Finance

Welcome from the International Institute

of Technology

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Finance Broking in Practice

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Chapter 1

Introducing the Mortgage Broking

Profession

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Introduction

 The mortgage broking industry has experienced rapid growth particularly over the last two decades.

 Customers can navigate through the vast array of players and products by using finance professionals, namely mortgage brokers.

 Australians borrowed in housing finance: – $15 billion 1986–1987 – $151 billion 2003

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Mortgage Brokers

 Two options to arrange finance: – Shop around

• traditional lenders • non-traditional lenders • mortgage managers

– Mortgage brokers (usually focused on home loans)/finance brokers (usually also deal with personal credit) • problem solvers • act on behalf of lenders • aiding borrowers in sourcing and applying for

mortgage finance or refinancing: – residential – investment

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Mortgage Broking Services  Services may include:

– making initial contact with the potential applicant. – completing a needs analysis to assess a client’s

capacity and how appropriate they would be for an introduction to a credit provider.

– conducting an interview to enable both parties to see if they are compatible in values and efficiencies.

– explaining the overall loan process in plain English without using acronyms or industry jargon.

– arranging a pre-approval for finance. – arranging an unconditional approval for

finance. – explaining the letter of offer to the clients.

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Mortgage Broking Services…

– ensuring the loan is approved and the required documentation is provided ensuring its correctness enabling settlement to occur.

– providing a follow-up service as a point of reference to the client and providing information via newsletters or other mediums.

– explaining the complaints procedures and becoming involved if there is a complaint from the client.

 Consumer advocate in the home loan selection process helping clients to: – arranging a pre-approval for finance. – arranging an unconditional approval for finance. – explaining the letter of offer to the clients.

Regulation of Mortgage Brokers

 Unlike others brokers there is usually no on-going relationship.

 The temptation is to maximize commissions.

 Regulated by Australian Securities and Investment Commission (ASIC).

 MFAA (Mortgage and Finance Assoc of Australia) and FBAA (Finance Brokers Association of Australia) responsible for educational policy.

 Industry requirement is the Certificate IV in Finance and Mortgage Broking.

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Mortgage Managers  Have arrangements with a wholesale lender to distribute

the funds (usually individually-packaged home loans)

 Some mortgage managers also operate as brokers, in that they will solicit loan applications, which are forwarded to lenders other than those for whom they manage the loans.

 Loan payments are made either to the lender, or to the mortgage manager.

 Once the loan is approved and disbursed, the mortgage manager will continue to administer the loan on behalf of the lender, by accepting payments, issuing statements, monitoring defaults and responding to any inquiries by the borrower.

Debt Reductionist Specialist  Some financial intermediaries call themselves ‘debt

reduction specialists’.  These finance intermediaries often do little more than

arranging refinances or debt consolidations at a cheaper interest rate.

 Usually an offset account is arranged.  Living expenses are purchased by way of credit card.  The consumer’s salary is offset against the home

loan balance during the interest-free period on the card.

 They also provide borrowers with budgeting advice, and encourage them to make increased repayments.

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 Traditional lenders – banks, credit unions and building societies. – authorised ‘deposit taking institutions’ (ADIs). – use their own funds to provide home loans. – accessed directly or mortgage brokers.

 Non-traditional lenders – known as wholesale or non-conforming lenders. – obtain their funds through investors, financiers

or trust funds. – Access via mortgage managers or mortgage

broker. – generally more flexible than traditional lenders.

Lenders

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 Educated and trained to determine the value of property independently.

 Provide expert advice on property-related matters.

 Certified Practicing Valuers: – Bachelor of Business degree – relevant work experience – registration from the Australian Property

Institute. – required to adhere to a strict Code of Ethics/

Code of Practice.

Valuers

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 Dominated by a number of ‘aggregators’ and franchise groups, e.g., Australian Finance Group – approximately 2,000 broker members. – processes in excess of 4,000 residential mortgages. – exceeding $900 million per month.

 Provide infrastructure and administrative support to member brokers: – organises a panel of lenders. – dedicated head office. – member services team.

Aggregator and Franchise Groups

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– customised IT systems to facilitate broking activities. • facilitates the processing of loan applications.

– customer relationship management systems. – training. – marketing activities for brokers to grow their business. – retain a percentage of both upfront and trail

commissions. – charge a fee for processing each loan, or – charge a monthly fee

Aggregator and Franchise Groups…

Remuneration of Mortgage Brokers

 Brokers receive remuneration in three main ways: – fees-for-service charged to the client; – an up-front commission (% of loan), and – a trail commission (% of loan paid periodically).

 An ASIC survey found that: – 97% of respondents received commissions or

financial benefits from credit providers; ● 57% of respondents did not charge their clients

fees, and ● 40% of respondents charged their clients fees

and also received commissions.

