HISTORIA BLOQUE
ACTIVIDADES Desafíos actuales
For brokers
The ADR scheme(s) effectively imposes a form of discipline on the industry by ensuring that firms meet certain standards in dealing with customers, resulting in greater consumer confidence in the industry.
For consumers
Consumers can have their complaints handled in a fair, efficient and low cost manner. For government
ADR schemes have an informal role in supervising the industry in two ways. They can help identify systemic trends or problems that can then be addressed by industry, regulators and/or governments, and they are also likely to be a point through which brokers who are not members of the ADR scheme will be identified.
For credit providers
Issues that affect the consumer’s repayment capacity can be resolved more quickly.
8.8.2 Costs/Disadvantages
For brokers
The costs are primarily borne by industry rather than regulatory authorities.
Indicative costs are available from schemes already operating. The Financial Services and Banking Ombudsman annual membership fees are $550 for two writers, plus $275 for each additional writer, up to $5,500. Additional fees are charged on the basis of complaints received.
The Credit Ombudsman Service Limited (formerly Mortgage Industry Obudsman Scheme) have a membership fee scale which is graded according to the number of writers ranging from $165. Fees are also charged for individual complaints.
Cost comparisons may be made with the Financial Industry Complaints Service (FICS), an ADR scheme for financial planners. Where there are less than 50 advisers, a minimum fee of $550 is charged. With larger organisations where there are more than 400 advisers, there is a maximum fee of $10,740.
Insurance Brokers Disputes Ltd charges $400 plus $60 per broker per annum. For consumers
None identified. For government None identified.
For credit providers None identified.
9 Impact on Competition
The proposals outlined above are considered to have a positive impact on competition. Although some traders would be prevented by the probity checks of any licensing regime from entering the market, these are traders who would be unlikely to compete fairly with brokers who offer a legitimate service.
The only reasons that prospective market entrants might be deterred, other than being unable to pass the probity checks, are the costs that might be associated with licensing or registration fees, gaining educational requirements and professional indemnity insurance. While these may amount to $2-3,000, depending on the cost of educational requirements, this is a relatively small outlay for any small business to make, and would not be inconsistent with entering any other similar occupation. Again, the only potential traders this is likely to deter are those who are not committed to a bona fide business.
Similarly, the costs involved in providing contractual documentation and the time required to provide the statutory disclosures and the statement of reasons are costs that may be considered to be normal costs associated with a business enterprise for which fees are charged. Commissions paid to the industry from credit providers are quite substantial and brokers are not precluded in these proposals from charging the consumer.
Cost should not therefore be a barrier to entry to the market.
The proposals are intended to enhance competition in the industry by redressing the imbalance in power and information between consumers and brokers. The information required to be provided in the finance broking contract will assist consumers to choose a broker who can provide access to the sort of credit they need and at a price they can afford. Educational requirements should encourage greater efficiency of the broking service and increase the possibility of the broker accessing an appropriate and affordable credit product. This should have a positive impact on market efficiency.
The requirements for membership of an ADR scheme, as well as appropriate redress provisions, will allow consumers to enforce their rights in a cost efficient manner, thereby proving an incentive to brokers to act lawfully and efficiently. Professional indemnity insurance should ensure that compensation is available to the consumer.
10 Consultation
In developing these regulatory proposals, preliminary papers were circulated for comment to the following organisations:
• Mortgage Industry Association of Australia • Finance Brokers Association of Australia • Gadens Lawyers (legal advisers to MIAA) • Australian Bankers Association
• Credit Unions Services Corporation (Australia) Limited • Australian Finance Conference
• Australian Association of Permanent Building Societies • Consumer Credit Legal Centre Inc
Proposals for further consultation
This Regulatory Impact Statement will be made widely available from government websites and through mailout on request.
It is intended that its availability will be advertised in national newspapers.
The paper will be sent directly to those organisations listed above, and to those who have expressed interest.
Comments are invited on any aspect of the paper. Details of costs to the industry of any proposed option are sought, as well as comment on any assumptions made in the paper. Submissions may be sent electronically or in hard copy.
