, and then four months later, suddenly have all the money taken back off you,” said Unwin. But “we are the only industry that can do the work and have our income at threat for up to two years”.
Unwin, like others, believes a middle ground should be found.
Managing expectations
While Paul Kellaway, director at mortgage broker Ace Lending, agrees that brokers should be discouraged from churning, he believes there needs to be a more reasonable expectation.
Kellaway told MPA: “I understand that banks lose out when clients refinance constantly but there are often situations where the clients make decisions without our consultation that cause us to have our commission clawed back.”
Clawbacks provisions can be particularly frustrating for brokers just starting out in their careers, said Kellaway.
“For someone who is fresh into the industry, and who doesn't have a book with 200 to 300 loans in it, it's really hard to make the bills pay when you're not sure if your commission has to go back to your aggregator,” he said.
“Obviously, you can’t wait two years before you spend those commissions but there is always a thought in your head of when/if you may need the cash to get clawed back.”
Numerous brokers also expressed frustration at their commissions being clawed back after being undercut by a bank.
Unwin described a recent situation where a client went into a branch for a separate loan; the branch, instead, rewrote the client’s entire mortgage, effectively poaching the customer off Unwin and leading to multiple thousands of dollars in lost commissions.
Brokers are able to fight the clawback in these instances, which often garners a favourable result. In fact, the business of undercutting is not necessarily promoted by the banks; it is often the resolve of aggressive branch staff looking to pump their own numbers.
With most banks generating up to 75% of their business from brokers, most realise that brokers are bringing them business, not the other way around, “and therefore 90% of them are really against” undercutting brokers, said Unwin.
But, as another broker told MPA: “Not only are we competing with or dealing with life issues that clients have, we also have to deal with banks trying to undercut us all the time… it's a free market, and the banks can do that, but my issue… is that banks should give their best rate up front.”
Mental health impacts
The FBAA report included numerous testimonials on the mental health impact of clawbacks.
One broker said: “From a mental standpoint, I felt as though I was working for free, although I looked after my clients’ best interests, I couldn’t help feel as though the banks won, the clients won, and I lost.”
Another said: “They are always painful when you have done all the work and the situation is completely out of your control due to selling, separations and client chasing cashbacks – that will likely go with another broker in this situation, and you only find out once it’s done. 100% within 12 months is way too blunt of a tool.”
According to the FBAA, most brokers manage clawbacks “by building strong client relationships or monitoring client triggers”.
The FBAA said: “Compared to sole traders, brokers working in small businesses were more likely to look towards different income streams or setting up reserves to manage impacts.
“This reflects the different approaches brokers have adapted with increasing business size.”
