A non-bank lender has criticised the lending practices of banks, saying that broker clawbacks are akin to modern day slavery.
Peter James (pictured above), the executive director of non-bank lender Mortgage Ezy, pointed out that broker churn had shifted to “lender churn”. This involved incentivising refinancing by offering cashbacks, honeymoon rates, and withholding rate increases until after RBA decisions, which could mislead clients.
“Brokers, through no fault of their own, find themselves effectively working for free as banks have lured clients with these incentives to facilitate refinances with minimal verification, putting broker loyalty to the test,” said James. “This trend has tempted many clients amidst significant cost of living pressures and unprecedented interest rate hikes that they have faced.”
“These practices have led to what we at Mortgage Ezy have dubbed ‘Modern Day Slavery’ and pushed us to, in essence, eradicate clawbacks altogether.”
Broker churn occurs when borrowers refinance through a different broker to get better terms, like a lower interest rate or cashback. Lenders pay a commission to the broker when a loan is settled, making this practice costly for them.
To discourage broker churn, lenders introduced clawback policies. These policies require brokers to repay some or all of their commission if a loan is refinanced within a set period, typically 12 or 24 months. Clawbacks have sparked controversy, with brokers arguing they are unfair given their existing regulatory obligations, such as the best interests duty (BID).
Supporters of clawbacks argue they protect lenders from financial losses, which can translate into higher interest rates for borrowers. There’s a movement for policy reform, with calls to cap clawbacks at 12 months and eliminate them when brokers act in the borrower’s best interests.
In 2023, the Commonwealth Bank of Australia (CBA) extended its clawback period to 24 months and introduced a gradual clawback schedule. However, the Finance Brokers Association of Australia (FBAA) contended that these changes were insufficient.
Other lenders have adjusted their clawback policy to help improve brokers’ cash flow.
NAB still maintains its 50% clawback for loans that refinance between 12 and 24 months after settlement.
For its part, Mortgage Ezy stamped out clawbacks on 28 of its products in July.
But while mortgage brokers are “free” to choose whether or not to work with lenders that have clawback provisions in their contracts, they are also bound by BID.
James explained that brokers could struggle to meet their customer obligations while avoiding contracts that might result in them working without compensation, given that clawback provisions were common among major banks and lenders.
James said the unfortunate result of this trend was the “commoditisation of mortgages”.
“Lending has been reduced to a race to the lowest price, often at the expense of responsible lending standards. In this climate, the valuable advisory role of a broker is devalued, and clients are encouraged to constantly switch lenders,” he said.
“With loan terms decreasing, lenders have less time to recoup their costs and generate returns on equity, ultimately leading to higher costs for all borrowers.”
With nearly one million borrowers rolling off low fixed rate terms, the mortgage market has become increasingly competitive as refinancing levels increase.
James said banks resorted to a strategy known as “loan cannibalisation” as they sought to maintain and expand their new loan volumes without compromising their Net Interest Margins (NIM) or return on equity.
“This approach has gained traction, particularly as banks find themselves with limited opportunities to refinance non-bank loans, which were a significant source of new business over the past year,” James said.
The process of devouring each other’s loans involves banks aggressively targeting and competing to refinance the existing loan portfolios of other banks, according to James.
This practice has led to several notable developments in the lending landscape such as cashbacks and, in James’ view, reduced lending standards.
“This relaxation includes reducing assessment rates, requiring less stringent income verification, and, in certain instances, allowing refinancing without the usual servicing requirements if the offered interest rate is lower,” James said.
“While these changes may entice borrowers with the promise of initially lower rates, they also introduce potential risks, as loans with less stringent standards may be more vulnerable during economic downturns.”
Ultimately, whether you think the comparison between clawbacks and slavery is valid is a matter of opinion.
In one sense, slaves are forced to work for their masters for little or no compensation. In the case of clawbacks, brokers are forced to work for lenders for little or no compensation if a borrower refinances within a certain period of time.
As more lenders resort to “smoke and mirror” tactics and short-term offers, James said consumers would be the ultimate victim in this situation.
James said customers could feel misled, paying more in the long run, and often ending up in loans that are ill-suited to their financial needs – undermining the initiatives aimed at ensuring positive customer outcomes in the lending market.
“As the lending landscape continues to evolve, it becomes imperative to closely monitor the impact of these practices on borrowers and the overall economy.”
“Striking a balance between competition and responsible lending is essential to ensure the financial well-being of borrowers and the stability of the lending market.”