Richard entered into an unconditional agreement to purchase a new property. He then approached his mortgage broker, Catherine, to secure lending from Richard’s bank, ABC Bank, to finance the purchase.
Catherine submitted the loan application to ABC Bank, but they did not assess it, despite Catherine’s attempts to follow up, because they were short-staffed. Catherine then suggested to Richard that they should approach other lenders, which Richard agreed to.
One of the lenders they approached, XYZ Bank, made an unconditional offer to refinance Richard’s existing lending with ABC Bank and a loan to finance the purchase of the new property. Richard accepted the offer that day. He recalled that Catherine’s advice was that the offer was a good deal.
Richard then found out from ABC Bank that he would need to pay them an early repayment cost (ERC) of $1,500 and repay a $7,000 cash contribution ABC Bank had given him, when he refinanced with XYZ Bank.
ERCs are also known as break fees and prepayment costs. They are the cost a borrower must pay their lender when they repay a fixed interest rate loan early (before the fixed rate term has ended).
Cash contributions are also known as cashbacks. They are an incentive some lenders use to attract and retain home loan customers. The lender agrees to pay the borrower a lump sum when they take out a home loan. However, if the borrower refinances with another lender within a specified period, they must repay the lump sum.
Richard paid the ERC and cash contribution, but subsequently decided to complain to FSCL that Catherine should have explained the costs of refinancing with XYZ Bank before he agreed to their offer. Richard was aware borrowers need to pay an ERC when they break a loan early, but he did not know how much it would be. He also did not know cash contributions had to be repaid.
Dispute
Richard believed Catherine should compensate him the amount he had paid to ABC Bank when he refinanced. He also complained about his inconvenience. He was happy with ABC Bank and would have preferred to have stayed with them. It was inconvenient having his bank accounts at one bank, and his lending at another bank.
Richard also believed it was possible that Catherine had gained more from the refinance than him. He believed she may not have received a commission from ABC Bank, or as large a commission as XYZ Bank paid her, if he had stayed with ABC Bank.
Catherine believed she had done nothing wrong. She believed Richard’s inconvenience was caused by ABC Bank, because they did not assess the new loan application.
Catherine also believed Richard had not suffered a financial loss. She gave a few reasons for this, including that Richard had secured a lower interest rate at XYZ Bank. Over time, he would recover the cost of the ERC.
Review
We did not accept that Catherine had encouraged Richard to refinance so she could obtain a commission, or better commission, from XYZ Bank.
We believed Catherine’s advice to approach other lenders was sound. ABC Bank had not assessed the loan application and, even if they did before settlement of the property, there was no guarantee they would offer lending. Richard may have been left in the position where he could not complete the purchase of the property if other lenders had not been approached.
However, we concluded that Catherine should have informed Richard of the costs he would incur to refinance with another lender before he accepted XYZ Bank’s offer. We were of the view that a reasonable financial adviser, in those circumstances, should have informed their client of the costs they would incur to refinance with another lender, so the client could make an informed decision.
Compensation
We found Richard had not suffered a financial loss because he would probably have accepted XYZ Bank’s offer even if Catherine had disclosed the costs to refinance. Richard’s priority was to secure lending so he could purchase the new property. He could have taken a week to consider XYZ Bank’s offer, in the hope ABC Bank would also make an offer. Instead, he accepted XYZ Bank’s offer the day it was made.
However, we concluded that Catherine had caused Richard some inconvenience. He had experienced stress and he felt he had lost the opportunity to make a fully informed decision about whether to refinance with XYZ Bank. We concluded that $500 compensation was a fair amount to recognise this inconvenience.
Record-keeping
We were concerned that Catherine had not retained all records of her dealings with Richard, particularly her advice about XYZ Bank’s offer. This made it difficult for us to establish the sequence of events that led to the complaint. We encouraged Catherine to take the complaint as an opportunity to review her practices for retaining client information and record-keeping.
Recommendation
Richard did not accept our recommendation that Catherine should pay him $500 compensation to settle his complaint. He believed $500 was not a fair amount of compensation. He intended to make a claim at the Disputes Tribunal instead.
Insights for participants
Mortgage brokers should give their clients information about the costs to refinance lending so they can make an informed decision. They should not assume that their client will know that they will need to pay an ERC and/or cash contribution to their former lender when they refinance, or the likely amount.
It is also important to have sound internal practices for retaining client information. From 15 March 2021, good record-keeping will be a legal requirement for all advisers under transitional licensing.
