Mortgage brokers caught recommending costlier loans as ASIC exposes holes in industry oversight

Mortgage brokers have been caught recommending home loans projected to cost borrowers more than $20,000 extra over five years, with the corporate watchdog questioning the explanations behind 27 of the 41 costliest cases it examined.

The findings heap more pressure on an industry already battling revelations of at least $4 billion in suspected mortgage fraud involving major banks, brokers and other intermediaries.

An Australian Securities and Investments Commission review found some of the country’s biggest mortgage broking networks lacked the information needed to spot brokers repeatedly recommending dearer loans.

“We found that aggregators’ data approaches were patchy,” ASIC commissioner Alan Kirkland told The Nightly.

Two of the eight groups examined couldn’t readily retrieve loan-cost comparisons from their systems, forcing them to check files individually to measure the difference.

ASIC also found two groups tipped off brokers up to 72 hours before their files were audited, potentially undermining checks designed to catch compliance failures.

“Clearly, that can undermine the integrity of the audit process,” Mr Kirkland said.

ASIC found no evidence of wrongdoing linked to the warnings, though its report separately flagged potentially backdated disclosure documents.

Three groups also excluded some withdrawn, declined or abandoned loan applications from their compliance checks.

Mortgage brokers now arrange a record 81.6 per cent of Australia’s new home loans, handling $139.1b in the June quarter alone.

Unlike banks, which must comply with responsible lending laws, brokers also have a legal duty to act in their customers’ best interests when recommending a mortgage.

That doesn’t always mean offering the cheapest loan but brokers must justify why a more expensive option better suits the borrower.

“The greater the cost difference, the stronger the evidence needed to show the recommendation is in the consumer’s best interests,” Mr Kirkland said.

Seven of the eight groups reported their brokers recommended loans other than the cheapest shortlisted option in more than 20 per cent of cases.

Mr Kirkland said aggregators had a “stronger obligation” to supervise brokers operating under their licences, but should still monitor lending patterns across their platforms, including those of independently licensed brokers.

Asked what stopped a broker flagged for questionable lending from switching networks or seeking their own licence, he pointed to industry reference checks and ASIC’s fit-and-proper test for new applicants.

The safeguards rely on conduct concerns being identified and recorded in the first place, something ASIC’s findings suggest the industry was not always equipped to do.

Mr Kirkland said ASIC also had found complaints being “missed, withdrawn without being fully investigated, or delayed”.

In one case, a borrower was blackmailed by their broker who said that escalating a complaint to the Australian Financial Complaints Authority could cost them a goodwill payment.

Another customer’s online complaint apparently vanished, with the broking business claiming it had never arrived.

Pressed on if ASIC had investigated the incidents or taken enforcement action, Mr Kirkland would not disclose what steps the regulator had taken.

He acknowledged that failures to follow complaints-handling rules could breach the law, yet urged dissatisfied borrowers to lodge complaints and seek compensation through the external authority.

That leaves customers relying on a complaints process ASIC itself found was failing some of them.

ASIC examined Australian Finance Group, Connective, Finsure, Lendi Group’s Aussie, Loan Market Group, Mortgage Choice, Outsource Financial and Yellow Brick Road’s Vow Financial. It did not identify which groups were responsible for individual shortcomings.

The regulator deliberately selected 1600 loan recommendations for examination, so its findings cannot be extrapolated across the industry.