MORTGAGE BROKING
The Credit Approval Process
BY PETER ANDREWS, MBA, CPA, B.ECONOMICS, B.ARTS
Former lecturer at Macquarie University
Peter Andrews is a specialist trainer in
Financial Planning.
After an early career in corporate finance
and banking, Peter became a lecturer at
Macquarie University.
He has also taught in the Graduate
School of Management at the University
of Sydney and the School of Banking and
Finance at the University of New South
Wales.
Peter has a Bachelor of Arts and a
Bachelor of Economics from the
University of Sydney and a Master of
Business Administration from the
University of Florida. He is also a
Certified Practicing Accountant.
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MB5 – The Credit Approval Process PA 160415
S o far you have been told about the responsible lending
requirements. That is not the whole picture, however. There is a
longer credit approval cycle that will be considered in this chapter. It
begins with the preliminary assessment carried out by the mortgage
broker and ends with registration of the mortgage and payment of stamp
duty.
Mortgage brokers are primarily involved in the early stages, which may be
referred to as ‘pre-credit’. This ends with submission of the loan
application to the lender or other credit provider.
The only time when mortgage brokers are involved after the post-credit
stage is when the credit provider forwards an offer letter to the applicant.
This is because the mortgage broker is responsible to ensure that the
requirements of the loan purpose are met.
Involvement of the mortgage broker also protects the client because it
ensures that the product being offered is the most appropriate one for the
client’s requirements.
CONTENTS
THE CREDIT APPROVAL PROCESS....................................................... 2
PRE-CREDIT CONSIDERATION BY THE MORTGAGE BROKER .............. 3
NAME AND OTHER BASIC DETAILS ......................................................... 3
PURPOSE OF THE LOAN ........................................................................ 4
NCCP ACT REQUIREMENTS .................................................................. 4
SOURCES OF INFORMATION .................................................................. 7
CONDUCT PRELIMINARY ASSESSMENT .................................................... 7
SUBMIT APPLICATION .......................................................................... 8
COMPLETE CLIENT FILE ........................................................................ 8
ACTIONS TAKEN BY THE CREDIT PROVIDER ....................................... 9
RECEIVE APPLICATION .......................................................................... 9
FINAL ASSESSMENT ............................................................................. 9
DETERMINE SUITABLE SECURITY AND OBTAIN VALUATION ........................ 10
NEGOTIATE SUITABLE SECURITY ........................................................... 11
CREDIT REVIEW ................................................................................ 11
PRE-SETTLEMENT CONFIRMATION........................................................ 11
THE OFFER LETTER............................................................................. 12
THE LENDER’S SECURITY DOCUMENTS ................................................... 12
ATTEND SETTLEMENT ........................................................................ 12
REGISTER MORTGAGE AND HAVE MORTGAGE DOCUMENTS STAMPED ........ 13
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“We still can’t believe how easy it was. Not only did our
THE CREDIT APPROVAL PROCESS broker arrange an appointment suited around us but
The credit approval process consists of a large number within a short time we felt completely comfortable and
of individual process steps. Table 1 presents a at ease with our refinance options. He gave us options
conceptual view of the various steps involved. which empowered us with choices that saved real time,
lots of money and much anguish.”1
Each step will be discussed in turn, although the reader
should note that mortgage brokers are almost wholly Table 1: The credit approval process
only involved in the pre-credit state. The mortgage
broker’s only later appearance, which is at the time the Stage Activities Participants Time lapse
offer letter is sent to the client, is required to ensure
that to ensure that the loan proposal offered is  Present Credit Guide
consistent with the proposal put to the client by the  Obtain and verify
broker before the application was forwarded to the applicant’s name &
other basic details
credit provider.
 Establish loan
purpose
In order to provide a more complete picture of the
 Gather and confirm
lending process, the following discussion will proceed information required
under the headings of the different stages listed in by the NCCP Act Borrower &
Pre-credit 1-2 days
Figure 1.  Present client with broker
choices
The three headings are:  Prepare application
 Conduct preliminary
1. Pre-credit Consideration by the Mortgage Broker
assessment
2. Risk Analysis by the Credit Provider  Advise client of
application outcome
3. Implementation of the Credit Decision.
 Submit application
 Receive application
Note the timing of the separate steps. The time lapses
 Final assessment
shown in Table 1 are indicative only. As an indication of
the total time required, Mortgage Choice indicates on  Determine suitable
Risk Analysis security and obtain
its website that the total process may take 6 to 8 weeks. valuation Lender 5-8 days

