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ASIC's report that found lenders providing interest-only mortgages need to lift their standards to meet important consumer protection laws.
ASIC's probe into interest-only home loans was announced in December 2014 and looked at 11 lenders, including the big four banks, to assess how they are complying with responsible lending laws.
The regulator identified that demand for interest-only loans had grown by around 80 per cent since 2012. ASIC's review looked at how consumers were assessed for loans by lenders with a focus on the affordability of the loans over the longer term.
The review found that interest-only loans are more popular with investors and those on higher incomes, and that delinquency rates are currently lower for interest-only home loans.
However, ASIC also found that lenders have been falling short of their responsible lending obligations in the provision of interest-only loans. Lenders are often failing to consider whether an interest-only loan will meet a consumer's needs, particularly in the medium to long term.
ASIC’s review of more than 140 consumer loan files from bank and non-bank lenders identified that in 40 per cent of files reviewed, the affordability calculations assumed the borrower had longer to repay the principal on the loan than they actually did.
In over 30 per cent of files reviewed, there was no evidence that the lender had considered whether the interest-only loan met the borrower's requirements.
In over 20 per cent of files reviewed, lenders had not considered the borrower’s actual living expenses when approving the loan, but relied instead on expenditure benchmarks.
ASIC said these practices can result in borrowers not being able to afford their loan repayments in the future, particularly for interest-only loans, which have much higher repayments after the initial interest-only period ends.
“Interest-only loans may be a reasonable option for some borrowers,” ASIC deputy chair Peter Kell said.
“However, lenders must have robust processes in place for assessing a customer's ability to afford a loan, taking into account the increased repayments once the interest-only period ends.
“They should lend responsibly, and in a way that does not result in consumers taking on debt that they cannot afford, especially if interest rates rise,” he said.
The report makes a number of recommendations that lenders and brokers should review to ensure they are complying with responsible lending obligations.
Following ASIC's review, all 11 lenders have changed their practices in line with the regulator's recommendations or have committed to implementing necessary changes in the coming months. The recommendations include ensuring loans align with consumers' requirements and objectives, lenders using consumers' actual expenses rather than relying on a benchmark and affordability assessments include buffers for future interest rate rises.
“We are pleased that the lenders involved in the review have already started implementing changes based on our findings.
“The rest of the lending industry, including brokers, should now take note and swiftly review the practices they have in place to ensure they comply with their responsible lending obligations,” Mr Kell said.
As a result of the review, ASIC has commenced several follow-up investigations, which are continuing.
Where necessary, ASIC is considering enforcement action or other regulatory action.