Mortgage broker income verification is under scrutiny. Can you answer for what your brokers submit?

A lender rings and asks you to walk through how one of your brokers verified a borrower's income on a file that settled last quarter. Could you? Not your word that the broker is a good operator, but the record of what was asked and what was checked. Most principals could not, and the pressure to be able to answer is building.

AUSTRAC has put every lender in the country on notice. Its analysis of 10 major banks found hundreds of millions of dollars in suspected fraudulent home loans, built on inflated incomes, misrepresented employment and business income that could not be verified. It was careful to say it had not found widespread money laundering. What it found was weakness in how income was checked before the loans were written. The headlines land on the banks, but the scrutiny will not stop there. When a lender starts asking harder questions about the quality of what comes through the channel, it is asking about your brokers.

This is a general overview of where the verification duty sits, what a lender can do to your business when its confidence drops and what you can put on the table when you are asked to account for your files. It is information, not advice, and the references are here so you can check them yourself.

Who verifies a borrower's income, the broker or the lender?

Start with what most people get wrong. Under the responsible lending provisions of the NCCP Act, a mortgage broker has its own duty to make reasonable inquiries about a borrower and take reasonable steps to verify their financial situation before recommending a loan. That duty is separate from the lender's. A broker does not discharge it by leaving verification to the bank, and ASIC's guidance in RG 209 is explicit that the two obligations stand on their own.

So there are three parties and three duties. The broker makes its inquiries, verifies what it can and forms a preliminary view that the loan is not unsuitable. The lender does its own inquiries and verification and makes the final call. And behind the broker sits the licensee, whose general conduct obligations under section 47 require it to take reasonable steps to ensure its representatives comply, to supervise them properly and to keep a written record of how it does so. Verification is not a box the borrower ticks.

ASIC has quoted the Full Court on the point: verification calls for more than taking the consumer at their word.

None of this is new law. What has changed is the temperature. When a regulator says the same warning signs were spread across banks covering most of the mortgage market, every licensee should be reading it the way ASIC intends, as a prompt to ask whether the same weakness could sit in its own files.

Why lender scrutiny of the channel lands on you

Brokers now settle more than 80% of all new residential home loans, a record share on the MFAA's figures, which puts Australia alongside the United Kingdom and the Netherlands as one of only three countries where brokers write the clear majority of mortgages. That is the context a lender sits in when it reads findings like these. It cannot tighten the channel without tightening on brokers, because the channel is where most of its lending now comes from.

When a lender's confidence in a broker group drops, it has a ladder of responses and none of them are pleasant. It can review a broker's accreditation, deactivate it or withdraw it. It can lean on the aggregator, which holds the master agreements and carries its own supervision liability, to investigate, remediate or terminate. And it can reach for the indemnity clauses and set off clauses in the agreements that sit under every broker group. Those clauses are worth reading closely, because some of them require the group to repay commission or wear a loss on a fraudulent file even where the broker had no idea the documents were false. The exposure is not always fault based.

That is the risk. The other side of it is an asset. A lender's confidence in your group is worth real money, in panel access, in the loans your brokers can write, in the relationships the business runs on. You protect that asset the same way you would defend it if a lender ever queried a file. You can show, quickly and across the network, what your brokers did.

What you can evidence, and what you cannot

The boundary that matters here works in your favour. You cannot guarantee that a borrower told the truth. The most cited number on this comes from a borrower survey now several years old. It found borrowers who used a broker were more likely to submit an inaccurate application than those who went direct. But that is borrowers reporting on their own applications, not a measure of what brokers did. Brokers also carry more of the self-employed, investor and complex borrowers, who are harder to verify by their nature. You will never control what a borrower puts in front of your broker.

What you can control, and evidence, is what your broker did with it. The inquiries they made. The income and expenses they verified rather than accepted. The reasons behind the recommendation, written so they make sense for that borrower rather than pasted from a template. ASIC's own view, put plainly by one of its commissioners, is that a licensee has a birds-eye view of its brokers and all the obligations that come with it. It expects you to pick metrics suited to your business, monitor them regularly and catch problems before they spread. And it expects the monitoring to be recorded, because under section 47 supervision is a documented obligation.

This is where most groups are exposed, and it is not because their brokers are dishonest. The overwhelming majority are not, and the industry bodies are right to keep saying so. It is because a principal running 20 or 40 brokers (or more) cannot hold that evidence in their head, cannot check every file the same way twice, and often cannot produce it on demand when a lender or the regulator asks. An anomaly in a file is a reason to ask a question and record the answer, never a verdict on its own. But you must be able to see it first, and then show that you looked.

The question most principals cannot answer

If a lender rang tomorrow and asked you to account for the income verification on 20 files your brokers settled last quarter, could you produce it, file by file, showing what was asked and what was checked?

Most principals cannot, and it is rarely because a broker did anything wrong. Nobody has ever pulled the evidence together and looked. Sooner or later a lender or the regulator asks. The question is not whether your brokers are honest. It is whether you can prove what they did.