Almost all of this timing, however, is beyond the control  Negotiate suitable
of the mortgage broker. The mortgage broker is only security
totally in control of the pre-credit stage, and the  Credit review
indicative time for this is 1-2 days business days.. This  Prepare and send Borrower/
means that all relevant data is gathered in Day One, letter of offer lender/
 Sign letter of offer solicitor/
with the credit application also being prepared by the conveyancer/
5-10 days
applicant and broker working together in Day One. and lender’s security
documents broker
Then, during Day Two, the broker carries out a
preliminary assessment and submits the credit Implementation Lender/
 Organise and attend borrower/
application and supporting documentation to the credit settlement solicitor/
provider. conveyancer 5-15 days
 Stamp mortgage
The two days for the pre-credit process is the internal Lender/solicitor
documents
standard set by most mortgage brokers and / conveyancer
 Register mortgage
aggregators. This is shorter than the industry code of
practice requirement of five business days.
These two days are crucial. Clients must be reassured
and made to feel at ease, as the following client
testimony indicates:

1 From Mortgage Choice website.

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MB5 – The Credit Approval Process PA 160415
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PRE-CREDIT CONSIDERATION BY
THE MORTGAGE BROKER
The lending process usually begins with a preliminary
discussion about what types of loan the broker is able
to provide, the length of time required to put the loan
in place, the information required, the documentation
required, etc. The loan types suitable for the applicant
are presented more clearly later, once information has
been collected from the client, so an informed decision
can be made. At that stage, if a more suitable type of
loan is available elsewhere, the client should also be
informed of that.
Then, once the client appears willing to go ahead,
he/she is asked to sign an agreement to proceed.
It is normal for mortgage brokers to conduct a face-to-
face information to obtain much of the information for
the preliminary assessment and the loan application.
Other forms of information may, however, also be used.
For example, ASIC envisages that enquiries may be
made online as well as face-face.2 Although not
mentioned by ASIC, they may also be made by such as
telephone and teleconference.
A preliminary letter can be used to advise the client
what to expect in the face-to-face meeting and provide
a list of the information and support documents that
will be required for the meeting. This ensures that the
interview proceeds smoothly in a time-efficient manner
and makes it less likely that the client will see another
broker.
Another matter to consider in the preliminary letter is
that the broker should consider disclosing his/her
capacity to assist the client, e.g. the products the broker
is able to provide. Although this is not a formal
requirement, it prevents misunderstanding at the
outset.
Although there are no legal requirements on the
matter, a sound way to conduct the meeting is for the
broker to have a Fact Finder that is used to record the
information obtained from the client. A properly
designed Fact Finder follows the course of a well
planned interview, so it serves as a meeting agenda as
well as a record if information.
2 ASIC Regulatory Guide 209.
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A further benefit of a Fact Finder is that it provides legal
evidence that the enquiries required for a proper
assessment have been made. That being the case, a
basic discipline to ensure that that is the case is to
complete all spaces on the Fact Finder, using words
such as “not applicable” to explain any absence of
information.
It is also wise to have a checklist to ensure that all
requirements have been met.
NAME AND OTHER BASIC DETAILS
The first item on a Fact Finder is normally the
applicant’s name and other details required for client
contact, such as street address, email address and
telephone number. These details are likely to be
obtained when contact is first made with the client,
which is most likely to be by telephone or a preliminary
interview.
Their first use is normally in a letter forwarded to the
applicant (or really prospect at that stage) advising
details of the “fact finding” interview and the
information and documentation that must be brought
along to the meeting.
A point to be careful about is that the Anti-Money
Laundering and Counter-Terrorism Act 2006 (Cth)
(AML/CTF Act) requires lenders to perform an identity
check on borrowers. Although the Act does not require
mortgage brokers to perform this task, it does provide
for brokers performing the task as agents of lenders.
Both the Mortgage and Finance Association of Australia
(MFAA) and the Finance Brokers Association of
Australia (FBAA) have prepared AML/CTF training and
compliance packages. Brokers appointed as agents for
the purpose should ensure that they undertake
appropriate training and comply with industry practice.
http://austrac.gov.au/finance_brokers.html
Documentary evidence that may be used to verify
identity includes:
 birth certificate
 credit card
 drivers’ license
 Medicare card
 Passport.
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PURPOSE OF THE LOAN Figure 1: Requirements leading up to an assessment
Requirement 1  Purpose of the credit
Other important information that is obtained before  Benefit to the
the client interview is arranged is the purpose of the Make reasonable applicant
enquiries about the
loan. when client contact is first made is the purpose of  Amount, maximum
applicant's objectives
the loan. amount, length, rate,
and requirements
terms, special
conditions, charges,
The reason for asking about the loan purpose at the
special features
outset is that the intended borrowing may not fit within
the lending guidelines of the mortgage broker or the
broker’s panel of lenders. Inventory finance, for Requirement 2 Can the applicant meet
example, is not normally a form of finance handled by a Make reasonable
all repayments, fees and
mortgage broker. Also, more speculative purposes, such charges from income
inquiries about the and liquid assets without
as property development, might be best ruled out at applicant’s financial experiencing hardship?
the outset. situation

A second reason for asking the purpose of the intended

borrowing at the outset is that the purpose determines Requirement 3 Using documentary
the sort of documentary evidence that must be brought evidence, with data such
Verify the applicant's as number of
along to the client meeting. For example, the financial situation dependents used to
documentary evidence required to verify the income of assess variable expenses
PAYG applicants is completely different to that required
for self-employed applicants. If applicants are going to
be given a checklist of information to bring along to the Assessment The Act requires the
client interview, the purpose and nature of the three process steps for
Both preliminary and both the preliminary
proposed borrowing need to be determined first so that
final assessments are assessment and the final
an appropriate checklist is provided. required. assessment.

