Does maligned policy have a place in today's broking market?
Clawbacks are a persistent bugbear of the mortgage broking world.
They have been cited as pet peeves by Australian brokers, while the Finance Brokers Association of Australia (FBAA) has even warned of their negative mental health implications.
Harsh clawback policies are particularly controversial among major banks with sizable proprietary channels.
MPA has heard reports of Big Four branch managers refinancing a customer out of a broker-originated loan – only to hit the broker with a clawback charge. While some brokers have successfully contested these fees, the practice continues to garner ill will.
As clawbacks remain a persistent frustration, alternative lenders are increasingly touting lenient clawback policies as a key differentiator in the competitive mortgage market.
Relative newcomer ORDE Financial has taken this to the extreme, with a zero-clawback policy across its entire product range.
ORDE managing director and chief lending officer Ryan Harkness (pictured) said the policy stems from building a broker-only lender from the ground up.
“When we first launched ORDE, we actually spent a lot of time dealing with brokers and working with brokers… In addition to the points – like inconsistent service, slow SLAs, and not feeling as well-served as they used to be – clawback was a key concern, even five years ago,” Harkness told MPA.
In fairness, Harkness has successfully seen this policy in action before; prior to ORDE, he spent six years at La Trobe Financial, one of Australia’s largest non-bank lenders. Like ORDE, La Trobe does not have a clawback policy.
There’s a clear rationale behind clawbacks. From a financial standpoint, they prevent a lender from paying out commissions on revenue that never fully materialises. If a deal unravels (a borrower cancels their mortgage, or sells their house, for instance), clawbacks recoup a portion of the broker’s commission.
But as Harkness said: “I've spent a lot of time in the industry, and in the majority of times, it's not the broker that causes the duration issue. Occasionally, customers will change their mind, or their position or circumstances change.
“Brokers have done the work upfront… and they shouldn’t be taking the full risk of their customers’ circumstances changing.”
But does that create an environment for brokers to take advantage of a lenient clawback policy? After all, clawbacks were first introduced to stop loan churning whereby some brokers would encourage their clients to refinance/switch lenders to nab an easy commission.
Balancing risk
Despite the immense scrutiny of the broking sector during the Royal Commission and the subsequent implementation of the Best Interests Duty (BID) reducing many of these practices, most lenders have retained a clawback policy to some extent.
These range from the particularly strict – such as Commonwealth Bank’s 100% clawback within 12 months – to stepped approaches favoured by the likes of AMP Bank.
One of ORDE’s non-bank competitors, Bluestone, has a 24-month clawback on prime full and SMSF loans, but just a six-month clawback on residential loans.
Other lenders, such as Better Mortgage Management (BMM), charge zero clawbacks on some of their most popular products (Bold Residential SMSF and Bold Commercial in BMM’s case) and stepped approaches for other products.
These various clawback approaches give lenders a safety net while providing leniency where they see fit.
But Harkness contended that “if you build a trusted relationship with brokers and brokers are dealing with customers that they have a trusted relationship with, clawback wouldn't be an issue.”
While Harkness hasn’t seen ORDE’s zero clawback policy specifically taken advantage of, he conceded that there have been “circumstances where the duration was shorter than we’d like.”
“We'll have the appropriate conversation if we think brokers are using our product range and creating churn themselves and we see it systemically, but it's really rare,” he said. “We don’t see it very often, and that probably comes down to the relationships that we've built with brokers.”
It is this relationship piece that Harkness drilled home. If there is trust among broker, borrower and non-bank lender, not charging clawbacks is simply the price of admission. Especially if you’re positioning yourself as built for brokers.
“It's where they're just trying to use our facility as a short-term, and they know it up front – then that would cause us concern,” said Harkness. “But we would have that conversation individually, instead of penalising every broker.”
Defending clawbacks
In Bluestone NSW state manager Tommy Lee’s view, a six-month clawback on residential loans strikes the right balance of doing right by the business and the broker. Anything after that “is a risk that we understand, but we accept,” he told MPA.
“I don't think that anyone plans on staying at a non-bank for a very, very long time and so for us, the (clawback) model is designed in a way that looks after brokers and recognises the fact that they need to do the right thing by their customers,” Lee said.
He explained that borrowers often turn to non-bank lenders like Bluestone when they are unable to secure a loan from a traditional lender.
But Lee also recognised the fact that borrowers are likely to transition to a more mainstream lender when the time is right. A prohibitive clawback policy on regulated loans would be in direct conflict with these customers’ needs.
While Bluestone has a relatively strict clawback policy, the group drew attention to the propensity for lenders to charge borrowers substantial early-exit fees which brokers should be aware of.
ORDE, for its part, charges an early repayment fee on unregulated loans of between 0.75% and 1.5% of the original loan amount within three years. La Trobe also cautions that break fees “may be calculated by reference to retail interest rates… or wholesale interest rates”.
