Arun had been Kahurangi’s mortgage broker for about ten years. When Kahurangi decided to build a new property, she asked Arun to arrange finance to purchase the section and build a house. Arun arranged the finance on a three-year fixed interest rate term with a bank. Kahurangi indicated that she was satisfied with the service he had provided.
After about 12 months, Kahurangi’s friend persuaded her to refinance with another bank. Kahurangi was aware of the early repayment cost she would have to pay her bank but was shocked when she received an invoice from Arun. Kahurangi called Arun and explained that her friend was just starting up a new mortgage broking business and she wanted to help her. Kahurangi told Arun that she did not know about the fee and did not think it was fair of him to charge her about $3,000 to arrange the finance.
Arun explained that because the bank had ‘clawed back’ the commission they had paid him to arrange the finance, he was just recovering this cost from Kahurangi. Arun referred to the contract Kahurangi had signed when she asked for his help to arrange the finance.
Arun did not agree to waive the fee and Kahurangi complained to FSCL.
Kahurangi explained there was more to her decision to refinance than simply helping her friend. Kahurangi said that Arun was aware of some other sections she wanted to develop and had spoken to the bank about finance. When she spoke to the bank about this, the bank were completely unaware and said that they would not lend her any more money. In addition, Kahurangi felt Arun had given her son bad advice when he recommended a particular insurance policy. Kahurangi said she had lost faith in Arun’s abilities.
Further, Kahurangi did not know she would have to pay Arun a fee if she repaid the loan within three years. She said that Arun should have drawn this clause to her attention when arranging the loan.
Arun did not accept that Kahurangi did not know about the fee. It was disclosed on the page Kahurangi had signed. Arun explained that he had spent 23 hours arranging finance for Kahurangi. The application was not straightforward because Kahurangi was self-employed, and the finance was released in stages as the building project reached completion milestones.
Under the contract Arun disclosed that he would charge $250 an hour for 20 hours of work arranging the finance to a maximum of $5,000. The bank had paid him $4,590 for his work arranging the loan and had clawed back $3,029.40. Arun had charged Kahurangi $3,439.40, $5,000 less the $1,560.60 not clawed back by the bank.
Arun said that he was unaware of the development referred to by Kahurangi and did not accept he had made any mistakes arranging insurance for her son. Arun felt Kahurangi had refinanced to help her friend and it was not fair that he should lose income as a result.
Usually, a lender pays a commission/brokerage fee to a mortgage broker for the work involved in arranging their mutual client’s lending. However, if the loan is repaid early, the lender will recover some of that brokerage fee. This recovery is called ‘clawback’.
Although Arun was able to retain some of the brokerage, he had lost $3,029.40 as a result of Kahurangi refinancing her loan early.
Was the fee properly disclosed?
Although the clauses disclosing the fee were not well-drafted, it was our view that, if Kahurangi had read them, she would have understood that if she repaid the loan within three years, she would be liable to pay Arun the amount clawed back by the bank.
Can the fee be justified by the amount of work involved?
Arun produced a retrospective timesheet to support his advice that he had spent 23 hours working on the application. The time allocated to some of the tasks seemed excessive and an hourly rate of $250 is at the upper end of the scale for the type of work undertaken.
However, overall, we decided that Arun was entitled to be paid for the work involved in arranging the finance and the application was not entirely straightforward. It was our view that the $3,029.40 Kahurangi was being asked to pay was not unreasonable for the amount of work involved.
Are there good reasons why Kahurangi should not have to pay the fee?
There was no evidence that the development of the other sections was discussed with Arun. If Kahurangi’s son had concerns about the insurance recommended by Arun, he could complain to FSCL.
Debt recovery fees and default interest
Arun also wanted to charge Kahurangi additional debt recovery fees of $575 and interest at 18%pa. We thought that $250 an hour for debt recovery work and overdue interest of 18%pa were excessive and should not be charged in the circumstances of this case.
It was our view that Kahurangi was obliged to pay the $3,029.40 to compensate Arun for the money he had lost when the bank clawed back the brokerage. However, we suggested that if Kahurangi paid the $3,029.40 within two weeks of signing the settlement form, Arun should waive the default fees and interest.
Both parties accepted the resolution, and the complaint was resolved on this basis.
Insights for participants
From time to time we receive complaints from consumers who say that although they knew they would have to pay their bank an early repayment cost if they repaid the loan early, they were completely unaware that their mortgage broker would also invoice them. If mortgage brokers want to recover the brokerage or commission clawed back by the bank from their former customers, they needed to communicate this clearly.
Ideally the fee and the circumstances in which it will be charged should be set out in plain language with an acknowledgement signed by the consumer. We would also expect to see some indication of the amount the consumer can expect to pay and how the amount is calculated.