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Remuneration of Mortgage Brokers…

 There are strict disclosure requirements.  There is no regulation of how mortgage brokers

should be remunerated.  The average initial commission paid by lenders is

approximately 0·5% to 0·7% of the amount borrowed. (This may vary)

 Most lenders pay an average trail commission of approximately 0·1% to 0.35% of the outstanding balance of the loan.

 Usually paid on a monthly basis. 16

 Bonuses can also be earned where the volume of business placed with a lender over a period of time meets or exceeds specified targets.

 Payment of commission will be determined by when loans are actually settled.

 If borrowers refinance within one to three years of settling a loan (seven-year average), the lending institution may not recover the cost of providing the funds, resulting in a loss of profits.

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Remuneration of Mortgage Brokers…

 Lender will clawback (or take back) commissions given to brokers if this occurs.

 Clawback provisions deter ‘churning’ (i.e., regularly refinancing loans every few months).

 Up-front commission is likely to be the major influence on the broker’s choice of loan.

 Trail commissions create only marginal incentives for brokers to place the borrower in a loan where they can afford the repayments.

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Remuneration of Mortgage Brokers…

 Brokers may make payments to third-parties for referring potential clients to them. – real estate agents – accountants – lawyers – collection agencies – car dealers – building contractors – financial planners.

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Remuneration of Mortgage Brokers…

Remuneration of Mortgage Brokers…

 Soft dollar payments – marketing subsidies – assistance with office equipment – profit-sharing arrangements

– Legislation disclosure obligations on brokers, generally excludes these types of financial benefits.

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 A mortgage loan can be defined as a credit product which is secured by a mortgage, whereby a borrower gives the lender a lien on the property as security for the repayment of the loan. – Sometimes referred to as home loans. – Contract between a borrower (mortgagor) and

a lender (mortgagee)

 Mortgage is registered with the land titles office.

 The estimated value of a property being used as security for a loan is called appraised value.

Main Concepts of Home Loan Finance

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Main Concepts of Home Loan Finance…

 Interest is calculated on daily basis and usually charged monthly.

 The principal is the amount owing on a loan.  Most of mortgage loans have a minimum of 12 months

and a maximum of 30 years of term (or maturity).  Term (amortization period) – agreed length of

time to repay a loan.  A guarantor is a person or organisation that

agrees to be responsible for the payment of a loan if the actual borrower defaults or is unable to pay.

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 Equity or home equity is the amount of a property actually ‘owned’ by the owner. – i.e., current value of a property less the amount still owed

on its mortgage.

 A minimum repayment required is the amount a borrower is contractually obliged to pay each month, in order to repay a loan within an agreed term.

 This amount can be sometimes recalculated which is called a re-amortise.

 Refinance – switching mortgage providers. 23

Main Concepts of Home Loan Finance…

 Deposit (commitment to buy) – an amount (5–20%) paid by the buyer at the time of exchanging the contract for sale.

 Default – failure to abide by the terms of a mortgage or loan agreement may result in: – financial penalties. – legal action to repossess the mortgaged property.

 Discharge (discharge of mortgage) – legal document representing the fact that the loan is paid off.

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Concepts of Home Loan Finance…

 Loan-to-value-ratio – abbreviated as LVR or LTR: – The percentage of the loan amount compared to the value

of the property which securitises that loan.

– When the ratio is more than 80%, most lenders will require a borrower to take out lenders mortgage insurance.

– Owner-occupier loans are generally for higher loan-to-value ratios, although some lenders will lend up to 95%.

– Investment loans allow 70–80% of the rental income to be considered when calculating serviceability.

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Main Concepts of Home Loan Finance…

Main Concepts of Real Estate

 Certificate of title – legal document which includes the [electronic] records of all current information relevant to a particular property or piece of land.

 Encumbrance – an outstanding liability or charge on a property.

 Caveat – lodged upon a land or property title indicates that a party, that is not the owner, claims some right over or interest in the property.

 Easement – a right to use a part of land owned by another person or organization.

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Main Concepts of Real Estate…

 Tenancy – Possession or occupancy of lands, buildings, or other property by title, under a lease, or on payment of rent.

 Freehold – Complete ownership of a property and the land it is built on.

 Chattels – the ownership of movable personal property, such as clothing, appliances and furniture; is separate from the ownership of the property.

 Fittings – fixed items in a property such as carpets, lights, curtains and stoves.

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Main Concepts of Real Estate…

 Strata title – individuals each own a small portion of a strata building such as a unit – which is identified as a ‘lot’ on the title. All owners share common property such as external walls, windows, roof, driveways, foyers, fences, lawns and gardens.

