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PC calls for reform to ‘inflated’ LMI payments

Borrowers paying lenders mortgage insurance should be offered more choice and ASIC should intervene to safeguard their interests, according to the Productivity Commission.

In is final report, released to the public this month, the Productivity Commission (PC) called for reform to lenders mortgage insurance (LMI), flagging a lack of choice and disclosure in the product’s issuance.

The PC called on the Australian Securities and Investments Commission (ASIC) to require lenders to provide borrowers who pay LMI, with the option of:

  • paying for LMI upfront, with the “unused” portion refundable in the event that they switch to a new home loan provider, and the refund schedule provided at the start of the loan; or
  • paying for LMI periodically [as in fact occurs for most other types of insurance], with no refund schedule necessary.

The commission contended that lenders receive rebates from issuers that are not passed on to borrowers, claiming that as a result, LMI providers are applying “inflated” prices that do not safeguard the borrower’s interests.

“Some lenders receive non-claim payments, including rebates for low claims, from LMI insurers and, in aggregate, these are not fully passed on to borrowers,” the PC said.

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“Instead, the overall market price of LMI is inflated by the existence of these non-claim payments.

“We see merit in intervention by ASIC to ensure that the interests of borrowers are adequately safeguarded in the LMI market.”

The PC also made reference to data from the Australian Bureau of Statistics (ABS), reporting that “although [LMI] is seen as a benefit to first-home owners, data shows its greatest application is to higher income home buyers”.

Further, the PC has proposed that the Australian Prudential Regulation Authority (APRA) should update its disclosure requirements for LMI providers and require them to disclose the amount and purpose of all payments made to lenders.

The PC pointed to independent consultant Phillip Khoury’s review into the banking sector, noting that an alternative to direct intervention would be to broaden disclosure requirements to inform stakeholders of the overall costs involved with LMI and enhance competition.

“The alternative to direct intervention [requiring lenders only to charge borrowers the cost incurred] would be to build on the existing requirement for LMI insurers to report their operating expenses in returns to APRA, which are subsequently published.

“Providing more detail about these expenses would increase understanding about the overall costs of the LMI sector and support competition.”

[Related: ANZ backs LMI refunding]

PC calls for reform to ‘inflated’ LMI payments
calls for reform, inflated, LMI payments
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