Enquiries to: Lucas Kolenberg
(02) 9338 8937
The e-mail address for submissions is: [email protected]
Submissions by post should be sent to: National Finance Broking Regulation 2004 Policy & Strategy Division
Office of Fair Trading PO Box 972
PARRAMATTA NSW 2124 Final date for submissions: 15 February 2005
Attachment A
United Kingdom
In the United Kingdom, it is estimated that brokers are responsible for approximately 60% of mortgages.50 In order to have lenders accept applications, brokers usually have to be registered with the Mortgage Code Compliance Board; in 2000, there were 10,470 broker firms, representing 43,569 mortgage advisers.
The main industry body for the mortgage lending industry is the Council of Mortgage Lenders (CML). It has 145 members who provide over 98% of the first mortgages on residential property in the United Kingdom. The CML also sponsors a voluntary Mortgage Code that covers the activities of both lenders and mortgage intermediaries. Generally, lenders who subscribe to the Code do not accept business from brokers who have not also agreed to adopt the Code.
The Code obliges brokers to:
• disclose their status with respect to the lender and the borrower;
• disclose at the outset whether they receive a fee for arranging the client’s mortgage; • provide clients with fair terms and conditions, setting these out clearly and in plain
language;
• have internal procedures for handling complaints fairly and speedily; and
• be a member of an alternative dispute resolution scheme (typically the Mortgage Code Arbitration Scheme).
Government regulation of broker activities in the United Kingdom currently takes place through the Consumer Credit Act 1974, the Office of Fair Trading Guidelines for Non-Status Lenders and Brokers, and precedents under the Unfair Contract Terms Regulations 1999. The Consumer Credit Act 1974 encompasses all forms of consumer credit and hire purchase and prohibits false or misleading advertising. The “Non-Status Lending Guidelines for Lenders and Brokers” is a series of guidelines issued by the Office of Fair Trading (OFT). They are specifically directed at enhancing the protection provided to consumers whose credit rating made it difficult for them to obtain finance.
The guidelines apply to both lenders and brokers and provide that:
• there should be transparency in all dealings with potential and actual borrowers, with full and early disclosure and explanation of all contract terms and conditions, and all fees and charges payable;
• contract terms and conditions should be fair, and should be written in plain English to ensure that borrowers understand the nature of the loan agreement and their rights and responsibilities;
• there should be no high pressure selling, and adequate time should be allowed for the borrower to reflect on the terms and conditions of the loan and to obtain independent advice before signing;
• advertising and other promotional material should not mislead, and there should be no cold-calling or canvassing of trade premises without the borrower’s prior consent;
• brokers should disclose at the outset their status with regard to the borrower and the lender, the extent of the service offered to the borrower, together with any brokerage fee or commission payable by the lender;
50
See www.cml.org.uk. See also Jason Clout, “Mortgage broking looks set to expand”, The Australian Financial Review, 12 April 2002, p. 70.
• lenders should take all reasonable steps to ensure that brokers and other intermediaries regularly marketing their products do not engage in unfair business practices, or act unlawfully, and that they serve the best interests of the borrower; and
• there should be responsible lending, with all underwriting decisions subject to a proper assessment of the borrower’s ability to repay.
However, from mid-2004, the Financial Services Authority (FSA)51 will be responsible for regulating mortgage lending, and brokers to the extent that they arrange mortgage loans.52
This change has been triggered by the need for the UK to meet standards set by the European Union.
To avoid dual regulation, mortgages entered into after the FSA assumes responsibility for mortgage lending will be carved out of the jurisdiction of the Consumer Credit Act 1974 and will be regulated solely by the FSA. The FSA proposals include:
• brokers will either be licensed by the FSA directly, or authorised to operate by an entity that is itself licensed by the FSA;
• brokers must advise borrowers whether or not they are acting on an execution only basis, or providing advice, and, if the latter, provide details of the number of lenders and credit products reviewed prior to making the recommendation;
• the broker must assess whether or not a loan secured by mortgage is appropriate for the borrower, and, if so, further consider what type of loan is suitable and which product best meets the consumer’s needs and financial circumstances;
• a higher level of regulation applies to mortgages identified as inherently more risky for the borrower (such as “equity release” mortgages for older borrowers); and
• brokers will be subject to the compulsory jurisdiction of the Financial Services Ombudsman (the complaint scheme for financial services in the UK). They will also be required to meet internal complaint-handling benchmarks.
