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14-245MR 'Low doc' lenders tighten lending practices
An ASIC review of ‘low doc’ home loans following the introduction of responsible lending laws has found lenders have tightened their lending practices.
Before the introduction of responsible lending laws in 2010, some lenders did not verify a borrowers financial situation for ‘low doc’ loans. Instead, lenders often simply relied on a statement from the borrower that they could meet their repayments. This led, in some cases, to borrowers not being able to pay back the loan, or only being able to do so by selling their home.
ASIC’s review of 12 lenders found that lenders had tightened their ‘low doc’ lending practices since the introduction of the responsible lending laws. For example:
- Lenders are providing ‘low doc’ loans to a narrower range of borrowers. ‘Low doc’ loans are only being offered to the self-employed or those who do not have a readily verifiable income, rather than borrowers with a regular income stream that can be readily verified by documents such as payslips.
- Lenders are obtaining additional information to verify a self-employed borrower’s income, such as business bank account statements and/or letters from accountants.
- Lenders have additional processes in place to ensure the reliability of information provided by mortgage brokers.
This tightening of lending standards since the introduction of the responsible lending laws is also reflected in Australian Prudential Regulation Authority (APRA) statistics indicating a significant decline in the number of ‘low doc’ loans. APRA statistics indicate that since commencement of the National Consumer Credit Protection Act 2009 in 2010, ‘low doc’ loans have declined from 6.4% of new residential loans by ADIs to 0.7% of new residential loans by ADIs.
Although lending practices have improved across the industry, ASIC also identified a number of compliance risks, including:
- poor-record keeping, including not recording the outcome of inquiries into borrowers’ requirements and objectives, and the relative priority of these objectives
- lenders relying solely on benchmark living expense figures rather than taking separate steps to inquire into borrowers’ actual living expenses
- lenders performing limited verification of borrowers’ ongoing fixed expenses for other loans they may have, and
- lenders reviewed have made changes to their practices in light of compliance risks identified during ASIC’s review.
ASIC Deputy Chairman Peter Kell said, ‘ASIC, along with other regulators, has a strong interest in home lending practices. Our review shows lenders have lifted their game since the introduction of responsible lending laws.
‘However, industry must not be complacent. Compliance with responsible lending laws is a key focus for ASIC and we will take appropriate enforcement action where conduct falls short.’
ASIC’s report identifies compliance risks that are relevant to credit licensees more generally, including other lenders, mortgage brokers and lessors, and also outlines how credit licensees can reduce their risk of non-compliance.
The responsible lending obligations require credit licensees to ensure that consumers are only placed in credit contracts that meet their requirements and objectives and that they can meet their repayment obligations without substantial hardship. In doing this, credit licensees must make reasonable inquiries into an individual consumer’s specific circumstances and take reasonable steps to verify the consumer’s financial situation.
We have published specific guidance for industry regarding our expectations about compliance with the responsible lending obligations in Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209).
REP 410 follows Report 262 Review of credit assistance providers’ responsible lending conduct, focusing on ‘low doc’ home loans (REP 262) and Report 330 Review of licensed credit assistance providers’ monitoring and supervision of credit representatives (REP 330). REP 330 found a marked reduction in mortgage brokers suggesting and assisting borrowers to apply for ‘low doc’ loans that coincided with the commencement of responsible lending laws.
In addition to reviews of responsible lending in the home loan sector, we have also undertaken reviews of micro lenders in Report 264 Review of micro lenders’ responsible lending conduct and disclosure obligations (REP 264) and debt consolidation in Report 358 Review of credit assistance providers’ responsible lending conduct relating to debt consolidation (REP 358).