Loan purpose is a basic part of the information that the

NCCP Act requires concerning the applicant’s
requirements and objectives. More detailed
information concerning requirements and objectives
will be obtained during the client interview.
NCCP ACT REQUIREMENTS
The NCCP Act, it may be remembered, requires an
“unsuitability assessment” if the credit is provided for
personal lending. There are in fact two unsuitability
tests:
 a preliminary assessment, perhaps carried out by
the mortgage broker; and
 a final assessment carried out buy the credit
provider as part of its credit review.
The NCCP Act requires three procedures before both
the preliminary review and the credit assessment. The
process is illustrated in Figure 2.
The three requirements will now be discussed. Each one
is mandatory. Failure to pay proper attention to any
one of them can lead to the credit contract being put
aside by either an external disputes resolution service
or a court of law.
Requirement 1: Enquiring About
Requirements and Objectives
ASIC has indicated that, as a minimum, the information
required to determine the applicant’s requirements and
objectives must include:
 the amount of credit needed;
 the timeframe for which the credit is required;
 the purpose for which the credit is sought and the
benefit to the consumer; and
 whether the applicant seeks particular product
features or flexibility, and understands the costs of
these features and any additional risks.

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MB5 – The Credit Approval Process PA 160415
 5 5. MORTGAGE BROKING
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Example – Enquiring about requirements and
objectives
In a review of responsible lending compliance risks
which it conducted in 2011, ASIC found that a number
of mortgage brokers only gave the immediate purpose
of the loan, e.g. to buy a house, as the client’s purposes
and objectives. As an example of why at least the
timeframe of the loan should be considered, ASIC gave
the following example in its report:
“A 25-year loan with a five-year fixed rate and
associated breaking fees may be unsuitable for a
consumer who expects to sell the property and
discharge the loan within two to three years.” 3
To ensure that this information is gathered properly,
mortgage brokers have checklists of enquiries that they
should make. ASIC has observed that such checklists
should also indicate the priority of the consumer’s
requirements and objectives in order to take account of
situations where the consumer has conflicting
objectives.4
ASIC has also provided guidance about what reasonable
inquiries about a consumer’s requirements and
objectives could include.5 These are:
 the amount of credit needed or the maximum
amount sought;
 the timeframe for which it is required;
 the purpose and benefit sought; and
 whether the applicant seeks particular product
features or flexibility, and understands the costs of
these features and any additional risks.
Example – Understanding the costs of features 6
An offset account is an account linked to a loan where
the credit provider does not pay any interest on the
account to the consumer, but instead the account
balance is deducted from (or offset against) the balance
owing on the loan when calculating the accrual of
interest on the loan. The net effect of this is to reduce
the interest paid by the consumer on the loan.
3
ASIC Report 262, para. 73.
4 ASIC Report 262, paragraph 76.
5 ASIC regulatory Guide 209, p.13
6 Based on an example in ASIC Report 262.
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Generally, the lender charges fees or a higher interest
rate for this feature. Consequently, whether such a
feature financially benefits a consumer depends on
whether the additional cost for this feature is exceeded
by the interest savings, determined by the amount of
money the consumer holds in the offset account.
ASIC found that where this feature was specifically
noted as important to a borrower, the cost was not
always explained. Nor was it always checked what
benefit the borrower would derive from this feature
based on the their stated financial situation.
While the client is outlining their objectives and the
purpose of the loan, the broker should be prepared to
bring various risk issues to their attention. Two the
Reserve Bank is particularly concerned about (mid
2015) are:
 the risk that property values may fall; and
 the risk that interest rates may rise.
Other risks that might be discussed with the client,
particularly with property investment loans, include
problems of vacant tenancy and property management.
Specific product risks should also be brought to the
client’s attention.
Requirement 2: Enquiring about Financial
Situation
According to ASIC, reasonable inquiries about the
client’s financial situation should normally include:
 current income as well as the reliability of that
income indicated by factors such as the length of
employment and also nature of employment – e.g.
full-time, part-time, casual or self-employed;
 fixed expenses – e.g. rent, repayment of existing
debts, child support and recurring expenses such as
insurance;
 variable expenses and influences on variable
expenses such as number of dependants;
 value and nature of assets – e.g. whether they
produce income;
 the client’s circumstances, including age and the
number of dependants;
 extent to which existing debts will be repaid from
the credit;
 credit history;
 geographical factors that may influence living
 6 5. MORTGAGE BROKING
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expenses, such as remoteness; and
