Have you been Ripped Off?

There are some well-known scams in mortgage broking. The most common is a system operating around the country where people are cold called and then visited with a promise of improving the efficiency of their finances unlocking the equity in their homes. They may be invited to sign a $300 bond for ‘valuation fees’. One couple who are now getting their home loan through Peach Home Loans signed away this money on their credit card and were told that they could get the money back if they change their mind. But they couldn’t!

The real sting is a charge of some thousands of dollars usually between $1,200 and $5,000 to ‘consolidate’ existing home loans into one line of credit often with a credit card attached. Fancy software is used to demonstrate how much they’ll save or how they can spend their savings in additional holidays etc.

Usually these lines of credit are simply expensive residential lending products at standard variable rate or above. Of course if credit cards are being refinanced into the debt mix, it is sometimes possible to demonstrate some interest savings. But it’s near on impossible to demonstrate savings where the client has an existing home loan at a reasonable interest rate. Never mind, the software shows how terrific things will be if the people the same people who can’t really handle a credit card are able to invest in property.

In addition to the up front fees they manage to wangle out of their customers, the brokers also pocket hefty commissions from the lenders. Lines of credit used to be ‘premium’ financial products but some lenders are now making them available at discounted rates along with ‘basic variable’ products. Likewise lines of credit can be obtained at very cheap rates within professional package type products.

Some lenders providing these products have ‘trailing commissions’ or payments paid for the duration of the home loan that rise to over three times the industry average after a few years. Nice work if you can get it even better if they’re paying you a consulting fee!

Needless to say, our view is that brokers should be seen as essentially agents of lenders like salespeople in department stores. They have access to a range of products and knowledge of the market, so they are useful. But their ‘advice’ should be taken with a grain of salt.

I recently participated in a ‘hypothetical’ put on by that first rate insurance company AAMI and ran into someone who works for the Victorian Consumer Credit Legal Centre. I asked her to provide me with useful phone numbers for people who had had problems with consumer home loans around Australia. This is her contact list. Contact these phone numbers if you feel you have been ripped off or not treated fairly by anyone in the finance industry. They’re only a phone call away.

In the meantime, amid the calls for regulation, Peach Home Loans supports the establishment of an ombudsman which cannot be opted out of by industry members. We have seen our share of vexatious consumers, so we think that consumers should put up a small say $20 refundable deposit to lodge a complaint. The complaint and resolution of it should then be funded by firms against which there are complaints. This and other complaints mechanisms should enable us to detect and remove from the business anyone who is declared by a complaints body to be not a ‘fit and proper person’ to be in the industry.

Why shouldn’t we have ‘licencing’ for mortgage brokers and regulate what they do more heavily with specified and auditable procedures for provision of advice. The answer is quite simple. Regulation is very costly and it would actually legitimate the structure of the industry where brokers pose as advisers but operate as salespeople with access to multiple products like salespeople in a department store.

The heavy regulation of investment advisers legitimates their practices which involve disguising salesmanship as ‘advice’ at the same time as adding substantially to costs. If the same thing were to happen to mortgage brokers, Peach would be unable to afford anything like the rebates we offer now.

But enough of this argument until another day and another newsletter.

The contacts for consumer complaints about brokers and consumer credit more generally are as follows:

For free financial counselling and/or legal assistance in relation to consumer credit problems, contact: