Low-doc crackdown pays off
Low-doc home loans were all the rage before the GFC but the introduction of responsible lending laws in 2010 led to a crackdown. A recent review of low-documentation loans by the Australian Securities & Investments Commission (ASIC) found lenders have tightened practices as a result of the reforms.
Low-doc loans are designed for self-employed borrowers and others who do not have an income stream that can be verified by standard documentation, such as pay slips. Before the new law was introduced, you could score a low-doc loan simply by providing a statutory declaration stating you could meet the repayments, without supplying any real proof. This sometimes resulted in borrowers not being able to pay back the loan or having to sell their home to do so.
ASIC's review of 12 lenders found that low-doc loans are now being offered to a narrower range of borrowers, lenders are obtaining additional information to verify income, such as business bank account statements and letters from accountants, and they have additional processes in place to ensure the information provided by mortgage brokers is reliable.
It's not all smooth sailing, though, with ASIC identifying a few problems, including lenders relying solely on benchmark living expense figures, rather than looking into the borrower's actual expenses, and performing only limited verification of fixed expenses or other loans.
"Our review shows lenders have lifted their game since the introduction of responsible lending laws," says ASIC deputy chairman Peter Kell. "However, industry must not be complacent. Compliance with responsible lending laws is a key focus for ASIC and we will take appropriate enforcement action where conduct falls short."
ASIC's suggestions for how lenders can reduce their risk of non-compliance include:
- 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.
- Treat accountants' statements with caution, particularly accountants with short-term relationships with the borrower.
- Don't rely on indices or ratios alone to assess household living expenses. Make reasonable inquiries.