The MFAA has outlined the role of a broker in the process of securing guarantors after the Banking Code Compliance Committee (BCCC) called for increased controls on brokers earlier this week.
The BCCC called for extending controls to third parties who undertake part of the guarantor process on behalf of a bank, such as brokers and solicitors, to help reduce financial vulnerability among guarantors.
However, the MFAA said some of these controls alluded to in the BCCC report, such as brokers attesting to the financial vulnerability of guarantors, could be beyond the responsibility of a broker.
“We need to be measured and careful as to what the role of the broker is in terms of the requirement around guarantor interviews and the controls in place,” said Naveen Ahluwalia (pictured above), MFAA executive policy and legal.
“Brokers are experts in terms of helping their customers get a loan, but it's not a broker’s level of expertise to assess things like vulnerability.”
Controls around guarantors have been a topic of regulation since the Royal Commission revealed gaps in the process that led to financially vulnerable people signing on as guarantors.
The Australian Banking Association (ABA), which developed the Banking Code of Practice (the Code) that applies to banks, has sought to strengthen these processes.
The BCCC’s 2023 Guarantees Follow-Up Report revealed that lenders had made “significant progress” towards meeting the recommendations laid out in the original 2021 report, generally aimed at helping protect this vulnerable cohort.
“There has been a significant uplift in terms of lenders strengthening their policies and processes to protect people going guarantor on loans,” Ahluwalia said. “Equally, there has been a real appreciation of the brokers role in terms of both engaging with and helping borrowers and guarantors to obtain a loan.”
Part of this shift has occurred because banks are obligated to follow the Code’s guarantor provisions.
For example, lenders are obligated to ensure – where reasonable - there is an independent meeting or interview with a guarantor, that the prospective guarantor is provided with certain information and that they understand what it means to be a guarantor.
The MFAA said it was “absolutely appropriate” for lenders to “outsource these obligations” to third parties like brokers.
“With brokers increasing their market share facilitating 70% of home loans in Australia and meeting with borrowers and the guarantors, it is entirely appropriate for them to meet – where reasonable – with guarantors face to face,” said Ahluwalia.
The BCCC 2023 report outlines some best practice examples of this where banks require brokers to conduct interviews, go through a pre-guarantee interview checklist, and provide a guarantor information pack.
However, the report also alludes to mandatory broker attestations as “doing things well”.
“Requiring for a broker to attest to the fitness of a guarantor or their state of mind, whether there is vulnerability indicators or not, is an extension of their role,” said Ahluwalia. “You are putting the broker in a space where they're signing or verifying things that they're actually not trained to do.”
The MFAA said the role of the broker was to look out for indicators of vulnerability and report it to the lender.
“They should tell the lender if they see signs of stress, pressure, or vulnerability and that they consider that it’s not in the best interest of the borrower to facilitate that loan,” said Ahluwalia.
“However, I don’t think a broker should be asked, for example to sign a declaration or an attestation as to the fitness of mind of the guarantor that requires the broker to make an assessment that is outside their remit.”
Ahluwalia said the MFAA was “concerned” that these situations could invite legal trouble for brokers.
“The thing is that if the broker was to sign declarations of that nature, we would have concerns about whether that would be covered under the broker’s professional indemnity insurance. There would be a risk around that.”
Another problem with the BCCC’s findings is the push for banks to require or mandate brokers to conduct interviews with prospective guarantors.
The MFAA, which has developed a Banking Code of Practice module that is required training for new members, sets out what brokers need to do for guarantors such as conducting interviews – where reasonable.
Ahluwalia said there might be circumstances where it was unreasonable for that interview to be conducted separately.
“Now when we talk about where reasonable, there may be circumstances where the guarantors already understand what it means to be a guarantor, and particularly if it's a sophisticated guarantor who’s already sought legal advice,” Ahluwalia said.
However, the BCCC said the interviews were there to ensure they were fully informed before entering into a guarantee.
The BCCC pointed to a case study that “raised concerns” where the bank had several exceptions to the policy, including “where the guarantor is considered financially astute and aware of obligations”.
“This is a broad and subjective assessment that may cause confusion for staff,” the report said.
Ahluwalia disagreed.
“The prospective guarantor may not need interviews with the lender and broker and it may be the case also that it is just challenging to be able to conduct that interview with the guarantor because of circumstances surrounding that,” she said.
“But certainly, I think both lenders and brokers would be doing it and having these interviews on a best endeavours basis.”
While some brokers may be concerned that they will have to quickly adjust their processes to these new controls Ahluwalia said brokers didn’t need to worry.
“Brokers don’t need to worry that there will be controls implemented tomorrow and certainly there are also controls that might be appropriate,” said Ahluwalia.
“We would welcome reasonable controls, which would potentially look like a checklist to ensure that the broker has interviewed and educated the prospective guarantor. However, beyond that, it might not be appropriate.
“We have got our industry’s back. We work closely with the ABA particularly in regards to the Code and I think we’ve communicated the role of a broker quite clearly to them and our lender members as well.”
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