I think there are significant deficiencies in the current MFAA NCCP docs. They not only fail to provide the right information to the client, but (in my opinion) they increase the potential liability of the broker; which is confusing since the legislation was supposed to tighten-up both those areas.
Just remember that I am not a lawyer, and am not providing any legal advise in this post. This is just my individual assessment of the current MFAA NCCP documents.
Just remember that I am not a lawyer, and am not providing any legal advise in this post. This is just my individual assessment of the current MFAA NCCP documents.
I’ll go document-by-document.
Credit Guide
MFAA document is fine since it contains just boilerplate stuff, although I would definitely add the commission percentages from each lender for both upfronts and trail so this information can be referred to in future documents.
Credit Quote
Under the “Services to be provided” section, the MFAA document has the text:
We will attempt to arrange the loan / lease specified below for you.
[HERE SET OUT DETAILS OF PROPOSED LOAN / LEASE]
The idea that the broker would have proposed loan details in this section goes against the purpose of the Quote which is to provide this before assistance is provided. Therefore, I would suggest changing this text to something non-specific like:
We will attempt to arrange the loan / lease requested by you.
I have problems with the ‘Maximum fee or charge payable by you’ section. The section talks about the valuation fee and its estimate. The quote is not the place to add lender fee estimations since the Quote (by its definition) must be provided prior to assistance being given (The MFAA documentation states that the Quote must be signed by the client PRIOR to providing assistance). How can the broker provide an estimation of valuation fees when assistance has not been provided? It doesn’t make sense. The quote is there to instruct the client on the broker fees, and nothing in that document should relate to the lender since this would be represented as assistance.
I would suggest that the wording be changed to say that valuation fees can be charged by the lender and, if so, that these fees are payable when the broker asks for the client to pay.
Still on this section… the MFAA document has the first line: “$XX including GST”, and then has the line “Our estimate of the fee is $XX. ” near the bottom. They are superfluous and confusing and therefore 1 should be removed (probably the 2nd one).
Still on this section, and continuing my diatribe on the valuation fees text… any mention of valuation fees should not be in this section. This section is to disclose the broker fees. I would suggest changing the left-hand title from “Maximum fee or charge payable by you” to “Maximum fee or charge payable by you for our services”.
If you keep the reference to valuation fees in this section, then you should amend the left-hand title sentence of “This is the maximum amount payable by you whether or not finance is provided” because that sentence is not true if you have an estimation of the valuation fees since (obviously) your estimation of val-fees may be lower than the final amount and therefore is not “the maximum”.
Overall, I would separate the section into 2 sections. One section talks about the broker fees only, and the 2nd section might be titled “Other fees payable by you”, and this section would include the estimation of lender valuation fees. This nicely separates the broker fees from any other lender fee.
Still on this section… this line “There are no other fees and charges payable by you to us however you may be liable to pay fees to the financier.” is useless and confusing, since the left-hand title already says that the fees in this section are the “Maximum”. It is especially useless if you do what I suggest above and create 2 separate sections (broker fees and lender fees).
The ‘When is the fee payable?” section should be changed to “When are the fees payable?” since there could be more than 1 fee.
Overall, this MFAA document is awful.
Preliminary Credit Assessment
I find it incredible that the MFAA has not provided a template of this document since this is the document that will provide the assessment of suitability to the client which I thought was the whole point. Anyway…
Every document we have seen has a section which outlines the recommended products. Most documents only have 1 lender/product recommendation which I find amazing since this eliminates the benefits of using a broker which is recommendations from a variety of different lenders. In addition, having only 1 lender/product means that the broker has really picked the product for the client, in contrast to providing a number of non-unsuitable products for the client and the onus of the final choice is on the client.
The problem with all these documents is that the amount of information contained within relating to the product features/fees/etc is inadequate. (For example, what do you enter into these documents if you are recommending a split loan?). What I suggest is to amend these sections by removing all references to product features/data/etc, and simply referring the reader to an attached Product Comparison report which is generated by ActiveClient or XPLAN. You can add disclaimers in this section to say that fees/rates/etc are a snapshot-in-time/estimation/etc and that the final values will be presented in the loan documents.