European Union
In the European Union, brokers (or “credit intermediaries”) are subject to limited regulation by European Union (EU) legislation under Consumer Credit Directive 87/120/EEC.53 The legislation has recently been redrafted with brokers now subject to the following obligations: • brokers must be registered within each Member State in which they operate;
• brokers must offer or arrange the most appropriate type of credit, taking into account the financial situation of the consumer, the advantages and disadvantages of the recommended product, and the purpose of the credit;
• brokers must indicate, in advertising and documents provided to clients, whether or not they work exclusively with a limited number of lenders, or whether they operate independently; and
• brokers cannot demand or receive brokerage fees from clients where they are remunerated by commission from the lender, or where they do not arrange finance for the client.
United States of America
In 2000, there were approximately 30,000 mortgage broker companies in the USA, employing an estimated 240,000 brokers. Mortgage brokers are the biggest source of mortgage lending and are responsible for approximately 72% of home loans originated in the United States.54
51
An independent, industry-funded body that regulates the financial services industry in the UK. See www.fsa.gov.uk
52
CP146:The FSA’s approach to regulating mortgage sales, FSA, August 2002.
53
See www.europa.eu.int/comm/consumers/index_en.html.
54
See www.namb.org. See also Jason Clout, “Mortgage broking looks set to expand”, The Australian Financial Review, 12 April 2002, p. 70.
The National Association of Mortgage Brokers (NAMB) is the only national trade association representing the US mortgage broker industry. It currently has only 13,000 members who are obliged to subscribe to a Code of Ethics and to “Best Business Guidelines”. These are significantly less detailed than the UK Mortgage Code.
The code and the guidelines stipulate that members must:
• conduct business in a manner reflecting honesty, honour and integrity; • conduct their business activities in a professional manner;
• endeavour to be accurate in all advertisements and solicitations; • avoid unauthorised disclosure of confidential information;
• conduct their business with all applicable laws and regulations;
• disclose any equity or financial interest they may have in the collateral being offered to secure a loan; and
• provide written disclosure of fees, and thoroughly explain the loan process to their clients. The NAMB also provides members with a model borrower–broker disclosure agreement, which explains to clients the relationship their broker has with lenders. The mortgage broker industry in the United States is currently regulated by ten Federal laws, five Federal enforcement agencies and over 45 State laws or licensing boards.55
A table of selected requirements is set out below. State Licensing Rules – United States
State Regulator Selected Requirements
Alabama State Banking Department
Must show a net worth of $25,000. Submit three letters of character reference and three letters of reference
concerning experience. Initial license fee of $500. Alaska Department of
Community and Economic Development
The state of Alaska does not regulate mortgage lending or mortgage brokering, regardless of lien
position. Arizona State Banking
Department
Required to maintain a surety bond for $10,000 to $15,000. Must have three years of experience in
lending and pass a written exam.
Arkansas Securities Department Company required to maintain a net worth of $25,000 and surety bond of $35,000. No specific education or
experience required. California Department of Real
Estate; Department of Corporations
Most brokers register under the Department of Real Estate. They must have two years' of industry experience during the last 5 years or a four-year
college degree and pass an exam. Colorado Division of Securities,
Department of Regulatory Agencies
Pay a license fee of $75 and take a required examination.
Connecticut Department of Banking, Consumer Credit
Division
Required to maintain a surety bond for $40,000. No specific education or experience requirements.
Delaware Office of the State Bank Commissioner
Mortgage brokers must maintain a bond of $25,000 and provide references from companies that have done business with them. No specific education or
experience requirements.
55
Details of individual licensing requirements can be found at: http://www.namb.org/gov_affairs/state_licensing.htm.
