Clawbacks: How big is the problem for brokers worldwide?

Mortgage professionals based around the globe speak out

Clawbacks: How big is the problem for brokers worldwide?

It’s a common thorn in the side of mortgage brokers in Australia: the prominence of so-called clawbacks, allowing companies to claim back commission payments made to brokers in the event of a loan terminating early.

That trend – labelled “buybacks” in other markets, including the United States – was discussed by brokers from across the globe on a panel at the recent International Mortgage Brokers Federation’s (IMBF’s) inaugural 2023 World Summit, with the difficulties faced by Australian brokers coming to the fore.

Peter White (pictured top right), IMBF’s global chairman, noted that in previous years, brokers in Australia risked losing up to 100% of their upfront fee in the two years following the origination of a loan – and while that has improved slightly in recent times, there’s still a steep price to pay.

“That has changed around a little bit. It’s now come back in some cases to 18 months and sometimes 50%, so different lenders have different models,” he said.

“But in general, it’s [within] one year that you risk [losing] 100% of your upfront if the loan terminates early in that first year.”

White said he had recently been engaged in discussions with authorities aimed at improving that situation for brokers, who he argued shouldn’t face such punitive measures if they are truly acting with their clients’ interests in mind.

“You can’t take 100%. You must leave the broker something,” he said. “They’re running a small business, they’ve had all those expenses – they don’t get reimbursement for that. So they’re making huge losses when these things happen.

“As long as they’re… acting in the best interest of the client, as long as that’s what’s playing out, then there’s got to be some sort of recourse. [If] the lender hasn’t made a profit they’re expecting to make, they must give the broker something.”

Australia, White added, appears to have the harshest clawback-related penalties in the world, a particularly difficult reality for brokers considering the fact that early termination of a loan, while rare, remains a possibility.

“A loan [can move] early. Either somebody set the deal up wrong, which can be a problem in those first four months, or alternatively somebody just won the lotto, they’ve had a death in the family, got an inheritance, they decided to pack up and move overseas,” he said. “They can move around and change jobs. We have a lot of people move up and down that Eastern Seaboard.”

How do clawback rules differ elsewhere?

In Ireland, meanwhile, brokers generally receive 1% commission across the board, according to Rachel McGovern (pictured, top left), director of financial services at Brokers Ireland, with the severity of clawbacks depending on the year of the loan termination – usually amounting to 100% in the first year, 50% in the second, and 25% in the third.

While commissions in Canada vary depending on the terms, clawbacks there are comparatively rare, according to Sadiq Boodoo (pictured, top centre), president of the Canadian Mortgage Brokers Association – Ontario (CMBA-ON).

“For the most part, none of [the lenders] have a clawback,” he said. “Some lenders have specific products [for which], if you break it within the first year – some of them are six months – they’ll claw back, but nothing after that.

“The majority of the lenders out there charge a penalty on breaking [a contract], so if the client takes a three-year or a five-year, and they break it after year one, the client’s paying a penalty. So the broker does not get clawed back.”

What impact will technology have in the mortgage space?

The question of whether artificial intelligence could transform mortgage industries across the world was also raised, with Carla Giles (pictured below), chief executive officer of CMBA in British Columbia, noting that brokers have nothing to fear from technological advancement.

“Some brokers are concerned about that. The ones that provide value, I don’t think they are,” she said, adding that AI can prove an excellent tool for marketing purposes.

Where technology is concerned, a potent trend is likely to be growing consolidation in the mortgage space, Giles said, and the emergence of financial technology firms that provide a wide array of services.

“I think the biggest issue, though, that is happening in Canada and across the world is that you’re going to see a consolidation of different types of business within one company,” she said. “So instead of you having an industry where you have very separate professions, such as realtors, brokers, appraisers, what will probably happen is consolidating all of that within one of these fintech companies.”