 indirect income sources (such as income from a
spouse) where that income is reasonably available
to the consumer – e.g. taking into account the
history of the relationship and the expressed
willingness of the person to assist with repayment
obligations.7
In order to make sure that the data collected is
complete, check lists showing what data are required
should be used.
The purpose for the enquiries into the applicant’s
financial position is indicated in the Explanatory
Memorandum that accompanied the NCCP Act when it
was introduced into parliament as a bill. It stated the
purpose as being to assess whether the applicant
would:
“…be able to meet all repayments, fees and charges and
otherwise service the loan from income and liquid
assets, rather than from long-term savings or from
equity in a residential home, without suffering
significant hardship. ”
Note carefully that there is a presumption that a loan is
unsuitable if it appears that borrower would have to
either:
i. liquidate long-term savings; or
ii. sell the family home
in order to meet repayment obligations.
Requirement 3: Verifying the
Financial Situation
All the checklist requirements concerning financial
information may have been met. It is still necessary,
however, to obtain supporting documentation to verify
the information that has been collected. This may not
be obtained at once, but it must be collected in time for
the consumer to be advised of the preliminary
assessment within 90 days of it being made.
The documentation that is normally required is set out
in Table 2. It may be necessary to ask for more because
banks may ask for more, depending on the
circumstances.
7 ASIC Regulatory Guide 206.
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Table 2: Documents for verifying a client’s financial
situation
Where the applicant is a PAYG:
 employee payslips
 confirmation of employment, and
 recent income tax returns / group certificates.
Where the applicant is self-employed:
 recent tax returns
 a statement from the client’s accountant, and
 business activity statements.
And also, for both employed and self-employed:
 documentary evidence of fixed expenses such as
rent and mortgage payments, child support etc.
 valuation certificates of assets
 credit card statements, loan statements
 credit report (usually obtained by the credit
provider)
Note that the documentary evidence of income consists
of three (or more) documents. This is not just a matter
of backing one document with another. It also provides
evidence of continuity, e.g. a letter from an employer
confirming employment or a statement from the
client’s accountant can indicate that the past income
evidenced by other documents such as payslips and tax
statements will be continuing.
Client’s
Although some of the information that is collected, such
as a personal borrower’s variable living expenses,
cannot be easily verified by documentary evidence, care
still needs to be taken to ensure that the information is
as accurate as possible. ASIC expects the client’s
assessment of variable expenses to be compared to a
benchmark so their reasonableness can be assessed. At
the same time it stresses that enquiries should be made
into a client’s actual living expenses, with a record being
made of those enquiries.8
8 ASIC Report 262, paragraph 109.
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Likewise, the Financial Ombudsman Service (FOS) has
stressed that individual circumstances should always be
taken into account.9 For example, a client with four
children is likely to have higher variable expenses than a
client with no children.
The preliminary assessment may be made once the
information concerning objectives and financial
situation has been obtained and before the
documentation is available to verify this information.
With most personal credit, including housing loans, it is
most likely made by inputting the data that has been
collected into a computer model provided by the credit
provider.
Although the mortgage broker is not likely to have final
responsibility for the credit, he or she should still use
the documentary evidence that has been collected to
verify the financial and other information provided by
the credit applicant so that there can be certainty that
they have the capacity to repay the loan. This is
required before the consumer is advised of the
preliminary assessment.
Notice that a credit report is required in the case of
personal borrowing.10 With personal borrowers other
information to judge character may also be required,
such as past payment history, educational background
and time at the same residential address.
Use of credit reports
The largest source of credit information on individuals
and companies in Australia is Veda, which claims on its
website (in 2013) to hold information on 16.5 million
credit active people and 4.4 million businesses.
The Privacy Act 1988 gives consumers the right to
obtain a copy of their own credit file free of charge if
they have been refused credit, or to assist them in the
management of their own individual credit standing.
Under the Privacy Act also, credit information may only
be released with the individual’s consent. To meet this
requirement, bank consumer loan application forms
invariably include a clause that authorises the bank to
obtain confidential credit information about the credit
applicant and also to exchange that information.
9 Financial Ombudsman Service Circular, Issue 5, March 2011,
“Responsible Lending Conduct Obligations &
Maladministration”.
10 The credit report may be obtained by the credit provider rather
than the mortgage broker.