State Regulator Selected Requirements
District of Columbia
Office of Banking and Financial Institutions
Brokers are required to maintain a surety bond ranging from $12,500 to $50,000. No specific education or
experience requirements. Florida Office of the Comptroller,
Department of Banking and Finance
Mortgage brokers are not subject to any specific financial requirements. Applicants for a broker's license must receive classroom education and pass a
written test. Georgia Department of Banking
and Finance
Mortgage brokers are required to maintain a net worth of $25,000 or surety bond for $50,000. They must also have two years of lending experience or complete 40
hours of coursework in the field. Hawaii Department of
Commerce and Consumer Affairs
Maintain a surety bond for $15,000. Mortgage brokers have no specific education or experience
requirements.
Idaho Department Of Finance A surety bond for $10,000 for home office and additional $10,000 for each office outside of Idaho.
Applicants for mortgage broker license must have three years experience in residential mortgage lending
if they are in charge of the place of business. Illinois Office of Banks and Real
Estate, Bureau of Residential Finance
Mortgage brokers must have a net worth of $35,000 and a surety bond for $20,000. Licensees are also required to have three years' experience in real estate
financing or attend mortgage lending classes. Indiana Secretary of State,
Securities Division
Registered loan brokers are required to post a $50,000 bond. They also must take 24 hours of
classes on loan brokering.
Iowa Division of Banking Must maintain a surety bond for $15,000. No specific education or experience requirements. Kansas Office of the State Bank
Commissioner, Division of Consumer and Mortgage Lending
Mortgage brokers are required to meet specific requirements.
Kentucky Department of Financial Institutions
Must maintain a surety bond for $50,000. Applicants for a mortgage loan broker license must complete a
30-hour training course. Louisiana Office of Financial
Institutions
Must have net worth of $50,000 or a surety bond of the same amount. Brokers are also required to complete 10 hours of education and pass a lending
exam. Maine Office of Consumer
Credit Regulation
Registered credit services organizations, which include mortgage brokers, must maintain a bond in the
amount of $10,000. No specific education or experience requirements.
Maryland Division of Financial Regulation
Mortgage brokers are required to maintain a surety bond ranging from $15,000 to $75,000. They must
have three years' experience.
Massachusetts Division of Banks Mortgage brokers must demonstrate financial responsibility but are not required any specific requirements. Brokers must show a year's experience
in the field; related course work can trim the experience requirement.
Michigan Division of Financial Institutions
Mortgage brokers are required to maintain a net worth of $25,000 and a bond for $25,000. No specific
education or experience requirements. Minnesota Department of
Commerce
No specific financial, education or experience requirements.
State Regulator Selected Requirements
Mississippi Department of Banking and Consumer Finance
Mortgage brokers are required to maintain a surety bond for $25,000. They must also have two years'
lending experience or pass an exam.
Missouri Division of Finance Mortgage brokers are required to maintain a net worth of $25,000 and a surety bond for $20,000. No specific
educational or experience requirements. Montana Department of
Administration Banking and Financial Institutions
Division
Mortgage brokers are required to pay a license application of $500 and loan originators $400. A broker applicant must have minimum of 3 years experience as a loan originator and take an exam to
test experience. Surety bond of $25,000 required. Nebraska Department of Banking
and Finance, Financial Institutions Division
Surety bond for $50,000 required. No specific educational or experience requirements.
Nevada Department of Business and Industry, Financial
Institutions Division
Brokers must have or work in an office with a supervisor who has two years' mortgage lending
experience.
New Hampshire Banking Department Mortgage brokers must maintain a surety bond for $20,000. No specific educational or experience
requirements. New Jersey Department of Banking
and Insurance
Brokers are required to have a net worth of $50,000 and a bond for $50,000. They also must pass a written
exam. New Mexico Regulations and
Licensing Department, Financial Institutions
Division
Must maintain a $25,000 surety bond, and pay a $400 initial license application fee. No specific educational
or experience requirements.
New York Banking Department Mortgage brokers are required to have two years of experience in the field.
North Carolina Office of the Commissioner of Banks
Must maintain a $25,000 surety bond. No specific educational or experience requirements. North Dakota Department Of Banking
and Financial Institutions
Must maintain a surety bond for $25,000. No specific educational or experience requirements. Ohio Department Of
Commerce, Division of Financial Institutions
Mortgage brokers must maintain a surety bond of $25,000 for their main office, plus $5,000 for each
branch office. They must also have 3 years'