ASIC Report 410: Review of low doc lending risks

ASIC has released its Report 410 which investigated whether credit licensees are meeting their lending obligations under the National Credit Act (the Act), particularly when it comes to low doc loans. 

Credit licensees have a legal duty, when assessing a borrower’s suitability for a home loan, to make reasonable inquiries into the individual borrower’s financial circumstances. 

However, low doc lending does not require a borrower to produce the usual proof of income documents. Rather, standard documentation such as pay slips, are sufficient to verify the borrowers income. 

The issue is that borrowers, suffering from financial hardship, are able to easily obtain home loans, and are placed in credit contracts they cannot repay. Therefore, low doc loans, where credit licensees have not made reasonable inquiries, are strictly prohibited.

Report 410 provides a comprehensive review of ASIC’s research into low doc lending. ASIC conducted a two-stage review on 114 low doc home loan files, regulated by the Act, from 12 credit licensees. The participants were lenders, of varying business and size, who provided low doc home loans. 

The current trend, according to the research, was an “overall loan approval rate for low doc loans slightly over 70%, with smaller lenders generally having an approval rate of less than 50%”. 

The study revealed significant improvements to low doc lending practices since the introduction of the Act. Particularly, ASIC found that:

  1. Only self employed persons or individuals who do not have readily verifiable income were eligible for, and granted, low doc loans by lenders;
  2. Lenders were more careful and made more inquires when verifying information provided by borrowers and third parties, including obtaining accountant and bank statements; 

However, the report also highlighted that there were circumstances were low doc lenders were at risk of non-compliance. Thus, all lenders should re-evaluate their current procedures in assessing borrowers who apply for low doc loans. ASIC said:

“Our expectations for compliance are now higher. The responsible lending obligations are a central element of the national consumer credit legislation, and ensuring industry compliance with these obligations is a key part of ASIC’s strategic priority to ensure confident and informed financial consumers. If we identify non-compliance in future, we will consider enforcement action”.

Report 410 identified some risk avoidance strategies that low doc lenders should adopt in order to meet their lending obligations. These include: 

  1. Documenting their procedures;
  2. Corroborating information provided by third parties in relation to a borrowers financial situation;
  3. Understanding the consumers requirements and objectives;
  4. Carefully looking at information in accountant statements and documenting procedures as to when further inquiries into accountant statements should be made;
  5. Focusing on individual circumstance of the borrower rather than applying some general income ratio;
  6. Making reasonable inquiries into a borrower’s income;
  7. Obtaining information on the borrowers fixed expenses, review credit reports and use adequate buffers;
  8. Treating particular types of income differently. 

Click here to view ASIC Report 410.

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