Australian Property News

Mixed results on mortgage broker review

Posted on Friday, November 18 2011 at 9:55 AM

The mortgage broking industry’s first six months of operating under the new national credit scheme was reviewed recently with mixed results, according to the Australian Securities and Investments Commission (ASIC).

Responsible lending obligations are the major focus of the new national credit scheme so some of the major issues ASIC paid particularly close attention to were how ‘low doc’ (low documentation) loans were promoted and if ‘equity stripping’ the family home (when mortgage brokers take advantage of mortgage holders in default wanting to save their homes) was still occurring.

ASIC reports that equity stripping is generally achieved in two ways:

• Charging mortgage holders high fees (in some cases consuming up to 20 per cent of the borrowers’ equity in their home prior to the refinance); and

• Refinancing mortgage holders into high-risk loans with almost unachievable serviceability levels.

While ASIC reports no evidence of equity stripping across the 16 mortgage brokers under review, it did identify some risks of non-compliance with the responsible lending requirements where credit assistance was provided for loans promoted as ‘low doc’.

Other non-compliant behaviour identified in the review included brokers not recording:

• A consumer’s requirements and objectives beyond the immediate purpose of the home loan (eg. to buy a home);

• Steps taken to verify a consumer’s income, or relying only on statements from a consumer to verify income, when providing credit assistance for home loans promoted as ‘low doc’;

• Enquiries into a consumer’s actual living expenses or steps taken to verify a consumer’s ongoing fixed expenses; and

• How a consumer’s ability to make repayments under the proposed credit contract had been assessed.

“ASIC considers that the enquiries and verifications a credit licensee must make to satisfy their responsible lending obligations are scaleable depending on the circumstances of the consumer,” said ASIC Commissioner Peter Kell.

“In some circumstances, fewer enquiries may be needed. This does not mean, however, that enquiries and verifications may be scaled down simply because of the label applied to a product, such as low doc’.”

Kell said that ASIC will now follow up on specific concerns with individual brokers and work with industry bodies to promote wider compliance levels.