 Company Title – alternative model of ownership as regards apartments, flats and/or home units to Strata Title. What is owned is the right to occupy a particular unit, or a specific portion of the building, but not the land it is built on.

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 The way a person behaves and presents themselves is part of professional practice.

 Fulfil the mandatory regulatory requirements: – minimum educational standards, – continuing professional development.

 Industry code of practices.

 Become a professional including becoming a member of a professional body. – FBAA and MFAA:

• codes of conduct. • develop and maintain personal competencies.

Applying Principles of Professional Practice

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 Conducting regular meetings: – where staff get the opportunity to share their knowledge

and experiences, – allow important information to be communicated

within the firm and potential problems identified.

 Staff members should be trained to exercise due care in their dealings with clients so they can exhibit an appropriate level of skill to give advice.

 Skill to seek assistance from other staff members or external experts who have specialist knowledge in certain fields which are relevant.

Applying Principles of Professional Practice…

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 Schedule work to fulfil obligations while taking into consideration time, resources and other constraints.

 The broker should ensure that: – professional development needs and goals are identified

and reviewed on a regular basis – competency, authorisation and licensing

requirements are clarified and complied with, and – professional development opportunities that

reflect the broker’s needs and goals are sought and completed within agreed timeframes.

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Applying Principles of Professional Practice…

 A mortgage broker can update, develop and maintain personal competencies on an ongoing basis through professional development opportunities such as: – coaching and mentoring – community courses – conferences – e-learning, ie Webinars – in-house programs – professional workshops/Seminars

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Applying Principles of Professional Practice…

 Skills needed for staff to perform their appointed tasks effectively should exceed legislative requirements.

 Mortgage brokers need to manage all organisational needs as well as those from: – regulators, – professional bodies, and – clients.

 A cycle of continuous follow-up and feedback should be implemented for staff development programs and performance reviews.

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Applying Principles of Professional Practice…

 Careful planning is necessary for a mortgage broker to be organised.

 Functions should be completed with a buffer in the schedule so that unexpected occurrences like disagreements can be sorted out in a timely fashion.

 The financial industry, economy and markets are changing rapidly with technology advancements and globalization of the world economy. – It is vital that mortgage broking firms develop the

competency and skills of their staff to cope with, and benefit from, these changes.

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Applying Principles of Professional Practice…

Technology and Software in the Broking Industry

 Technology has become an important tool in the way people do business.

 To operate in today’s business world, one needs at least a workable knowledge of the technology and office equipment in use in any organization.

 Equipment such as a computer or laptop, scanner, copier, printer and even mobile phone applications are in common use in the industry.

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Technology and Software in the Broking Industry…

 It is important to be conversant with a multitude of practical computer functions such as: – how to turn on the computer or operate a keyboard, – creating documents for use in business, while ensuring

that a consistent presentation style and look is preserved.

 Being able to navigate around the workings of the computer and operate input devices, like a scanner, keyboard, or camera, will build an ease and confidence in carrying out day-to-day functions.

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Technology and Software in the Broking Industry…

 Software is another useful technology that mortgage brokers employ when serving their clients, such as: – Office applications – E-mail facilities – Databases

 Mortgage Broking software is designed to improve the speed and accuracy of providing advice. – Provides consistency in the process. – Uses information from a fact find.

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Professional Outcomes  Advantages of software

– verifies the integrity of information. – research undertaken quickly and effectively. – Obtain comparative quotes online. – speed, e.g., identifies products, uses templates. – access/use appropriate loan assessment software. – professional-look formatting including

colour, charts, company logos, etc. – conforms to compliance regulations.

 Objective – Best possible financial advice.

Identification, Records and Files

 Creates an automated workflow system.

 Can send documents without the need to print and send them physically. – Name – Describe – Track

 Modules. – Business activity – Launch – File wizards

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 Generation and Storage – Client file notes – Review reminders – Summaries of financial information – Off-site back-ups

 Information security – Computers shut-down at the end of a day – Password locked (including Screen Saver) – Laptop computers taken home – Strict guidelines should be in place to prevent

information from being stolen or manipulated. 40

Identification, Records and Files…

Technical Support

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 Often on-going due to the complex nature of software and technology – Organizations’ HelpDesk – Supplier IT Support

 Maintain operational efficiency and productivity.

 Employees should be formally trained – Use of software wizards – Use software’s ‘Help file’ function

 Join software on-line forums

 Workplaces can be dangerous.

 Accidents can affect individuals and businesses.

 Fines and penalties can apply. – (e.g., WorkSafe in most States)

 Brokers need to consider the safety of those on their premises including: – clients – employees – agents visiting from other premises

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Workplace, Health and Safety

 Risk management techniques should be used.

