On Thursday, 20 August 2015, ASIC released Report 445 titled Review of interest-only home loans. Despite being primarily focused on interest-only home loans, the report provides important new responsible lending guidance for lenders, brokers and servicers, with particular focus on home loans.
The summary of key findings and action items set out in the appendix to the report is essential reading for all finance industry participants. Importantly, although the report refers extensively to lenders, ASIC has confirmed that the principles apply equally to brokers and servicers.
ASIC issued the report after reviewing the files of nine ADIs and two non-ADI lenders. ASIC reports that all lenders reviewed have agreed to implement or have already implemented the recommended changes. ASIC’s strong expectation is that the whole of the industry will follow suit.
It is likely many financiers will need to change processes as noted in the table at the end of this report.
Many will argue that ASIC’s standards exceed the reasonable enquiries and verification mandated by law, and to some extent conflicts with ASIC’s previous statements on scalability. However, ASIC’s expectations are clear, and lenders and broker who do not comply are at risk of regulatory action.
Requirements and objectives
The most challenging aspect of the report is ASIC’s expectations in relation to making reasonable inquiries into borrowers’ requirements and objectives (ROs). ASIC’s thoughts on this topic are not new and have been in the public arena for at least one year. Release of the report emphasises ASIC’s focus on ROs and is a call to action for all lenders and brokers.
ASIC found that most lenders surveyed did not appear to be making sufficient enquiries in relation to ROs, or if they were, lenders are not recording their findings. Over 30% of files reviewed showed no evidence of whether the lender considered if an interest-only loan would meet the borrower’s requirements. There is significant emphasis on both enquiring and recording findings.
In the report, ASIC expressed doubts whether a tick box system is sufficient to identify ROs, at least in respect of home loans. Tick boxes with some free text may suffice. There is a risk that ASIC’s expectations may not be satisfied unless there is some personal communication between the lender or broker and the borrower.
Financiers have struggled with the issue of what ROs apply to home purchase loans because typically borrowers will say that their key and only RO is to purchase the home, or get a fast home loan. The concept is easier to grasp for refinances, as there should be ROs that trigger the desire or need to refinance.
It appears that ROs for home purchases largely come down to loan product features.
For example, if a borrower states that their prime objective is to pay off the loan as fast as possible, the simple and cheapest loan will be appropriate, and lenders should not offer a more expensive multi-featured loan. However, the requirement does not extend to requiring lenders to send borrowers away to another lender with a cheaper loan. This is a difficult concept because the cheapest loan may not be the best way to pay off faster because a loan with a redraw or offset account combined with proper money management may better achieve that RO.
ASIC specifically says that an interest only term of more than five years for a home loan is at a high risk of not meeting R&Os. Special notes should be recorded indicating why a longer term is appropriate. Additional notes should be made if an owner-occupier ever requests an interest only period, or if the requested product features seem to not correlate with the borrower’s situation.
The message is clear:
- make more extensive enquiries into ROs;
- record those ROs and results of enquiries; and
- do not arrange or provide a loan that does not meet those ROs.
Short summary of actions
The table below provides a brief summary of the action items arising from the report. The areas likely to require change are shaded.
There is an overriding rule that applies to all the items below - make more enquiries and record the results..
Click here to view the table.
The report can be accessed here.