ASIC’s Report 410 (RP410) noted a number of important findings that apply to responsible lending generally.
The report released on 23 September 2014 comprises the results of ASIC’s review of ‘low doc’ loans. ASIC reviewed loans written by 12 lenders comprising ADIs and non-ADIs.
Prior to 2010, before responsible lending, a self-employed borrower, or individual without a typical regular income steam could apply for a ‘low doc’ loan and self-certify that they could afford the repayments.
Responsible lending imposed a substantially different test, placing an onus on credit licensees to ensure that consumers:
- are only placed in credit contracts that meet their requirements and objectives; and
- can meet their repayment obligations without substantial hardship.
ASIC found that the lenders had taken active steps to implement responsible practices, and aligned themselves closer to the new responsible lending laws. Some key findings are noted below.
- Lenders have reduced the range of borrowers eligible to enter into ‘low doc’ style loans. Rather than making the product available to everyone, ‘low doc’ loans are only being offered to the self-employed or those who do not have a readily verifiable income.
- Borrowers with regular and easily verifiable income are usually required to submit the standard range of supporting income and expenditure evidence.
- Lenders are obtaining additional information to verify a self-employed borrower’s income, such as business bank account statements and/or letters from accountants.
- Lenders have taken additional steps to verify the information provided by mortgage brokers rather than purely accepting the information on face value.
Although the report focused on ‘low doc’ loans, it raised a number of important findings that apply to responsible lending generally.
Identifying a borrower’s requirements and objectives sounds simple, but it is still a problematic area of law. RG209 notes that lenders need to understand the purpose of the credit, and then determine whether the type, length, rate, terms, special conditions, charges, and other aspects of the proposed credit matches the purpose.
RP410 notes that some lenders determined that the loan met initial or short term objectives, but did not consider medium or long term objectives.
ASIC suggests the following can be adopted to improve compliance.
- Clearly document responsible lending procedures dealing with escalation, and unsatisfactory situations.
- When relying on information from third parties, ensure that the collection procedures are robust, and that inconsistencies are explored.
- Create records describing what steps are taken to conduct assessments.
- Be cautious of accountant’s statements, particularly accountants with short term relationships with the borrower.
- Do not rely on indexes or ratios alone to assess household living expenses. Supplement these with reasonable enquiries about the specific borrowers situation.
- Obtain both a consumer and a commercial credit check.
- Incorporate buffers into calculations to adjust for potential changes in financial circumstances.
Clearly, ASIC expects a fairly detailed consideration of the borrower’s requirements and objectives. This conflicts with borrowers’ expectations of a fast response and simple paperwork, and lenders desire to automate the approval process.
The report does not mention scalability, a term used 17 times in RG209. How scalability is impacted by loan size, customer type, product type, and other factors remains unclear.