 All tasks have some degree of risk involved, thus it is essential to: – identify hazards and hazardous jobs – assign priority to each risk – assess the risks in order of priority – control the risks – periodically evaluate WHS risk

management procedures 43

Workplace, Health and Safety…

 The common methods for identifying hazards fall into the following categories: – Inspecting the workplace. – Finding and applying available information. – Testing and measuring. – Surveys of employees and others at the workplace. – Analysing records and data of previous incidents.

 All hazards must be reported to enable people to track the kinds of hazards in workplace and take action where necessary to make the workplace safer for all staff and clients.

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Hazard Identification…

Risk Control

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 Risk control is the process of implementing measures to reduce the risk associated with a hazard in the following order: – Substituting the system of work.

• Chemical – e.g., less hazardous cleaning agents – Isolating the hazard.

• Physical – e.g., restricted work areas – Minimising the risk.

• Physical – e.g., guards • Administrative – e.g., warning signs

– Protective equipment. • Physical – e.g., safety glasses, ear plugs/muffs

Emergencies Instructions and Procedures

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 Instructions should include: – emergency numbers – contact details of designated person – exit routines and procedures identified – evacuation warnings

 Nominated evacuation assembly area(s) clearly identifiable.

 Sufficient ‘fire wardens’.

Emergency Exits

 Exits must be free and safely accessible: – no obstacles in or near emergency exits.

– equipment stored one side only in corridors.

– ‘two’ escape exits on every floor or large room.

– appropriate fire extinguisher-types easily accessible.

– emergency exit posters indicating escape routes and nearest emergency exits.

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Housekeeping & Prevention

 Protocols should be in place and checked regularly: – work areas clean and tidy. – exits, stairways, walkways, electrical panels, fire-fighting

equipment kept clear of obstructions. – sufficient storage racks for tools, materials, parts and

products. – spills or slipping substances cleaned immediately. – assigned responsibilities for ‘housekeeping’ duties. – all fire-fighting equipment regularly checked

and maintained. – all employees trained in location of fire alarm

stations and use of fire-fighting equipment.

Communication  Vital for a mortgage broker, being tool of trade

in dealing with clients and business. ‒ based on the process of giving advice

 Communication techniques to be sophisticated.

 Clear, concise and effective.

 Forms: – written – verbal – body language

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Communication…

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 Written correspondence: – Compliance documents, Credit Guide, etc. – Emails – Faxes – Telecommunications – Files

 Industry Jargon: – Resist

 Visual Diagrams: – Use as much as possible

Communication…

 Industry – Corporations Act 2001 specifies all correspondence

needs to be: clear, concise and effective. – Some documents to contain specific wording.

 Organisational – Standards should be developed to complement and

build on industry standards. – No ambiguous statements.

 Technical terms/jargon – Resist overuse of abbreviations with clients.

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Communication…

 Proof reading (don’t rely on spell check) – Bad spelling perceived negatively; non-trustworthy,

second-rate organisation. – Misinterpretation of context by client. – Inaccurate statements/misleading information. – Missing/incomplete information.

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Communication…

 Dress appropriately.

 Greet client: ‒ Verbal tone and inflection ‒ Conscience of positive body language

 Offer refreshments and a comfortable seat.

 Engage in conversational pleasantries: ‒ Tone and inflection ‒ Conscience of body language ‒ Ask questions to establish rapport

 Provide business card and credit guide. 55

Format or Style

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 Ensure it is appropriate: – Personal/formal.

 Technical terms/jargon: – Resist overuse of abbreviations with clients.

 Has a profound effect on client’s understanding.

 Communications records: – File kept for every client and all records

of communications/correspondence. – Record-keeping standards developed to

complement and build on industry standards.

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Developing and nurturing Business Relationships

as a Broker  A Mortgage/Finance Broker needs to develop and

nurture relationships. ‒ Their clients and potential clients. ‒ Other professionals and third parties who may be

in or become involved in a referral relationship.

 Interpersonal style and methods of dealing and negotiating with others need to be adjusted to suit each different relationship that exists.

 Relationships take time to develop however the benefits can last a long time if properly maintained.

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 Dealings with colleagues, clients and other parties should be carried out through competent performance and with great respect to confidentiality.

 Each organization will have its own standards and expectations, as set out in their internal policy and procedures documents and in their practices.

 Listening skills are particularly important to ensure that the needs of clients and other parties are met.

Developing and nurturing Business Relationships

as a Broker…

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 Care should always be taken to ensure that plain and clear language is used.

 If there is a case of cultural differences, concepts and language should be used that are appropriate and able to be understood (or a reliable interpreter enlisted).

 Networks that you have cultivated with care can feed business referrals back to you as a natural extension of established mutual respect.

Developing and nurturing Business Relationships

as a Broker…

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Assessments True/False

Multiple Choice Short Answer