When borrowers refinance to secure a better deal or cashback offer, brokers are having their upfront commissions clawed back (when it falls within the first two-year period of a new loan). Many Brokers are forced to work for free if the loan discharges within the first year.
Peter James, the founder of non-bank lender and mortgage manager Mortgage Ezy, claimed it’s time to stop punishing Brokers and eliminate this ugly blight on the industry – clawbacks.
“I’d like to see cashbacks and clawbacks eliminated from the industry entirely.”, he chided.
“All loans on our Ezy Program now have no clawbacks… they’re gone,” stated James. While clawbacks were initially implemented to prevent brokers churning clients, James explained that banks, rather than brokers are mainly to blame for clients churning so he doesn’t understand why the industry makes Brokers shoulder the cost.
James noted that several banks have been enticing borrowers with cashback offers in recent years, reaching amounts as high as $6,000 to $10,000. These offers provide borrowers with an immediate cash incentive to refinance with another bank, which may or may not be in their best interest.
According to the FBAA, the cost of clawbacks for brokers between 2018 and 2021 surged by 47.4 per cent, from $10,229 in 2018 to $15,077 in 2021. In 2022 this has increased exponentially with 2023 even worse.
“It’s highly unfair to hurt brokers—who are diligently acting in their clients’ best interests—simply because banks are handing out wads of cash to bribe borrowers,” James argued.
Regarding loans discharged up to two years after their start date, “In our case, even if a loan has unfortunately discharged the following day, we would claw back nothing,” he added.
The sole exception to the no-clawback policy is when a broker is found to be deliberately churning business and proven not to be acting in their clients’ best interests. “That’s the only time we’d tap the broker on the shoulder… I believe that’s the direction the industry needs to go,” James said. “If the broker is acting in the best interests of the customer, why should they be penalised?”
James observed that the lending environment has changed since the introduction of clawbacks and no longer sees a reason for them to exist. He expressed hope that Mortgage Ezy’s decision to remove them would inspire other banks and lenders to follow suit.
“It’s important to remember that, in the past, brokers could recoup that money from their clients,” James pointed out. “That’s been eliminated… brokers cannot seek compensation from their clients for clawbacks.”
According to the MFAA 2022 December quarter figures brokers now handle 69.3% of all residential home loans highlighting the value they offer. James recognised that, in some instances, brokers work for no compensation, which Mortgage Ezy considers “unsustainable.” and “unwarranted.” Some Brokers have compared this with “Modern day slave labour of Brokers”, he emphasised.
Acknowledging that cashbacks tempt borrowers to refinance, increasing the likelihood of clawbacks, James expressed disappointment that “cash for loans” has become such a significant aspect of bank lending. In some cases, he noted that he had seen borrowers on internet forums encouraging each other with tips on how to refinance multiple times a year.
Not only do cashbacks harm brokers, but they also hurt borrowers, he stressed. “A person could refinance every few months, the broker gets clawed back each time, and they work for free… banks are using that clawback to some extent to finance churn from others,” James explained.
He argued that resources currently devoted to refinancing loans through cashback offers, should be redirected toward lowering interest rates and/or reducing fees for all.