Over recent months, hundreds of column inches seem to have been devoted to cascading by lenders, and specifically the charge made by some commentators that the whole concept is in some way an instrument of the devil, designed to lure unsuspecting brokers into laziness, leaving clients poorly served and unfairly treated. What that argument ignores is one simple fact – that the vast majority of mortgage brokers are actually fully grown adults capable of rational thought, who understand what the word ‘professional’ means.
Of course there will be bad apples in every barrel – you only have to look back at the self-cert storm-in-a-teacup a few years back. Now, as then, there will inevitably be the odd broker who might consider trying to take unfair advantage of cascading to make their lives easier. Although in this day and age that would be a very foolish broker indeed.
We all know that the Financial Services Authority (FSA) will be keeping a very close eye on the application of the ‘Treating Customers Fairly’ (TCF) principles from March 2007 onwards. Any broker who cannot demonstrate why a cascaded product was deemed to be the best option for a client could indeed face accusations of mis-selling and the consequences that would follow if the case were proven.
Is it likely, as some have suggested, that this particular mis-selling possibility could blow up into a major industry scandal further down the line? It really beggars belief that any broker who has recently weathered the administrative storm and high cost of regulation to stay in our industry would now put their livelihood and reputation at stake just through laziness.
Common sense says that the vast majority of brokers are clued-up enough to see cascading for what it really is. It is a labour-saving tool that can help to inform the whole-of-market advice they give, making a significant contribution to the fairest possible treatment of non-conforming clients.
Getting it into perspective
Moving to the positive, we need to get the whole concept of cascading into perspective. To begin with, we have to remember that cascading remains a niche facility within a niche market. Our current experience at db mortgages for example shows that of the total population of decisions-in-principle (DIP) issued; only about 7 per cent are cascaded. For those clients and their brokers, however, cascading is of the greatest value.
The reason lies in the complexity of the non-conforming marketplace where there are no benchmarks on client eligibility for a certain category of product, only shades of grey. Every lender will have a slightly different way of treating factors like defaults and CCJs. Add to that the fact that clients don’t always give their broker an accurate account of their own circumstances and you can see why problems can occur. When the application is made, the broker may well not have a true understanding of their client’s credit profile.
When lenders run their checks through a credit reference agency to obtain the applicant’s true credit status and then also apply their own individual criteria, it’s not difficult to imagine the headaches for a broker that would result if cascading didn’t exist. He or she could potentially face making applications running into double figures with no guarantee of acceptance, each time having to generate a new form. It’s such an unacceptable situation that many brokers would probably reconsider the viability of trying to place some non-conforming cases at all – leaving some clients with a problem nobody will solve. This is something the critics of cascading should bear in mind.
Another important issue that opponents of cascading sometimes ignore is the unwelcome effect of repeated credit searches. Cascading will help direct the broker and their client to the best value product available as quickly as possible with the minimum number of ‘hits’ on a client’s record, even if these are treated as ‘soft’ footprints.
Addressing concerns
If we accept then that cascading is likely to remain a permanent feature in the non-conforming market, how does the industry work to address concerns by making sure the concept works in the best interests of clients?
One obvious issue is the role of lender underwriters in the process. The idea of completely automated cascading, whilst feasible, lacks appeal in the non-conforming marketplace because it would always lack the real-world flexibility of a human being making risk decisions based on skill and experience.
In an ideal world, technology and human understanding should work together to deliver the fairest outcome in the fastest time. At DIP stage a customer’s credit bureau data is automatically reviewed against the lender’s particular eligibility criteria. If the product initially selected by the broker or packager is unavailable to that customer for whatever reason, the case is referred to an underwriter who will look at the applicant’s profile and decide which product scheme the applicant can qualify for.
However,‘ best’ can mean more than one thing, of course. If we’re talking rate then the cascaded product should represent the very best rate available from that lender. Customers should always have the confidence of knowing that a lender won’t use cascading as an excuse to put them on a more expensive product ‘just because they can’. This still doesn’t mean that the broker can’t secure a better rate from another lender, which is why re-broking whole-of-market after a cascade is received is so important.
Not that rate is the only consideration. The principles of TCF also allow for other factors to be judged even more important in certain circumstances. If, for example, an applicant is struggling for a deposit then a loan-to-value of 90 per cent may outweigh a slightly lower rate from another lender whose LTV is only 85 per cent. Or, if there’s a contracts race, responsiveness of service may well be the deciding factor.
Packagers can also add a valuable second tier of cascading for brokers, as Peter Hatton of Jigsaw in Essex explains: “We carry out credit searches in almost as much depth as lenders with clients’ permissions, and sometimes this means we identify an issue which the client hasn’t disclosed, making the broker’s original lender choice unsuitable. We can go back to the broker and, without breaking Data Protection rules, suggest they talk to their client again. When the new picture is confirmed we can cascade between lenders using our knowledge of attitudes and criteria to inform the broker’s advice. Once with an individual lender the case may be cascaded again. In this way a packager adds value to the entire chain: brokers and their clients aren’t kept waiting, while any lender we suggest as part of our cascade is presented with a clean case that is likely to fly, saving their underwriters time.”
What goes down must go up
Something the regulator is perhaps justifiably concerned about is the way not all lender systems have the facility to cascade up as well as down. The possibility of downward shifts only clearly makes nonsense of the TCF-focused nature of cascading. An obvious example would be a customer who informs their broker about a CCJ from a few years earlier assuming this will affect their case. Indeed it may do with one lender, while another may choose to ignore the CCJ and upgrade the application to a more attractive rate than the broker anticipated. This is yet another benefit of cascading that isn’t always highlighted by detractors.
A further question is whether lenders should base their cascading decisions on credit scoring or credit bureau data. While both can theoretically be used, the credit scoring route can provide challenges to lenders. Another difficulty with credit score cascading is that it represents a big departure from the market’s current expectations. Brokers and packagers would have no way of knowing what product or price point a customer would fit in – so on balance it seems hard to see the benefits, and therefore most lenders cascade based on eligibility rather than credit score due to the complexities.
The non-conforming market is now a permanent part of the mortgage landscape and, within it, cascading has emerged as a powerful tool to cut through a minefield of complexities and give clients the fairest possible deal for their circumstances. All that’s needed is a grown-up attitude to the results it provides – and if any broker is childish enough to let cascading do their work for them then frankly they deserve the consequences.
The views expressed in this article are those of Mark Bergin, director of sales and marketing at db mortgages.