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If a proposal is declined because of the information in a
credit report, the mortgage broker is required by the
Privacy Act to tell the applicant the reason for the
declined proposal and give the applicant the name and
address of the credit reporting agency. The applicant
must also be of their right to access the agency’s file.
SOURCES OF INFORMATION
Most of the source documentation required to work
out the client’s financial situation should be available
from the client. A checklist should be used, with the
client being asked to have the information ready before
the first meeting has been arranged.
Other information, such as a letter from a past
employer, financial statements prepared by an
accountant, or a certificate of valuation, may have to be
obtained after the interview. The client should be
advised of the need during the meeting, and provided
with appropriate letters of authority prepared before
the meeting.
Because of the privacy legislation, an approach to a
third party for information should never be made
without written authorisation from the client.
To ensure that the applicant’s loan is processed as
quickly as possible, the required approaches to third
parties for information should be made as soon as
possible after the interview with the applicant.
CONDUCT PRELIMINARY ASSESSMENT
A properly performed preliminary check saves time
later on. For a start, it serves as a check of the
completeness and consistency of the documents
provided by the borrower. This minimises the need for
further inquiries.
The preliminary assessment is also especially significant
in segments with high rejection rates, as a
comprehensive credit review ties up considerable
resources in these segments. In that way it saves the
credit provider’s time and resources. This is more
efficient and allows more careful scrutiny of other
proposals where the degree of risk exposure may be
less apparent.
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To satisfy the requirements of the NCCP Act, the
reasons for deciding that a proposal is unsuitable must
be set out in a written report that is available to the
applicant on request.11 If a request is made, the report
must be made available to the client within seven
business days following the date of the request. The
only other requirement on the matter is that the report
must be provided without charge.
The form of the advice to the borrower is not
mandated, either in the legislation or professional
codes of conduct. As a form of legal protection,
however, it should be in writing.
SUBMIT APPLICATION
If the mortgage broker decides to go ahead with the
proposal, copies of the information that has been
collected will be passed on to the credit provider for a
final assessment and credit review. It is important to
ensure that the information is passed on in its entirety
so that the final assessment can be performed.
It is important that the information should be passed on
to the credit provider in a timely manner. The key word
is promptly, as soon as practicable after completion of
the preliminary assessment – on the same day if
possible.
At the same time it is an industry code of practice
requirement to advise the client of the outcome of the
credit application, whether successful or unsuccessful.
Again, the advice should be prepared and forwarded
promptly once the preliminary assessment has been
concluded.
Note carefully that the time lapse between interviewing
the client and forwarding the credit application to the
credit provider, along with the advice to the client,
should not be longer than two days. This is the one
piece of timing in the whole credit approval process
that is under the control of mortgage brokers and it is
normal company policy
COMPLETE CLIENT FILE
It is also a good idea to create ‘diary memos’ of contacts
with the client, such as telephone calls and meetings
with the client, and include these on the client’s file.
Other essential information includes:
 cient’s application;
 the loan application to the lender; and
 any supporting documentation forwarded to the
lender.
To satisfy privacy legislation requirements, all
information about a client must only be used for the
purpose for which it was collected. Likewise, sensitive
information such as religion, political preference, sexual
orientation, criminal convictions, professional and trade
union membership and health, may only be collected if
required by applicable laws or rules. For example,
health information may be collected if the client is also
applying for life insurance.
Such records should be kept as a normal good business
practice, but for a mortgage they serve another
purpose. This is because they provide an ‘audit trail’
that shows that the requirements of the NCCP Act and
other legislative requirements have been properly
observed. This protects the business against litigation
and provides evidence that all required steps were
taken. The file should be kept in a secure, fireproof
place, with access being restricted to authorised
personnel so that the requirements of the privacy
legislation are met.
Since client files should kept for protection in the event
of litigation, they should be kept for seven years after a
credit assessment has been made. 12 This is because the
statute of limitations removes the risk of litigation once
seven years have lapsed.
Client information may be kept on paper, but it is more
likely to be stored electronically, perhaps at data
centres external to the organization. However it is
stored, proper security measures must be in place to
protect the information.

