The week we speak to Paul Wells of La Trobe Financial about their view on commission clawbacks in the specialist lending market and the value to brokers of Australia's niche credit specialists market.
Video transcript below:
Reporter: Recent discussion around clawbacks in specialist lending has prompted La Trobe Financial to take a tough stance. We spoke to Paul Wells, Chief Investment Officer about why and also my brokers should be taking advantage of Australia’s niche credit specialist market.
Paul Wells, Chief Investment Officer, La Trobe Financial
Paul Wells: As a specialist lender we don't have a large branch network. We rely completely on brokers for our originations. It's important to us that their value is fairly recognised. We believe that where a lender agrees to pay the cost of acquisition for a loan the broker shouldn't subsequently have that payment taken back for events that are outside their control. That said brokers need to recognise that more the more they ask for upfront, the more likely that may depend on value that is only created by an extended loan term. That’s particularly somewhere that new prime lending stands above prime lending in our view. Most specialised lenders are able to charge the bar and upfront fee and that fee is more than enough to pay the broker their upfront commission in full. So you don't need an extended loan term. Now question seems to be emerging in specialised lending and as to what that upfront payment relates to. Traditionally it’s an application fee and that covers the work undertaken in underwriting the loan and in on-boarding the loan into the systems and in paying the broker their upfront commission. We have had some lenders now characterising that fee as relating to something other than their up-front work. We disagree with that. If it is a risk fee then in effect the clawback means the brokers is subsidising the lender running a discounted borrower rate and we don't think the broker should be responsible for that either. For La Trobe Financial by recognising that fee as an application fee even if the loan discharges early we've got no reason to try and clawback that commission.
Reporter: Wells feel strongly that the new prime space is doing well for a number of reasons.
Paul Wells: Experienced lenders and brokers know that new prime residential and commercial borrowers are an important long-term segment of Australian lending and that they can be lent to successfully and responsibly. As an issue underpinning new prime lending, what we've seen is the funding markets and I can do understand and agree with that, in the recent years they are now backing new prime strongly and most importantly in our view, we think that's much more a liable over the longer-term. The other issue that's cleared out is the that new consumer regulation that came out in 2010. Legislating responsible lending was always going to be a good thing because inversely inevitably over time it was going to leave a defined space for specialized lending that was approved by both legislation and by ASIC. That's now happened. The aggregators and brokers are progressively realizing that and they're re-engaging with new prime very strongly.
Reporter: So why does La Trobe feel that specialist lending is relevant for brokers?
Paul Wells: Two reasons. It is the source of immediate additional revenue and strengthening their client relationships. The additional revenue comes from two sources – [existing deal flow]. To do that the specialist lender has to be very good at limiting any additional work involved in these deals, making sure it's fast and efficient for the broker. Existing relationships is because we take a view that specialist lending should not only be residential. It should include small commercial, small construction and some specialized assets and so for some brokers those assets, those deals are beyond their scope. We don't see it that way. From our perspective one of the skills of good specialist lenders is to be able to leverage their servicing, their documentation and their broker education skills, to bring those sort of deal flow within the scope of the broker. By doing that you're also then strengthening the client relationships because you're able to make meet more or maybe even all of your broker clients needs.