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Royal commission submission takes aim at mortgage lending

A submission to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has taken aim at “irresponsible lending”.

In the first submission to be released to the public, the Consumer Action Law Centre (CALC) said that the number of households facing mortgage stress has “soared” by nearly 20 per cent in the last six months to more than 921,000, arguing that lenders are to blame.

The submission referenced Digital Finance Analytics’ prediction that homes facing mortgage stress could top one million by 2019, with older Australians particularly at risk.

The Melbourne-based not-for-profit consumer organisation highlighted that its services “assist with banking, all forms of consumer credit including mortgages and car loans, insurance (other than following road traffic accidents), consumer leases, debt collection and debt management services” and that its comments were therefore based on “extensive experience supporting consumers of financial services through advice and assistance”.


CALC categorised the term “misconduct” into two areas: irresponsible lending (covering credit cards, car finance and mortgage lending) and unlawful sales practices (mis-selling of insurance, property spruiking and timeshare).

It took particular aim at a lack of inquiries into the suitability of loans for the borrower when it came to mortgages for older Australians.

The group wrote: “Irresponsible mortgage lending can have severe consequences, including the loss of the security of a home.

“Consumer Action’s experience is that older people are at significant risk, particularly where they agree to mortgage or refinance their home for the benefit of third parties. This can be family members or someone who holds their trust. A common situation involves an adult child persuading the older person to enter a secured loan/mortgage contract as the borrower and assures them that they will make all the repayments.

“The lack of appropriate inquiries into the suitability of a loan only comes to light when the adult child defaults on loan repayments and the bank commences proceedings for possession of the loan in order to discharge the debt.”

The group gave several case studies, previously published by the Financial Ombudsman Service.

Benchmarking “a significant problem”

CALC also reiterated growing concerns that the Household Expenditure Measure (HEM) is not a robust enough living expense test, stating: “The use of ‘benchmarking’ by major lenders when undertaking affordability assessments is a significant problem and risks breaching responsible lending laws.”

Noting that the Australian Prudential Regulation Authority shares their concern, the centre said that the reliance on the HEM test raises concerns about the robustness of the actual measure.

“APRA states that it has concerns about whether these benchmarks provide realistic assessments of a borrower’s living expenses.

“In the same vein, ASIC has issued proceedings against Westpac in the Federal Court for failing to properly assess whether borrowers could meet repayment obligations, due to the use of benchmarks rather than the actual expenses declared by borrowers.”

The group went on to voice concern over the adequacy of interest rate buffers in affordability assessments, suggesting that there are “significant variations in the approach lenders take to including appropriate buffers” and reports that a third of interest-only borrowers do not know they have this type of mortgage, “raising concerns about the adequacy of communication and disclosure at the point of loan entry”.

CALC concluded: “The combination of these issues means that much of the harm caused by irresponsible lending in the home loan sector is yet to come.

“Should interest rates increase, many people who have entered into loans where affordability assessments have been inadequate are likely to find themselves unable to make repayments.”

[Related: UBS says mortgage downturn will be worse than expected]

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