Accountants who certify that borrowers applying for finance have the ‘capacity to repay’ a loan have been reminded by ASIC about their responsibilities to ensure there is a reasonable basis for providing the certification.
The alert follows the release of an ASIC report, Protecting wealth in the family home which drew on a qualitative examination of a small number of refinancing transactions for borrowers in financial difficulty.
The report discussed the practice by some lenders of relying on an accountant’s certificate to verify a borrower’s capacity to make repayments before approving a loan. The report also examined a small number of cases where accountants had provided certificates without properly ascertaining or investigating the borrower’s financial position, or their true capacity to repay the loan.
‘In each case examined, the accountant had insufficient information to make a reliable judgment about the borrower’s financial position. In fact, in two cases it appears that the accountant who provided these certificates had never met or spoken to the borrowers’, Ms Delia Rickard, ASIC’s Acting Executive Director of Consumer Protection said.
The report shows that mortgage brokers seeking to arrange refinancing transactions for borrowers in mortgage stress regularly approach accountants for a certificate of the borrowers ‘capacity to repay’.
‘Relying on an accountant’s certificate effectively shifts the risk of credit assessment from the lender to the accountant. Accountants need to be aware that certifying a capacity to repay without making proper inquiries may expose them to legal action, particularly where the borrower defaults within a short period after taking out the loan’, said Ms Rickard.
‘ASIC urges all accountants who provide ‘capacity to repay’ certificates to check they have appropriate systems in place to ensure there is a reasonable basis for providing the certification in every case. ASIC also urges these accountants to consider the implications of providing these certificates without reasonable basis’, Ms Rickard said.
‘It is essential that accountants make detailed and rigorous inquiries before certifying the borrower’s ‘capacity to repay’, in order to protect themselves and borrowers’, said Ms Rickard.
‘If the borrower cannot truly meet the proposed repayments, they risk losing a significant proportion of the equity accumulated in their home through refinancing as a result of high interest rates, and high broker and lender fees. If they subsequently default they stand to lose further equity through enforcement and legal costs.
‘In many cases it may be better for a borrower to make the difficult decision to sell up immediately and preserve the equity they have left in their home, rather than entering into a refinancing arrangement with extra fees and charges together with repayments they can’t truly manage’, Ms Rickard said.
Background
The ASIC report, Protecting wealth in the family home, drew on a qualitative examination of a small number of transactions where brokers arranged refinances of home loans for borrowers in financial difficulty. It analysed the conduct of the parties involved with a view to drawing lessons that might help consumers, brokers and lenders to make better decisions.
The report analysed three refinances in detail. For those three borrowers, refinancing cost them on average:
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27 per cent of the equity accumulated in their home; and
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a minimum of $20,120 in fees and charges.
The report questioned the value of the accountants’ certificates in verifying capacity to meet repayments, even where those certificates were completed accurately and in good faith. The accountants’ certificates were determined to be an inadequate substitute for proper credit assessment procedures.