An ASIC review of mortgage brokers providing credit assistance for home loans in the first six months of the new national credit regime has found that while they are generally aware of the new responsible lending obligations and taking steps to comply, there is room for improvement.

ASIC Commissioner Peter Kell said the responsible lending obligations are central to the new national credit regime and that ASIC is committed to ensuring industry adopts practices and procedures to achieve compliance.

‘We undertook this review to assess how the home loan industry was complying with the new responsible lending obligations in the early days of the regime’, Mr Kell said.

‘Loans promoted as low doc were a particular focus given the role these products played in the lead up to the US sub-prime crisis and in equity stripping as identified in ASIC’s March 2008 report, Protecting Wealth in the Family Home.’ (REP 119)

ASIC’s review, which examined the procedures of 16 mortgage brokers, did not consider whether individual loans were appropriate. While the review didn’t find evidence of equity stripping [1], it identified some risks of non-compliance with the responsible lending requirements, particularly where credit assistance was provided for loans promoted as low documentation (low doc).

Consistent with the regulatory requirements, files reviewed generally recorded inquiries into a consumer’s credit requirements and objectives, inquiries into and verification of a consumer’s financial situation, and/or assessment of whether a consumer would be able to meet their obligations under the proposed credit contract without substantial hardship.

Some of the compliance risks ASIC identified in its review included instances of brokers not recording:

• a consumer’s requirements and objectives beyond the immediate purpose of the home loan (eg buy a home)

• steps taken to verify a consumer’s income, or relying only on statements from a consumer to verify income, when providing credit assistance for home loans promoted as low doc

• inquiries into a consumer’s actual living expenses or steps taken to verify a consumer’s ongoing fixed expenses; and

• how a consumer’s ability to make repayments under the proposed credit contract had been assessed.

‘ASIC considers that the inquiries and verifications a credit licensee must make to satisfy their responsible lending obligations are scalable depending on the circumstances of the consumer. In some circumstances, fewer inquiries may be needed. This does not mean, however, that inquiries and verifications may be scaled down simply because of the label applied to a product, such as low doc’, Mr Kell said.

‘We’re in the process of following up specific concerns with individual brokers and will be working with industry bodies to promote compliance more widely.’

ASIC’s review focused on the practices of mortgage brokers, rather than lenders, because the responsible lending requirements didn’t apply to most home lenders until January 2011. A further review of how credit providers in the home lending market are now meeting their responsible lending obligations will commence in coming months.

Background

Responsible lending obligations, contained in the National Consumer Credit Protection Act 2009, require credit providers and credit assistance providers to:

• make reasonable inquiries into a consumer’s requirements and objectives

• make reasonable inquiries into a consumer’s financial situation

• take reasonable steps to verify a consumer’s financial situation

• assess whether a proposed credit contract will meet the consumer’s requirements and objectives; and

• assess whether the consumer will be able to comply with their financial obligations under the proposed credit contract without substantial hardship.

There are significant civil and criminal penalties that apply to contraventions of these responsible lending obligations. Credit assistance providers who do not satisfy their responsible lending obligations also place themselves at increased risk of civil action by consumers seeking compensation for any loss or damage they may have suffered as a result.

In February 2010, ASIC issued Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209) to assist industry in understanding the responsible lending obligations. .

Responsible lending commenced for mortgage brokers and smaller lenders on 1 July 2010. It commenced for banks, building societies, credit unions and registered finance companies on 1 January 2011.

Download:

Report 262, Review of credit assistance providers’ responsible lending conduct, focusing on ‘low doc’ home loans

Related media release:

11-147MR ASIC successfully completes credit licensing

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Note:

1. ‘Equity stripping’, as defined in Report 119 Protecting Wealth in the Family Home (REP 119), is when fringe brokers take advantage of the desire of mortgage borrowers in default to save their home by:

• charging them high fees (in some cases consuming up to 20% of the borrowers’ equity in their home prior to the refinance); and

• refinancing them into loans where they are at extreme risk of being unable to afford the repayments on the loan.