As a final step in the pre-credit stage, the broker should

ensure that the client’s file contains all required
information and is properly secure. It is likely that the
file was begun when contact was first made with the
client. The file should contain all correspondence with
the clients and all documents - such as payslips, copies
of tax returns, etc. that were used as sources of
information for the preliminary assessment.
12 The only statutory requirements concerning retention of files by
11 NCCP Act, s.120 mortgage brokers relate to financial records.

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ACTIONS TAKEN BY THE CREDIT
PROVIDER
RECEIVE APPLICATION
It is important to ensure that all copies of application
documentation is passed on in its entirety. It is
advisable to prepare handover reports for this purpose.
FINAL ASSESSMENT
The final assessment follows the same steps as the
mortgage broker’s preliminary assessment, although
more information may now be available, such as the
credit review (if not previously obtained by the
obtained by the mortgage broker.) Although the credit
review is more likely to be carried out by a credit
committee (discussed later), the final assessment is
likely to be carried out by a single officer of the credit
provider, with the file being passed upwards for
approval if it exceeds that officer’s authority.
It is the reviewing officer’s responsibility to review the
credit application and supporting documentation to
verify that the proposed loan is “not unsuitable” in
terms of the NCCP Act. The mortgage broker may be
asked to obtain additional information from lawyers,
accountants, past employers, present employers, the
Australian Taxation Office, etc. It should be obtained in
a timely manner, but only after obtaining the client’s
permission.
There have been cases of major banks “rubber
stamping” fraudulent proposals put forward by
mortgage brokers. Since the applicant’s relationship is
with the mortgage broker, ASIC is unable to carry out
proceedings against a bank acting in this way. However,
when such cases have gone before an EDR service such
as FOS in the past the borrower has been granted relief
in the form of lighter repayment obligations. (Because
FOS is not able to apply criminal penalties in such cases
it tends to describe the failure of the credit provider as
“maladministration”).
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There have been claims that all of the major banks are
involved in maladministration of this kind. Certainly, if
they are, this could be an expensive failure in time
because of the orders that can be made by FOS (and
COS) – even when the applicant has deliberately
misstated their income. Also, there is the further cost of
processing doubtful applications that may be rejected
at the credit review stage. The final assessment is
therefore not a matter of ticking boxes to satisfy the
responsible lending requirements – it is instead a basic
precaution that safeguards the credit provider.
Special attention should be paid to types of loan that
have been subject to mortgage broker fraud in the past,
such as low doc and credit impaired loans. Certainly,
cases of mortgage brokers submitting abnormal
numbers of loans of that kind should be checked
carefully. There can also be other warnings, such as
inconsistencies in the data that has been provided.
There is a tendency for mortgage brokers to carry out
their preliminary assessment by inputting data into a
computerised model provided by the credit provider.
This suggests that human intervention should happen
at the stage of the final assessment. Also, unless there
has been deliberate misstatement of financial data on
the part of the mortgage broker, the final responsibility
for a careless final assessment rests with the credit
provider.
As the following example indicates, this is particularly
the case with “low doc” loans.
Example - Low doc lending case study13
Mr and Mrs Z applied for a loan from the financial
service provider to:
 refinance an existing loan, and
 obtain additional finance of approximately
$200,000 to assist them in purchasing another
property.
The approved their loan based on:
 their income as disclosed in their application, and
 their declaration that the loan was within their
ability and capacity to service.
Mr and Mrs Z disclosed:
13
FOS, ‘Responsible Lending Conduct Obligations &
Maladministration’, The Financial Ombudsman Service Circular,
March 2011.
 10 5. MORTGAGE BROKING
10
 partnership income of $400,000
 rental income of $40,000, and
 a parenting allowance of $20,000.
The bank did not make any independent enquiries to
verify this information.
Mr and Mrs Z subsequently claimed that the bank’s
decision to lend amounted to maladministration as they
the clients did not have the capacity to service the
additional loan of $200,000.
FOS took the view that a prudent and diligent lender
ought to have been alerted to make further enquiries
when presented with a Low Doc income declaration
listing pre-tax income of $440,000 combined with a
parenting allowance of $200,000. Also, a FOS
caseworker was able to obtain a tax return prepared
one month before Mr and Mrs Zs loan application that
revealed that their actual income was $45,000.
FOS determined that the customers’ deliberate
misstatement of their income was sufficient to prevent
the loan being considered “maladministration” or
unjust, and that the loss should therefore be
apportioned, with Mr and Mrs Z bearing two thirds of
their loss and the financial services provider being
responsible for one third.
DETERMINE SUITABLE SECURITY AND
OBTAIN VALUATION
A valuation is carried out for all property offered as
security. This may be carried out by independent
valuers, or by the staff of the lender. The value is
determined on the basis of values of similar properties
that have sold recently. Websites such as
www.allhomes.com.au can provide a significant amount
of information suburb-by-suburb.
If an independent valuer is employed, instructions
should be confirmed in writing, and include details
regarding access arrangements, identification,
ownership, agreed fee (or basis for its calculation) and,
if applicable, the purchase price and the selling agent.
The instructions should also list the parties intended to
rely on the valuation, the purpose of the valuation, and
agreed time for completion of the report.
So:
1. If the Purchase price is $100,000 and the Valuation
is $100,000 then the Security Value would be
calculated as $100,000
2. If the Purchase price is $120,000 but the Valuation
is only $100,000 then the Security Value would be
the LESSER which would be $100,000
3. If the Purchase price is $100,000 but the Valuation
is $120,000 then the Security value would still be
the LESSER of the two being $100,000
As well as having security values that may be less than
an independent valuation, banks rarely lend up to their
security values unless other security, such another
mortgage, or a personal guarantee secured by a
mortgage over property, has been provided. The
normal practice is to lend up to 80% of the credit
provider’s security value, although a percentage of up
to 95% is allowed if lenders’ mortgage insurance (LMI)
is in place.14
With LMI, the borrower pays the premiums. The
purpose of the insurance is to protect the lender
against a loss should the borrower default on their
home loan. The amount covered is the amount of the
borrowing, with a single up-front premium that is paid
for by the borrower. Depending on the lender, the
premium may be capitalised, i.e. added to the home
loan, with a consequent small increase in the monthly
repayments.
Example – Lender’s mortgage insurance15
Newlyweds Tim and Erica are battling to save a deposit
for their home, and currently spend approximately 32%
of their combined monthly salary on rent.
Paying rent is putting a real strain on their ability to
save a deposit and after speaking with their mortgage
broker, Tim and Erica learn they can secure a mortgage
for up to 95% of the value of the property they hope to
buy if they take out Lenders Mortgage Insurance.
Tim and Erica have saved $20,000 for a deposit and
additional funds to comfortably meet the other
commitments associated with their mortgage - such as
solicitor and application fees.

