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Why the AFG share price and mortgage broking industry is getting smashed today

The mortgage broking industry looks the biggest victim of the Royal Commission this week as shown by today’s 32% fall in the Australian Finance Group Ltd (ASX: AFG) share price.

It’s no surprise Hayne has singled out some of the fee-gouging business models of the mortgage broking industry that bring little value to consumers other than charging them additional fees to arrange a home loan with a bank such as Westpac  (ASX: WBC).

In particular the Royal Commission has recommended banning trailing commissions from lenders to mortgage brokers for loans issued from 1 July 2020 and instead forcing them to take fees upfront.

It seems Commissioner Hayne has recognised that trailing fees mean the longer a loan the greater the potential recurring commission to a mortgage broker, although a longer loan may not be in the best financial interests of the borrower.

For its part the mortgage broking industry including AFG, Yellow Brick Road Ltd (ASX: YBR) and Mortgage Choice Limited (ASX: MOC) (down 23% today) claims that it lowers costs and increases choice for consumers by acting as a middle person between a lender and borrower.

This is only true though if a borrower does not have the capacity or time for whatever reasons to arrange their own loan directly with many free online services such as iSelect Ltd (ASX: ISU) and Canstar helping make this process easier in 2019.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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