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Clawback commission confusion: What the law says

Charging clients clawback fees has been the source of much discussion lately in the broking space. On this week's Broker News we speak to Jon Denovan of Gadens Lawyers who says that a shift is occurring as understanding and clarity grows around the need for them.
 

Video transcript below:

Anna Temple: Charging clients clawback fees has been a source of much discussion lately in the broking space. Jon Denovan of Gadens Lawyers says a shift is occurring as understanding and clarity grows around the need for them.

John Denovan, Gadens Lawyers
Jon Denovan:  I think there is a changing view about the ethics of getting clawback from borrowers. You must remember that before, borrowers are liable to pay deferred establishment fees or exit fees.  Those fees have gone now, but borrowers are still not having to pay big establishment costs and so they are not paying establishment costs, somebody is subsidising it.  And the person who is subsidising it is the lender if the loan runs long enough or you, if it doesn’t run long enough, you the broker.  So it’s only fair enough that you should be able to claw that back.
 
Anna Temple:  Whilst brokers are well within their rights to charge clawback fees to clients, Denovan warns that brokers must make sure they are doing so within the law.
 
Jon Denovan:  The key thing is though, making sure you do it legally because charging for clawback is exactly the same as charging for commission.  And if you are dealing with regulated loans, to charge for commission to borrowers, you have to have a thing called  a quote, that’s what is called a q-u-o-t-e quote and that has been signed by the borrower before you provide credit assistance, so the timing is important.  It’s no good having it as an afterthought, it needs to be done before you suggest or arrange a specific loan for the borrower.
 
Anna Temple:  The most important thing according to Denovan is to be transparent about these charges from the start to avoid pushback later.
 
John Denovan: The thing about charging anybody anything is to make sure that it’s clear and transparent, because if you charge by ambush you always get pushed back.  So it’s not something to be afraid of.  You are arranging a loan, you are doing your job, the borrower is paying nothing for your services and you say look, if you repay the loan within 3 years or 5 years, whatever the clawback period is, you will have to pay part of the establishment fee because I have to pay back my commission.  And then it’s important to remind the borrower, perhaps annually that that exists because 3 years down the line, they will forget and suddenly they are selling their house or re-financing and they get hit with a bill for $3,000 and they hate you.  So keep them in the loop and things should be smooth sailing.
 
Anna Temple:  This is Anna Temple reporting for Australian Broker Online.