The security value of the property for loan purposes,

however, can differ because generally security value is
calculated as the LESSER of the contract purchase price
14
or the independent valuation of the security property. The allowed percentage is likely to be lower for loans past a cut-
off of $300,000.
15 Example from Gemworth.

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 11 5. MORTGAGE BROKING
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Keen not to miss out on the property they've decided to
purchase, Tim and Erica's broker advises that they can
capitalise their Lenders Mortgage Insurance - which
means adding the cost of the premium to their
mortgage.
Purchasing their new home for $400,000 with a home
loan of $380,000 the monthly repayments on their 30-
year mortgage (rate 6.82%) comes to approximately
$2,482.
The Lenders Mortgage Insurance premium on their
$380,000 home loan comes to approximately $12,426.
Should Tim and Erica capitalise their Lenders Mortgage
Insurance premium, it will increase their monthly
mortgage repayments by $81, taking the total monthly
mortgage repayment to $2,563.
Lenders mortgage insurance calculators can be found
on various websites, such as:
http://www.yourinvestmentpropertymag.com.au/calcu
lators/mortgage-insurance/
Required input is the value of the property and the
amount of the loan.
NEGOTIATE SUITABLE SECURITY
Explaining the existence of security values that are
lower than independent valuations may at times be
difficult. An additional burden of negotiation may be
created if the credit provider considers that its normal
security is not enough. Situations where additional
security may be sought include the following:
 The applicant has changed jobs: a minimum 6
months in is normally expected in their current
employment. If they have been less than 12
months in their current employment, it is normal to
require them to have been in their previous
employment for at least 2 years and in the same
field.
 Length of time in current residence. This is looked
at as an indication of stability in the applicant’s
personal life. Two years is usually a preferred
minimum; usually, more than three addresses in
the previous two years will be scrutinised heavily
by the credit provider.
In such cases it may be that sufficient security can be
negotiated to allow the application to proceed. The
security negotiated may be in the form of a lower LVR
ratio, or perhaps the addition of a third-party guarantee
such as a guarantee from a family member.
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The willingness of lenders to accept a third party
guarantee cannot be taken for granted. This is because
under both the NCCP Act and the Consumer and Credit
Act 2010, the lender must be satisfied that the
guarantor:
 has been properly advised; and
 properly understands the consequences of being a
guarantor.
Failure to meet these requirements may result in the
guarantee being set aside by a court of dispute
ombudsman.
CREDIT REVIEW
Having carried out a final assessment and obtained a
valuation of the security offered, it is time to carry out a
credit review. Ideally the credit review should be
performed by a credit committee, or at least by a
specially designated person without previous
involvement in the loan application.
The credit review is separate from the final assessment.
The final assessment considers the risks to the
applicant, as required by the NCCP Act. The credit
review, in contrast, considers the risks to the credit
provider.
Even if the loan is declined, the credit review may
indicate that the loan will be considered again for
approval if certain conditions are met, such as an
increase in security or an increase in the required
deposit.
PRE-SETTLEMENT CONFIRMATION
There are various pre-settlement matters that the
credit provider needs to check before an offer letter is
forwarded to the borrower. These include:
 checking that the original approval has not expired
through passage of time;
 confirming amount required to discharge other
debts (such as council rates);
 ensuring borrowing parties have confirmed their
identity (to prevent fraud);
 ensuring contracts for the sale of land have been
properly executed to ensure the legal transfer of
title and are in accordance with the original loan
application; and
 gaining consent of prior mortgagee if second
mortgage security is being taken;
 12 5. MORTGAGE BROKING
12
Required amounts payable to the various parties to the
settlement, including the borrower, are then confirmed.
THE OFFER LETTER
Once the various pre-settlement checks have been
carried out, the credit provider is ready to prepare and
send an offer letter16 for forwarding to the borrower.
Care needs to be taken that it confirms to requirements
of the NCCP Act – most lenders ensure this by using
templates that comply with the Act’s requirements. All
offer letters include provision for the client to
acknowledge acceptance of the loan terms and
conditions. The borrower’s solicitor should check them
carefully because they represent the home loan
“contract”.
At this stage, for the first time after submission of the
application to the lender, the mortgage broker is once
again involved. This is because the mortgage broker is
responsible for ensuring that the product being offered
by the lender is consistent with the requirements of the
client. This follows from the fact that mortgage brokers
have primary contact with the client and as such are
responsible for breaches of the responsible lending
provisions of the NCCP Act. Brokers should also be
prepared to take borrowers through the contract to
ensure that they understand their obligations,
particularly relating to repayments and the conditions
that apply in the event of late repayment. Special
conditions such as redraw facilities should also be
explained, and the borrower should be left with an
understanding of all fees that apply.
There may still be time to have conditions changed. As a
last resort, there is always another lender. Arranging
another loan, however, will take time.
Other points for the mortgage broker to check in the
offer letter include:
 That it is a formal offer rather than an indicative
offer or an offer in principle.
 There is a proper listing of default events. These
include failure to make payments on time, and
providing false and misleading information.
 That the security has been properly listed with all
required details, such as address if it is residential
property.
 That the name and address details of the
mortgagor are recorded so all correspondence will
be received.
The borrower’s solicitor or conveyancer should also
check and make arrangements for the borrower to sign
and return the letter of offer to the lender.
THE LENDER’S SECURITY DOCUMENTS
The mortgage and other documents need to be
prepared next. This usually happens when the lender’s
solicitor returns the signed letter of offer, although
some lenders prepare all the documents
simultaneously.
Once they have received them, the borrower and the
borrower’s solicitor / conveyancer execute the
mortgage documents and return them to the credit
provider.
Notice that the mortgage broker is not responsible for
preparing any of the documentation. All lenders have
prescribed forms for different types of loan
documentation.
Once all documentation has been executed, the only
remaining step before settlement is for the borrower to
insure the property. This is always a requirement of the
lender.
The borrower’s solicitor / conveyancer should, one
week prior to the settlement, write to the borrower
providing advice of the exact date and time of
settlement. The party acting for the credit provider
should then liaise with all parties to the settlement and
attend the settlement.
ATTEND SETTLEMENT
The payment to the vendor and transfer of the title
deed is referred to as settlement. Generally,
representatives of the purchaser, vendor and lender are
all present at settlement.
Before the settlement is finalised, all parties must be
completely satisfied that all documentation is properly
in place. It is not unusual for property settlements to be
held up or postponed for documentation reasons, such
as problems with the title deed.
Generally, disbursement is made by direct payment to
the vendor. Credit providers do this to ensure the loan
is used for its intended purpose. The purchaser then
takes possession of the title documents and the
property itself.

