A 28-year industry veteran and CEO of La Trobe Financial, Greg O’Neill, has come out hard against the charging of risk fees by specialist lending industry participants.
O’Neill, who has worked at La Trobe Financial since 1984, has seen many changes to the industry over that time and says one concern he holds for the specialist lending sector future is not interest rates, unemployment, or whether there is or is not a housing bubble, but rather the ‘unnecessary practice’ of particular specialist lenders charging borrowers a ‘risk fee’ without providing any correlated borrower/consumer benefit.
He argues that there are three things all brokers should now be asking before referring clients to any lender:
1. Is any Risk Fee being charged to my client?
It has become common practice for specialist lenders to charge borrowers risk fees of up to 1.5 % - and often 2% - to obtain the loan in addition to the higher rate of interest offered. These amounts can add up to $5,000 or more on some loans.
Unlike LMI offered by independent third party providers, O’Neill claims these specialist lender risk fees offer no consumer benefit or protection level at all for the borrower.
“LMI at least provides a bona fide independent contract of loss insurance for the lender, which in turn benefits the borrower from recovery actions of lenders to some extent. A risk fee charged by specialist lenders is merely pocketed as profit.”
2. Am I putting my clients’ interest first in referring them to this lender?
O’Neill says some brokers could appear to be potentially conflicted by the very existence of such risk fees without knowing it. It seems payment of risk fees may assist the chosen lender to pay the referring broker a higher upfront loan origination fee.
A fundamental basis of the NCCP Act was to ensure borrowers could easily compare loans, make informed choice, and be represented independently and impartially by their broker as their agent.
“The NCCP at section 47(1)(b) states brokers (credit representatives) ... ‘must not put the borrower at a disadvantage’ and placing a client into a loan with a risk fee from which you are sharing could be an argument to be prosecuted as a breach of general conduct obligations,” he says.
“Simply put, the broker must always place the borrower’s interest above their own in receiving remuneration. So…the question all brokers should be asking is: ‘Are my clients being charged a risk fee, and what benefit do the borrowers receive from that fee versus what benefit I as the broker am receiving or is there an alternative provider?”.
3. Is there a better alternative?
The ‘handful’ of remaining specialist lenders were deeply buffeted by the GFC due to increased costs associated with reliance on capital market securitisation funding, says O’Neill and they also had to contend with the Federal Government’s decision by Wayne Swan in December 2010 to axe loan exit fees in an effort to increase competition.
“This resulted in, if not all, then most specialist lenders adopting a front end loaded risk fee structure on all loan products to compensate for their lower overall profitability and to comply with the new legislative push.
“Ironically the current market outcome and distortion were foreseen by the May 2011 Senate Economics Committee inquiry into ‘Competition in the Banking Sector’, which stated the exit fee ban could lead to higher upfront fees and reduce competition…The absolute ban on loan exit fees of any amount has given rise to this current ‘risk fee anomaly’ resulting in no consumer benefit and several sector distortions. Unfortunately common sense did not prevail and the legislation was enacted with much fanfare about saving consumers.”
However, while O’Neill is the first to admit the specialist sector is small (roughly $2b of new loan volume per annum), it nonetheless remains an important sector of the much larger total $1.3 trillion residential lending market in Australia.
“Our organisation has for over 60 years served this sector with distinction and we understand such clients’ situations when dealing with them” he says.
“What we are increasingly seeing is the good brokers are now really asking the question about risk fee relevance and benefit, as they are truly understanding the business importance of representing the interests of their borrowing clients first.”