Broker's Going for Broke: The Rise of Unregulated Intermediaries in Australian Banking: Australian Deposit Taking Institutions Have Embraced Third Party Brokers to Grow Their Mortgage Business, According to the Results of an Australian Prudential Regulation Authority (APRA) Survey
Chantivong, Anoulack, Coleman, Anthony D. F., Esho, Neil, Journal of Banking and Financial Services
Australia's authorised deposit taking institutions (ADIs) have become increasingly reliant on broker-originated lending. This is evident in terms of both the number of ADIs using brokers, as well as the proportion of lending business generated through brokers relative to traditional origination and distribution channels.
Broker-originated lending has the potential to provide significant cost advantages and growth opportunities for ADIs. However, there are also potentially significant additional risks that need to be managed and ADIs need to understand these as well as the costs and benefits.
To increase knowledge of the broker-introduced loan market and to assist ADIs in managing the associated risks, APRA undertook a survey of all ADIs. The results provide the first "official" estimate of the size of the broker-introduced loan market. This report also details common industry risk management practices, the responsibilities of brokers and the commission structures used.
The survey contained 20 questions covering topics related to risk management and lending practices, the magnitude of broker-originated lending and commission structures.
Table one records some basic statistics concerning the survey. In total, surveys containing 20 questions were sent to 238 institutions. The response rate was a very high 93 per cent.
A total of 56 institutions stated that they use brokers to originate loans (14 banks, 34 credit unions, and eight building societies). This represents approximately 25 per cent of all ADIs. Furthermore, 25 institutions plan to use brokers for the first time in the next t2 months, illustrating the likelihood of further growth in the market.
Table one also shows the aggregate size (both in terms of dollar value and number of loans) of the broker-originated loan market. The total dollar value of broker-originated loans outstanding as at June 2002 was $86.6 billion. As expected, banks dominate the market with approximately 96 per cent of the total dollar value of broker-originated loans.
The total dollar value of broker-originated housing loans was $76.3 billion, which represents roughly 23 per cent of all housing loans made by ADIs. Broker-introduced housing loans account for 23 per cent of banking industry housing loans, 2 per cent of credit union housing loans and 35 per cent of building society housing loans.
The total dollar value of broker-originated commercial loans is $9.9 billion, which equates to 6 per cent of commercial loans made by ADIs. Building societies rely heavily on brokers to generate commercial loans, with 48 per cent of building society commercial loans being generated via brokers.
Broker-introduced commercial loans only account for 5 per cent of commercial loans made by banks and 7 per cent of commercial loans made by credit unions. For all ADIs, broker-introduced personal loans account for only 1 per cent of total personal loans, with little variation across the sectors.
As at June 2002 banks held approximately 765,000 loans made through brokers, the majority in the housing loan category (489,000). For credit unions, the most common form of broker-originated loan is personal loans (12,000) while building societies tended to use brokers more heavily in the housing loan market (19,000).
In total, for all ADIs there were approximately 802,000 broker-introduced loans outstanding as at June 2002. Together with the total dollar value of $86.6 billion, this underlines the significance of the market, and the due attention to it that is required.
The average loan sizes for personal loans and housing loans are similar across banks, credit unions, and building societies at $9000 and $149,000 respectively.
Broker usage statistics
In tables 2a and 2b we divide the market into bank loans and credit union and building society loans respectively. …