16 The offer letter may also be known as a “terms and conditions

letter”. Other terminology may also apply.

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 13 5. MORTGAGE BROKING
13
REGISTER MORTGAGE AND HAVE
MORTGAGE DOCUMENTS STAMPED
When all parties are satisfied with the documentation
and the purchase price has been paid, the purchaser or
more typically the lender takes the title document to
the state Land Titles Office to have the mortgage
registered.

Stamp duty applies on the purchase of land, which may

include buildings, in all States and Territories. It is the
purchaser who pays the duty.
The duty payable is based on the market value of the
property or the purchase price, whichever is greater. A
time limit applies – in New South Wales it is three
months – and concessions may be available to
particular classes of purchases, such as first
homebuyers.
As an indication of the stamp duty rates that apply,
Table 4 shows the rates that apply in New South Wales.

Table 3: NSW stamp duty rates for an owner occupied

or investment purchase
Value of property Rate of duty

$0 - $14,000 $1.25 for every $100 or part of the dutiable

value

$0 - $14,000 $1.25 for every $100 or part of the dutiable

value

$14,001 - $30,000 $175 plus $1.50 for every $100 or part, by

which the dutiable value exceeds $14,000

$30,001 - $80,000 $415 plus $1.75 for every $100 or part, by

which the dutiable value exceeds $30,000

$80,001 - $300,000 $1,290 plus $3.50 for every $100 or part, by

which the dutiable value exceeds $80,000

$300,001 - $1m $8,990 plus $4.50 for every $100 or part, by

which the dutiable value exceeds $300,000

over $1m $40,490 plus $5.50 for every $100 or part,

by which the dutiable value exceeds
$1,000,000

over $3m $150,490 plus $7.00 for every $100 or part,

by which the dutiable value of the
residential property exceeds $3,000,000.

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