Most documents have a section which details a simple net-surplus calculation to show that the client can meet their obligations and that the broker has done their own independent assessment outside the lender calculators. In the IRESS software, we have ceated a simple net-surplus lender called “Broker Assessment” which you will be able to adjust the assessment rate, product rate, etc and then you can generate your own serviceability sheet to attach to this document to satisfy this requirement.
However, having said all this, I think this section is fraught with danger. For example, your simple net-surplus calculations could come out negative because it’s an investment deal and your simple calcs don’t include the interest addback on negative gearing. So the danger is that you are recommending a lender/product that does not satisfy your own assessment.
Also, a better method if outlining whether the client can meet repays, is to generate a Risk Analysis report from the IRESS software which shows the incoming/outgoing dollar amounts exactly based on the client scenario and the selected product over the full term of the loan.
In addition, if the loan is a refinance, then there is another IRESS-provided report called the Mortgage Research report which outlines the attractiveness of a refinance over the current loan.
I also find it a little disturbing that the client is not required to sign these documents to say that they understand and accept the information provided herein. I would suggest having a client signature area as some aggregator documents have this. In fact, I would go as far as getting the client to initial each page.
Proposed Credit Disclosure
In my mind, this is the worst document.
The MFAA guideline states “It would be sufficient compliance to give this document prior to providing credit assistance”, but how is this possible when this document contains lender/product information? Bizarre.
The MFAA document has a section on “Proposed finance” which lists some attributes of the proposed lender/product, but a) the section is woefully inadequate in the information it provides, and b) it is totally unusable in split loan deals. So I suggest amending this section to point to the Product Selection Report generated by ActiveClient or XPLAN and add some disclaimers here. The Product Selection report contains all major information about a selected product, along with the reasons why the client chose that product which is very important.
In the “Reasonable estimate of commission” section, the only text that should be in this section are the estimates on the commission for this particular lender/product (so relating to the MFAA document – it’s the first 2 lines). The rest of the lines are just a duplication of what’s in the Credit Guide and you should remove all this and just have a line pointing the reader to the Credit Guide something like “Please refer to our Credit Guide for a full description of the commission structure (blah blah)”.
I also suggest removing the $ amounts since on some deals (like line-of-credits) you don’t know what the upfront will be since it’s based on loan utilization. The % values should be enough, in my opinion.
The “Estimate of total fees” section is, in my opinion, the worst section, woefully inadequate, and just begging for litigation.
The MFAA document only lists a couple of fees (not sure if MFAA wanted the broker to list all fees or only those 2 fees), but then states “These figures are estimates only”, then later states emphatically that “We are NOT AWARE OF ANY OTHER FEES”. I mean the ambiguity of this section is staggering. And plus, all this textual diarrhea is under the section titled “Estimate of total fees”.
I think the broker should think very deeply on what needs to be entered here, because it’s every broker’s nightmare to wrongly state the upfront fees and upon settlement the broker has misrepresented the total fees, or worst, the client does not have adequate funds to settle due to unknown/incorrect fees.
In my opinion, this section should be amended to merely point at 2 attached documents: 1) the Product Selection report, which outlines the product fees, and 2) a IRESS software Purchase Cost report which outlines fees such as stamp duties, govt fees, etc. Again, a disclaimer should be written in this section.
Still on this section… the line “We are not aware of any other fees or charges payable to anyone else in relation to the application for finance” is just opening-up the broker to litigation and should be amended. Some deals such as splits or multiple securities are very hard to get the fees right and this line does nothing to protect the broker against this.
Again, the fact that this document does not have to be signed by the client is concerning (and laughable actually).
Overall
Overall, in my opinion, the MFAA documents are woefully inadequate and, in many respects, are a step backward for both the client and broker in terms of providing adequate information and protection.
Obviously, you may have noticed that many of my suggestions relate to the documents provided by ActiveClient, but without sounding like a salesman, I think that brokers will be inadequately protected without the ActiveClient reports or, alternatively, all brokers need to have similar reports/documentation from their software platforms which mimic the 5 reports I have listed:
1) Product Comparison
2) Product Selection
3) Purchase Cost
4) Risk Analysis
5) Mortgage Research
In my opinion, to rely solely on the MFAA NCCP documents without additional supporting documentation will not supply your clients with the necessary information, nor will it adequately protect both the client and the broker.
