Ivan’s mortgage broker arranged a two-year fixed term loan with a bank. Six months later another mortgage broker suggested he may be able to get Ivan a better deal. The second mortgage broker presented a new lending proposal, taking into consideration the early repayment fee Ivan would have to pay the bank, and Ivan decided it would be worthwhile refinancing.
Shortly after refinancing the lending, Ivan received an invoice from the first mortgage broker for about $4,300. Ivan did not understand what the invoice was for, and complained to FSCL.
We referred the complaint to the first mortgage broker’s internal complaints process. The mortgage broker explained that the invoice covered the commission ($4,300) that the bank had asked it to repay because Ivan had repaid the loan early. The mortgage broker directed Ivan back to its contract which said:
Further, I understand that the Adviser may/may not charge me for services (unless specifically negotiated in advance), but receives a commission from the Lender providing the loan. Such commission is subject to clawback and I may be liable for its repayment in the event of early repayment of the loan arranged.
The mortgage broker considered its contract with Ivan was clear, and that Ivan was obliged to pay the $4,300.
Ivan did not agree and complained to FSCL.
Ivan’s view
Ivan said that he thought the contract provision referred to by the mortgage broker was:
- difficult to understand
- buried under an unrelated heading
- contained jargon, like ‘clawback’ which Ivan did not understand
- did not give any indication about how much the fee could be or when it could be charged.
Review
We expressed some concern to the mortgage broker about the wording of its contract with Ivan. If the mortgage broker wished to recover commission it had to repay to the bank after the early repayment of a loan we considered it should, in plain English, explain both the circumstances in which it would charge the client and the amount the client could be expected to pay. We agreed with Ivan that a lay person would not understand the term “clawback”. In our view, the clause the mortgage broker was relying on was difficult to understand.
Outcome
After some further discussion with us, the mortgage broker reconsidered its position and agreed it would not pursue Ivan for the $4,300. The mortgage broker also advised us that, as a result of Ivan’s complaint, it had re-written the clause to make it easier for clients to understand and now contained a maximum figure that would be charged to the client.
Our insight
We were pleased to see the mortgage broker’s approach to this complaint. Not only did the mortgage broker promptly resolve the complaint, but it also viewed the complaint as a learning opportunity and improved the wording of its contract to avoid future complaints.
However, Ivan’s complaint does highlight our general concern about ‘clawback’ provisions in some mortgage brokers’ contracts with their clients. While a mortgage broker is entitled to be paid for their time and expertise in arranging finance, we are concerned that many contracts contain clawback provisions that are difficult to understand and do not explain when and how much a client may be expected to pay if the loan is repaid early.
We are also concerned that not all “clawback” charges passed on to a client fairly represent the cost of the mortgage broker’s time and expertise in giving advice to the client. It may be fairer for the mortgage broker to charge a fee to the client based on their time and expertise in organising the loan, rather than on the amount of commission “clawed back” by the lender.
