ASIC recently released report 410 on its review of low doc home lending following the introduction of responsible lending obligations.
In conducting its review ASIC reviewed 12 credit licensees of varying sizes representing a broad cross-section of businesses active in providing “low doc” home loans.
Reduce the risk of non-compliance
What could be of interest to lenders is the additional guidance given by ASIC in the report’s appendix. It suggests steps lenders can take to improve compliance with their responsible lending obligations, in particular with regard to “low doc” loans. The appendix also has general application and that is why it is important for all lenders to consider how the report impacts on their responsible lending practices.
Examples given by ASIC are:
- Lenders need to have clearly documented procedures as to what they will require to assess loan applications, including circumstances in which applications should be escalated to more senior staff.
- Where lenders rely on information from third parties to make the assessment of “not unsuitable”, give customers details of the information obtained and relied upon, make a realistic assessment of whether further verification or review should take place and importantly follow up any materially inconsistent information directly with the customer.
- Focus on the customer’s requirements and objectives, in particular with regard to what are the reasons for putting the customer into a low doc loan, other than “self-employment”. This is particularly the case where the interest rate is higher and the loan has fewer features than other loan products offered by the lender. The suggestion is that “self-employment” of itself may not be a sufficient reason to place a customer in a “low doc” loan.
- Where obtaining statements from accountants ensure that the statement not only contains the required information, but also:
- tailors that information specifically to the customer,
- properly identifies the accountant and his/her professional qualifications, and
- is free from disclaimers about the accuracy or reliability of the information.
- Focus on the longevity of the relationship between the accountant and the customer, taking particular care where there is only a short-term relationship between the accountant and the customer.
- Do not rely on standard business expense ratios or income matrices alone, but focus on how they apply to the customer’s particular business.
- Enquire into and verify variable expenses and in particular the customer’s ability to reduce those expenses in order to make loan repayments.
- Obtain both consumer credit and commercial credit reports (where appropriate). Ensure there are adequate buffers for change in financial circumstances and a surplus income position.
- Do not treat all sources of income as the same for assessment purposes. The guidance issued by ASIC in an appendix of report 410 should be reviewed by lenders because in our view it has general application to all types of lending.