Lender concentration shows how much of a trail book depends on one lender or lender group. A buyer should measure it using several bases—not only loan count—and then investigate whether the dominant exposure creates a practical dependency in commission income, accreditation, transfer approval, client servicing or future run-off.

A concentrated book is not automatically a poor acquisition. It may reflect a coherent historic client base and well-performing loans. The risk is that one change can affect an unusually large part of the acquired cash flow. The buyer therefore needs evidence about both the size of the exposure and the contractual and operational conditions behind it.

Measure concentration more than one way

Start with a complete loan-level file as at a defined cut-off date. Assign every loan to its legal lender and, separately, to the relevant lender group or common funding relationship. Product brands, white-label products and successor entities can otherwise make one economic exposure appear to be several unrelated lenders.

Calculate each lender’s share of:

  • active loan count;
  • current outstanding balance;
  • balance eligible to earn trail under the applicable terms;
  • gross trail reported for each month;
  • net trail actually received after identifiable deductions; and
  • recent settlements or new lending, if the operating business or ongoing servicing relationship is also part of the transaction.

Show the largest lender, the three largest lenders and all remaining lenders rather than relying on a single blended figure. Repeat the analysis monthly over a period long enough to reveal lender exits, refinancing waves, portfolio sales and changes in payment patterns.

These measures answer different questions. Loan count shows how many relationships are exposed, but a few large facilities may drive much more balance and income. Current balance may overstate the income base if some loans are not eligible for trail. Gross trail can hide aggregator fees, splits or adjustments, while one strong receipt month can conceal a declining exposure.

ASIC’s mortgage-broker remuneration review describes trail as a recurring commission normally based on a small proportion of the current or average loan balance. It also found differences in commission arrangements and examined provisions for recovery and stoppage of commission payments (ASIC REP 516). The buyer should therefore use the actual terms and statements for each lender, not assume that equal balances produce equal or equally durable trail.

Request evidence behind the percentages

Ask the seller to provide evidence that lets the concentration schedule be reproduced rather than accepted as a presentation figure:

  • original aggregator or lender statements with loan-level detail;
  • a loan register with stable identifiers, lender, product, settlement date, current balance, status and trail received;
  • lender and lender-group mapping, including white-label or migrated portfolios;
  • commission schedules, variations and notices of rate or eligibility changes;
  • accreditation, panel and aggregator records relevant to continued servicing and payment;
  • correspondence about suspensions, disputes, remediation, system migrations or lender exits;
  • monthly discharge, refinance and repayment data by lender; and
  • evidence of any consent or transfer condition that differs by lender or product.

Reconcile the lender totals back to the full trail population, payer statements and bank receipts. If the seller’s schedule assigns a different lender name from the payment statement, retain a mapping table and the reason. Unallocated loans should remain visible as an exception rather than being absorbed into “other”.

Loan records may contain personal information. The Office of the Australian Information Commissioner says vendors and prospective purchasers must consider privacy obligations during a business sale, use de-identified information where possible and can restrict electronic access through a data room (OAIC). Initial concentration work usually needs stable masked identifiers and financial fields, not borrower names.

Investigate what the largest exposure depends on

For every material lender exposure, trace four dependencies.

Payment dependency. Who owes and remits the trail: the lender, aggregator or another intermediary? Which agreement and commission schedule govern it? Confirm how changes, offsets, disputes and cessation are treated.

Transfer dependency. Determine whether the rights, records and servicing arrangements can move to the buyer, and what consents, accreditations or system steps are required. A lender concentration calculation does not prove that the associated income transfers.

Portfolio dependency. Compare run-off, repayment and refinance behaviour by lender and loan vintage. A large exposure may be stable, or it may be concentrated in older loans already declining quickly. Analyse concentration together with seasoning and historical attrition.

Servicing dependency. Identify whether the buyer can access the lender’s systems, maintain accreditation and respond to client requests. Review complaints, contactability and the level of ongoing work. Similar trail dollars can carry different service requirements.

The legal and compliance setting also limits how a buyer responds after settlement. The National Consumer Credit Protection Act requires mortgage brokers covered by the provisions to act in consumers’ best interests when providing credit assistance and to prioritise consumers’ interests where a conflict exists (Federal Register of Legislation). ASIC’s guidance explains its approach to those obligations (RG 273). A purchaser cannot assume it can refinance clients merely to diversify the book or protect trail income; any future credit assistance must be assessed under the applicable duties and each consumer’s circumstances.

Stress-test the dependency

Build a lender-by-lender base case using reconciled net receipts, then apply transparent stresses to the largest exposures. The purpose is not to predict a lender’s conduct. It is to see how sensitive the buyer’s model is to plausible changes and where further evidence matters most.

Hypothetical example: a book receives 46% of net trail from Lender A, 19% from Lender B and 35% from all others. The buyer tests a scenario in which Lender A’s annual run-off is five percentage points higher than the base assumption and a separate scenario in which three months of its payments are delayed. These are buyer-selected assumptions, not forecasts. The model shows the effect on cash available for acquisition debt, servicing costs and contingency reserves without treating delayed income and permanently lost income as the same event.

Test at least:

  • faster balance run-off at the largest lender;
  • a commission-rate or eligibility change, where the governing documents permit change;
  • delayed transfer approval or payment interruption;
  • failure to obtain a required accreditation; and
  • the combined effect of lender concentration and a concentrated loan vintage or borrower group.

Keep each assumption separate and show the outcome before financing. A purchase-price adjustment, retention, condition precedent or deferred payment may allocate some transaction risk, but it does not remove the operating dependency. The buyer’s lawyer, accountant and finance adviser should determine whether the evidence supports the proposed structure and drafting.

Questions buyers often ask

Is there a safe maximum lender percentage?

There is no universal percentage that decides whether a trail book is acceptable. The significance depends on the payment terms, transfer conditions, run-off, loan quality, servicing capability and the buyer’s capacity to absorb disruption. Set a decision threshold for the transaction, but do not mistake it for a regulatory safe harbour or a substitute for evidence.

Usually, analyse both the named lender and the broader dependency. Combine exposures where brands share the same legal payer, funding source, commission arrangement or transfer decision, while retaining the underlying brand detail. Document the mapping so the analysis can be reproduced.

Can new lending diversify the acquired book?

Possibly over time, but it should not be treated as a cure at completion. New business is uncertain, existing loans may run off first, and any credit assistance must comply with applicable consumer obligations. Value the acquisition on supportable evidence rather than a diversification plan that has not occurred.

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.