What is a mortgage manager?
For the purpose of this document, a mortgage manager is an intermediary between the funder/lender and the customer. The key characteristic of a mortgage manager is that the manager presents itself as a product distributor rather than a finance broker.
If a business presents as a finance broker, borrowers will expect that the business will shop around to find them a suitable loan. However, a mortgage manager should be seen by borrowers in the same way as a lender is seen.
It is essential that the capacity in which the licensee is acting is made clear through:
- the Credit Guide;
- consistent and clear advertising, promotional activity, and conduct.
There should be nothing in the relationship which detracts from the manager being a product distributor as distinct from a finance broker.
A business can change hats. By way of analogy, a customer dealing with a Mercedes dealer will understand that the dealer is acting as a seller and that caveat emptor – buyer beware applies. However, if a Mercedes is not appropriate for a particular buyer, the Mercedes dealer could change ‘hats’ and become a consultant to assist the customer to buy another vehicle from a third party supplier. In the same way, a mortgage manager can change from a product seller to a finance broker but it is absolutely essential that:
- the initial nature of the relationship is made clear; and
- any change to the nature of the relationship is made clear.
What is this paper about?
This paper deals with the following current issues:
- white label programs;
- conflict of interest;
- outsourcing; and
- pricing issues.
In this paper, we focus on challenges faced by customer facing managers – ie managers who deal directly with the borrower. Most of these issues will not apply to ‘up the line’ managers – ie managers who sell through finance brokers or other third parties. A manager will be considered to be ‘up the line’ even though the manager deals with borrowers directly in relation to credit approval or management after an introduction from a third party broker.
For the purpose of this paper, a white label broker is a broker who has a product named after the business (for example, the Jones Home Loan) but has no ability to set the interest rate. Accordingly, the white label product simply becomes another product that the broker can offer. White label is just product branding. Using this definition, a white label broker is not a mortgage manager.
Sometimes white label products provide brokers with higher commission than some other products. This is acceptable so long as the consumer is not worse off as result of the higher commission.
Conflict of interest
All licensees are subject to the requirement that they must ‘have in place adequate arrangements to ensure that clients of the licensee are not disadvantaged by any conflict of interest’.
If a broker can set the interest rate, there is a conflict of interest which will be hard, if not impossible, to manage. This is because the higher the interest rate the borrower pays, the more commission that the broker earns. Although the NCCP provisions dealing with conflict of interest do not apply brokers dealing with unregulated finance, they would still need to ensure that their dealings with customers were not misleading or deceptive.
On the other hand, managers have managed this potential conflict of interest by virtue of the nature of their relationship with borrowers. They are in the same position as lenders where the borrower should know that the higher the interest rate, the more the lender (or in this case the manager) will earn. In the same way that lenders are not obliged to disclose their margin, it would be inappropriate for managers to disclose their margin and that disclosure is not required provided the requirements discussed under the next heading are met.
Mortgage managers are governed by the same regime as finance brokers – ie the NCCP Act treats them as ‘credit assistants’ as distinct from ‘credit providers’. Accordingly, managers must provide a Product Disclosure Document (PDD) (except for CL13 servicers of exempt special purpose funding entities which are outside the scope of this paper).
Managers are usually remunerated by the margin between the delivery rate (the rate at which the funder provides the product) and the borrower rate (ie the interest rate paid by the borrower). This amount is paid by the funder to the manager and will probably comprise ‘commission’ for legal purposes and therefore will form part of the commission that needs to be disclosed in a PDD.
Regulation 28H(3) provides that commission need not be disclosed in a manager’s PDD if all of the following apply:
- the manager is required to manage the relationship on a day-to-day basis;
- the credit contract and associated documents are branded or co-branded with the name of the manager;
- the manager told the customer about the manager’s written agreement for management and origination of loans;
- the manager told the borrower that the manager is not acting for the borrower;
- the maximum cost and the interest rate to be charged are published on the manager’s website [The regulation currently refers to the lender’s website, but Treasury has stated that this should be interpreted as a reference to the manager’s website. This is expected to be confirmed soon in ‘fine-tuning’ regulations to be made.];
- the manager cannot increase the interest rate above the interest rate that is published on the website [For variable rate loans this must be a reference to the initial interest rate because otherwise it makes no sense. The MFAA has requested Treasury to make ‘fine tuning regulations to make this clear.].
The best way to display a maximum rate on a website is to show the maximum rate for each product. Of course, it is fine to offer discounts from that rate to secure business.
Some managers outsource all or part of their function to the funder or another third party.
This outsourcing should not change the categorisation of the manager so long as the outsourcing party represents the manager in relation to day-to-day control. The key factor is the nature of the relationship between the manager and the consumer.
Some lenders and managers set interest rates by reference to a ‘reference rate’. A borrower’s interest rate might be set at a margin above or below the reference rate. The margin may be set for the life of the loan or for a specified period.
Other lenders and managers have a wholly variable interest rate.
Under both the reference rate and wholly variable rate regime, the law will require the lender or manager to exercise its unilateral right to vary interest rates reasonably. This will be an implied term into the credit contract even if there is no express statement in the credit contract that the right must be exercised reasonably. In addition, section 78 of the Credit Code provides that a court may annul or reduce a change to the interest rate if it is ‘unconscionable’.
The initial commercial position of a borrower under a reference rate or wholly variable rate model is the same. At the particular time when the borrower’s initial advance is made, the initial interest rate may be set at a discount to the reference rate or variable rates may be low and so the new borrower may be paying more or less than existing borrowers.
However, there is a difference between a reference rate and a wholly variable rate throughout the term of the loan. This is what I call the ‘parity’ issue.
For example, if Joe obtains a loan set by a reference rate, and Jill later obtains a loan at 25 bps below the reference rate for the life of the loan, Joe will know that Jill is paying 25 bps less than Joe. Joe can normally go to the lender’s or manager’s website and see the reference rate. The ‘parity’ between Joe and Jill may remain the same throughout the life of the loan – ie there will always be 25 bps difference.
However, often lenders with reference rates reserve the right to re-set the rate if there is any change to the loan (switches, splits etc), or if the lender decides to vary the base rate or margin. Further, reference rate lenders can introduce new reference rates for different products. So, borrowers with a reference rate loan are often not guaranteed parity.
Likewise, in relation to a wholly variable rate loan, the parity may change. Although Jill may start at 25 bps less than Joe, Jill’s rate may vary at different times by different amounts from Joe’s rate.
The difference in the changes to the rate may arise for a number of reasons including:
- the loan is part of a different pool which has been funded in a different way;
- the funder has allocated different interest rates to different pools of funds;
- there are different funders for different mortgages.
A borrower under a wholly variable rate may at any time be better or worse than a borrower under the reference rate regime when compared to new borrowers, and so it cannot be asserted that borrowers under a wholly variable rate regime are better or worse off. Many funding pools are wholly variable and any restriction on their ability to vary rates acting reasonably could significantly reduce competition and available funds.
It is clear that lenders and managers are entitled to vary the interest rate so long as they do not do so unreasonably or unconscionably. The issue is exactly the same for managers and lenders who have a reference rate or a wholly variable rate. There is no reason why borrowers should expect parity.
Licensees should consider a specific disclosure in their promotional material, credit guides, and credit contracts to the effect that ‘because your rate is variable, your rate may differ from other rates advertised by us’. Advertising, website, and promotional material should convey a consistent message.