A gap in reported trail income should be treated as an exception to investigate, not as proof that the borrower has defaulted and not as income that will automatically resume. The loan may be in arrears, but the payment may also be absent because the balance fell, an offset reduced the commission base, the loan discharged, a lender suspended trail under its agreement, or the statement and loan file do not align.

For a buyer, the practical task is to identify every non-paying or under-paying loan, assign a supported reason and decide how that reason affects sustainable income. A portfolio-level total cannot do this. The work requires loan-level statements, status data, the operative commission rules and a month-by-month reconciliation.

A missing trail payment is a question, not a diagnosis

ASIC’s mortgage-broker remuneration review found that trail was generally paid monthly as a percentage of the ongoing loan amount. Calculation methods varied: most surveyed lenders used the prevailing balance, extra repayments reduced the base, and some lenders also deducted offset balances (ASIC). A low payment can therefore be consistent with a live, performing loan.

The review found that lender agreements allowed trail to be recovered or suspended. Arrears was the most common example, but thresholds varied and could start at 30 days or longer. Other examples included suspected broker misconduct, unlicensed activity or an over-limit line of credit. Only the seller’s current agreements and written counterparty data establish the rules for the book being sold.

Do not collapse the following into one “non-paying” category:

  • contractual suspension: trail is withheld under a lender or aggregator rule, perhaps because an arrears threshold has been reached;
  • reduced commission base: repayments, redraw treatment or an offset reduce the eligible balance;
  • closed or discharged loan: no future trail is expected because the facility has ended;
  • hardship or restructured loan: payment terms changed, but the commission outcome still depends on the agreement;
  • administrative exception: a timing cut-off, reversed entry, transfer problem, unmatched account or statement error explains the gap; and
  • unresolved: the available evidence does not support a conclusion.

“Unresolved” is a valid due-diligence outcome. It is not a licence to count the income.

Build a loan-level exception schedule

Request 24 to 36 months of monthly trail statements, linked loan-level data and relevant commission schedules, adjusted for the book’s age, available records and transaction risk. For each facility, capture:

Field Why it matters
Stable de-identified loan ID Links records without exposing borrower names unnecessarily
Lender, product and settlement date Connects the loan to the correct rules and vintage
Opening and closing balance Tests whether the expected commission base is shrinking
Offset or redraw treatment Explains some low payments without implying arrears
Contractual repayment and arrears days Distinguishes a missed instalment from a contractual suspension threshold
Hardship or restructure flag and dates Shows whether status changed during the review period
Trail rate, eligible balance and gross trail Recreates the expected payment under the stated rule
Suspension, adjustment or reason code Records the counterparty’s explanation
Net amount received and receipt month Links the statement to cash
Current status and evidence date Prevents stale labels from being treated as current facts

The OAIC says covered vendors must comply with the Australian Privacy Principles during due diligence and should consider de-identification; buyers must also protect privacy rights (OAIC). Start with anonymous IDs and aggregated arrears bands. Ask privacy advisers when identifiable records may lawfully be disclosed.

Reconcile the gap through time

Use three linked tests.

First, calculate expected trail. Apply the documented rate to the eligible balance defined by the current schedule. Do not substitute the original loan amount, the approved limit or a seller’s headline balance unless the contract actually uses it.

Second, compare expected trail with the statement and bank receipt. Trace gross trail, lender adjustments, aggregator deductions and the net deposit. Keep timing differences separate from permanent non-payment: an amount earned in one month may appear in a later remittance cycle.

Third, follow exceptions forward. For each zero, reversal or material shortfall, examine surrounding months. Record whether payment resumed, was caught up, remained suspended or ended with loan closure. Written counterparty reason codes are stronger than recollection.

APRA describes non-performing exposure by reference to unlikeliness to repay and/or 90 days past due, while noting that financial difficulty can exist without current arrears (APRA). It also says arrears may continue to accrue for prudential reporting until a hardship loan returns to performing status (APRA). These classifications are not a universal broker-commission formula. Do not assume an APRA status triggers the trail terms.

Assess what the exception population means

Summarise by loan count and eligible balance, because a few large loans may drive the gap. Cohorts can include current but low-paying, 1–29 days past due, 30–59, 60–89, 90-plus, hardship/restructured, suspended, discharged and unresolved. Use the lender’s definitions.

Then ask:

  • How much reported book balance produced no trail in each month?
  • Which lenders, vintages, products or seller-originated cohorts account for the gaps?
  • How often did suspended payments resume, and were missed amounts later caught up or permanently lost?
  • Does the seller’s forecast include suspended or unresolved loans at a full run-rate?
  • Are price adjustments, holdbacks or post-completion verification mechanisms proposed for uncertain payments?
  • Who owns pre-completion adjustments, recoveries, complaints and information requests after settlement?

Hypothetical example: a de-identified schedule shows 600 live facilities. In the latest month, 18 produce no trail. Evidence shows six are discharged, four are below the lender’s commission base after offsets, three are suspended for arrears, two are timing differences that pay next month, and three remain unexplained. The buyer’s maintainable-income model should treat those cohorts differently. It should not add all 18 back, nor assume all 18 represent permanent attrition. These figures illustrate a method only; they are not a benchmark.

Respect borrower hardship and professional boundaries

Arrears analysis is commercial due diligence, but it concerns borrowers who may be experiencing hardship. Under section 72 of the National Credit Code, a debtor who considers they are or will be unable to meet obligations may give the credit provider a hardship notice, and the credit provider must respond within the statutory framework (Federal Register of Legislation). A buyer should not infer a borrower’s circumstances from a missing commission line or treat client contact as a debt-collection exercise.

Have lawyers interpret assignment, suspension, recovery and completion protections. Use accountants to test receipts and cut-off, privacy specialists for data handling, and credit-compliance advisers for proposed borrower contact. Valuation should reflect verified cash flow and uncertainty, not one assumed reinstatement rate.

Frequently asked questions

Does zero trail mean the loan is in arrears?

No. Arrears may cause suspension under some agreements, but a zero can also reflect discharge, offset treatment, a low or nil eligible balance, timing, an adjustment or bad data. Obtain loan-level status and the applicable payment rule.

Should suspended trail be added back to earnings?

Not automatically. Test whether the contract provides for resumption or catch-up, whether the loan has returned to the required status and whether historical statements show actual recovery. Keep unsupported reinstatement outside the base case.

Are hardship and non-performing the same thing?

No. Status definitions serve different legal, prudential and contractual purposes. A hardship arrangement does not by itself prove that trail is payable or suspended, and a commission label is not a regulatory classification.

Sources

Disclaimer

This article provides general information only. It does not constitute legal, tax, accounting, financial, credit, valuation or other professional advice. Circumstances differ. Obtain advice from appropriately qualified advisers before acting or entering a transaction.