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.”