ASIC: Responsible lending in mortgage industry improving

Australia's home loan industry has improved its performance over the past year, adopting “better ‘responsible lending’ practices”, an ASIC review has found.

This conclusion is based on the findings outlined in Report 493, which focused on how 11 large mortgage brokerages (responsible for 63 per cent of mortgage broking credit representatives) enquire into and record consumers’ requirements and objectives for the purpose of assessing whether an interest-only home loan meets their requirements.

Background

The findings follow ASIC’s 2015 report into how lenders were meeting their responsible lending obligations when providing interest-only home loans (Report 445).

In this report, the regulator identified that nearly all lenders reviewed did not keep sufficient evidence of enquiries into consumers’ requirements and objectives when entering an interest-only home loan, with over 30 per cent of applications reviewed showing no evidence that the lender had considered whether the interest-only home loan met the consumer’s requirements.

ASIC also found there may be some incentive for brokers to recommend an interest-only home loan, “as the principal will not initially be paid down and the trail commission will be paid for a number of years on a higher balance”.

Given this evidence, and the fact that ASIC had previously identified concerns that interest-only home loans “arranged through a few fringe mortgage brokers to refinance and/or consolidate consumers’ existing debts were not meeting consumers’ objectives to reduce their payments and save their family home”, the regulator said it is “important to also review the responsible lending practices of mortgage brokers for interest-only home loans”.

Report findings

According to the new report, information provided by the 11 mortgage brokerages showed that between July and December 2015, the number of new interest-only home loans fell by 16.3 per cent (from 43 per cent in the June 2015 quarter to less than 36 per cent in the December 2015 quarter), with the total value of these loans dropping by 15.6 per cent.

The percentage of interest-only loans with a term greater than five years dropped by more than half, from 11.2 per cent to 5.1 per cent.

Almost 80 per cent of applications reviewed included a statement summarising how the interest-only feature specifically met the consumer's requirements and objectives.

ASIC also noted that the percentage of new home loans approved by lenders which were interest-only had decreased by 12 per cent and that the amount that could be borrowed through these loans also decreased as lenders have adjusted their assessment of consumers' ability to repay, in line with ASIC's recommendation in report 445.

While welcoming the findings of the report, ASIC said there is still room for improvement.

“It is vital that mortgage brokers understand consumers' requirements and objectives to ensure they are not placed in unsuitable credit contracts,” said ASIC deputy chairman Peter Kell.

“ASIC is pleased that our concerns about interest-only loans and responsible lending are being acted on by the home lending industry, but there is still room for improvement.”  

Compliance risks

According to the report, several practices placed brokers at increased risk of being non-compliant with their responsible lending obligations.

These included:  

• general, rather than tailored information on products and loan features that could impose increased financial obligations or restrict repayment flexibility (such as interest-only home loans);  
• inconsistent record keeping and, in some cases, fragmented and incomplete record keeping;  
• the fact that more than 20 per cent of applications reviewed did not include a statement explaining how the interest-only feature of the loan specifically met the consumer’s underlying requirements and objectives; and
• in some cases, where the potential benefit of the interest-only loan depended on the consumer taking specific action (for example, allocating additional funds to higher interest debt), it was unclear whether the consumer understood the potential risks/additional costs if the specific action was not taken. 

Recommendations

To improve current practices, ASIC recommended that mortgage brokers take a number of actions, including:

• ensuring they understand the consumer's underlying objectives for requesting specific loan products and features; 
• recording concise summaries of consumers' requirements and objectives and the reason why a particular product, features and lender was chosen; 
• providing a statement summarising the broker's understanding of the consumer's requirements and objectives, which could also include the reason a particular loan is suggested, for the consumer to confirm before obtaining a loan; and
• where the potential benefits of a loan feature might require the consumer to undertake specific behaviour, ensuring consumers are aware of the action they need to take to obtain the potential benefit, as well as the potential costs should this action not be taken.

“Mortgage brokers are well placed to assist consumers find products that meet their requirements," ASIC said.

“For these benefits to be realised, it is important that consumers have confidence in mortgage brokers, including their compliance with the National Credit Act.”

ASIC is currently undertaking a separate review at the request of the government in relation to broker remuneration structures and their effect on consumer outcomes. This report will be provided to the government by the end of 2016.

[Related: Banks to fund ASIC mortgage probe]

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Annie Kane

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