Facing the challenge

Nia Williams

July 1, 2009

At the beginning of the year, the Association arranged to talk with its leasing broker members about the challenges which faced them. The challenges in the commercial mortgage market are well documented, but different sectors of the market are facing very different problems. It is essential to understand these unique issues in order to offer this sector of the market a voice. So what are the issues facing the leasing broker? During the round table meetings held by the Association at the beginning of this year, the same topics were raised again and again.

Less lessors

As with the commercial mortgage market, many lessors have closed their doors to broker business. Some have closed their doors altogether. But unlike the commercial mortgage market, it is actually prime funders who are very thin on the ground so it’s the good quality deals brokers are struggling to find a home for.

The result of this is that prime deals are being placed with sub-prime funders (also called tier two funders) with the associated higher costs for the client. Some brokers have reported that one or two sub-prime funders are trying to step up to fill the gap and become pseudo prime funders. There is a huge opportunity here: there is good quality business to be had by any funder brave enough to take it.

Pump up the volume?

Some lessors have restricted the number of brokers they will deal with as they have only limited funds to lend and they have designated broker business as a higher risk. But brokers had an issue with the methodology employed by funders when ‘culling’ brokers. Lessors often claim that they have reduced the number of introducers they will take business from due to a ‘flight to quality’, but many assess your ‘quality’ as a broker based on the quantity of business you introduce. But if a broker is contracted to introduce large volumes of business to a funder, chances are a certain percentage of this will be of a lower quality, purely to ‘make up the numbers’. Good brokers aren’t necessarily the ones who do the most business, but the ones who do the best business. In short, many brokers were angry at having been cast aside as a ‘low quality’ introducer, when they were nothing of the sort.

Broker to broker business

Despite being a common practice in other areas of financial services, broker to broker business (where one broker introduces his client to another broker and the commission is split) is shunned by the leasing world. Lessors have been stung by fraud in the past and are concerned that as the chain becomes more tangled, brokers they have already decided not to do business with can find a back door to accessing their services.

But now many lessors have reduced their broker panels significantly, without some tolerance of broker to broker business, many clients will find their route to market has been closed off totally.

But is this set in stone or is there room to negotiate? If the chain was transparent, would a commercial mortgage broker, or a leasing broker without the access to some tier one funders, be able to use a leasing broker to help their clients? This is something the Association will work on and talk about with lessors. It’s tricky as many lessors have very valid reason for shunning this particular model and if there are to be any changes, they will take some time to appear. But we will be asking the questions.

Commission claw backs

Commission claw backs were becoming very hard for brokers to budget for. Although these had always been built in as part of a brokers’ contract with a funder, the terms are becoming stricter and enforcement is adopted more readily. It is important to note that the situation varies hugely across the market but where changes have been made periods have been extended and larger percentages clawed back. In practice, this made it almost impossible for a small broker to budget for as 100 per cent of commission paid could be clawed back a year and a half after the deal had been written.

NACFB quality

Although I’ve put this one last, this should probably come top of the list. Being a member of the NACFB should open doors. We’re hoping that after some work lessors should make the distinction between NACFB brokers and the rest of the market. Obviously we cannot have any influence over a funder’s commercial decisions, but we do want to ask them not to tar the whole broker market with the same brush.

But for this particular exercise, we need all members to get involved too. Chair of the NACFB’s Leasing and Asset Finance division, Stephen Bassett, asked those brokers who came along to the meetings to ‘bang the drum’; to act as ambassadors for good business practice and to make funders aware that you are an NACFB member, that you do comply with a Code of Practice, and that the NACFB represents quality brokers. Many funders are not aware of who, among those brokers they deal with, are NACFB members; or what proportion of the business that is introduced to them comes from an NACFB broker. Without that kind of knowledge, it’s difficult for any funder to appreciate the strength of the membership. With each member as a good will ambassador for the work the Association does, the message will gradually filter through.

Next steps involve engaging the funders in a dialogue to try and act as a mediator to put the brokers’ views across for all of these issues. We believe that by working with others in the industry we can make a difference and improve things for brokers and funders alike. Unfortunately, any change is going to take time; results will take a while to filter through, but we’re hoping a slow drip, drip will gradually win around funders and other brokers alike. When the green shoots appear in earnest and funders who have left the market look to return, we want to make sure that they see the NACFB logo as a badge of quality, and brokers who wear that badge are the ones they want to do business with.

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