Clawback confusion: Is it ever ok to charge clients?

by Mackenzie McCarty19 Aug 2013

The introduction of clawback fees for brokers hasn’t had the negative impact on lenders – particularly mortgage managers - that many predicted following the abolition of deferred establishment fees in 2011, but confusion remains as to what actions brokers can take to recoup some of the loss.

Australian First Mortgage (AFM) founding director, Iain Forbes, says there hasn’t been a noticeable backlash from brokers since the group began charging clawback fees, he suspects, because most can agree there are few other options.

“Clawback fees are charged by AFM and we have no option but to charge these fees, as no business can pay a commission, have the mortgage discharged and not charge a clawback  if the mortgage is discharged in say three to six months…Brokers do accept that this is part of doing business. There is no resistance whatsoever.”

While he agrees that clawback fees aren’t necessarily the fairest option for brokers – or for lenders- Forbes says there simply aren’t any viable alternatives.

“It does cost the lender a considerable amount of money to put a loan on its books and if a borrower has used a lender for a short term and then discharges a loan again in six months after settlement, the lender has in fact lost money.  Whilst the borrower has benefitted from the loan, both the broker and the funder have lost money.”

While some brokers have opted to pass clawback fees onto clients themselves, some remain confused as to the legality – or ethicality - of doing so. Forbes says those who try to clawback fees from their own clients could even be violating the law.

However, Gadens Lawyers partner, Jon Denovan, says getting a clawback from the borrower isn’t illegal so long as you offer a quote that complies with all the rules.

“It has to be signed by the borrower and it has to happen before you provide credit assistance, so it’s got to happen pretty early in the discussions…If you don’t have a quote that complies with the law; if you were just hanging around with a short agreement that you typed up or a credit card so that you could debit their account, then to do so is illegal - it’s a criminal offence.”

Denovan adds that, while he’s aware of a large number of people who frown upon the practice from an ethical viewpoint, he disagrees with the idea that it constitutes ‘double-dipping’.

“It’s not double-dipping, is it, because you’ve lost your commission…This clawback of commissions is only there because the banks can no longer charge a [deferred establishment fee]. So it’s a way of circumventing the government’s elimination of defs, which is probably a bloody good thing, because it was a silly thing to outlaw. Being the inventor of defs – I invented them for Aussie in 1996 – they allowed borrowers to get loans without paying establishment fees. A clawback is the same thing; a clawback fee is the bank charging borrowers…an establishment fee like they used to.”

However, one issue brokers need to be aware of when charging clients a clawback fee, from Denovan’s point of view, is the potential for ‘fee-by-ambush’.  

“The difficulty is, there’s often a ‘fee-by-ambush’ and that’s what the government didn’t like about deferred establishment fees; you’re organising to refinance or sell your house and all of a sudden you find out your three grand poorer.”

“I always recommended to banks when they had defs - and now I recommend to brokers if they’re going to have this clawback - to keep in touch with customers once a year and just remind them that that fee is there, because people are less likely to complain if it’s not a surprise.”


  • by Andrew 19/08/2013 10:29:46 AM

    As Iain says "no business can pay a commission, have the mortgage discharged and not charge a clawback..." and that exact concept applies to the Brokers business too. The broker incurs costs writing the loan, so just as the lender seeks to recover some costs via clawback, so too the broker should seek to recover some costs via a fee. If it is ethical for a lender to recover some costs, then it sure ain't unethical for a broker to do the same.

  • by Michael eberand 19/08/2013 10:34:39 AM

    I disagree with Forbes.

    The lenders have ample margin to at least only part charge a claw back.

    A hefty part of what we do is provide labour otherwise the lenders would have to put on more employees. They do not charge their employees back their hourly wages.. And so should we also retain part of the commission for the work.

    If margins were very tight we could understand but given profits and margins where they are , to me, lender full claw backs is what is unethical.

    Good on Advantedge for understanding and having a 50% claw back arrangement- they provide the respect to us mortgage advisors which we deserve. That's why I support them

  • by Michael eberand 19/08/2013 10:40:28 AM

    Issue is a claw back is a substantial hit for broker of passed on to client . But as a cost to the mortgage provider it would be simply absorbed into the overall profitability of the product.

    Margins are now out where they were or better than when we had no clawbacks and higher commission rates.

    Broker commissions should simply be part of the funding model for the home loan lender- get rid of clawbacks and support lenders who support us by not having them or at partial clawback only