The findings from ASIC’s recent review of the responsible lending practices of 11 large mortgage brokers in respect of interest-only home loans show that there is still room for improvement. The review focused on the way that mortgage brokers were making inquiries into (and recording these inquiries) a consumer’s requirements and objectives for interest-only loans in order to comply with their responsible lending obligations under the National Consumer Credit Protection Act.
The key findings of the review were as follows:
- Policy and procedures – The guidance contained in the responsible lending policies and procedures reviewed was quite general in the majority of cases and did not provide sufficient guidance as to the circumstances when an interest-only loan would be unsuitable for a consumer. Mortgage brokers should include specific guidance in their responsible lending policies about the circumstances in which interest-only home loans, and other loan products or features that are higher risk, may be unsuitable for a consumer.
- Inquiry tools (records of inquiries) – In the cases where mortgage brokers used inquiry tools such as “fact finds” to assist in recording their inquiries into a consumer’s requirements and objectives, the tools were often not filled in completely. Mortgage brokers should ensure all questions in inquiry tools are answered and that all records of inquiry are captured in one location.
- Inquiry tools (underlying objectives) – The questions contained in inquiry tools were generally aimed at product features rather than seeking to record consumers’ underlying objectives. Mortgage brokers should ensure that they can demonstrate how any home loan features meet the consumer’s underlying objectives and have clearly documented processes to resolve and record the outcome of any conflicting consumer objectives.
- Inquiry tools (level of detail) – Most inquiry tools included provisions for mortgage brokers to record free-text information about the consumer’s requirements and objectives, however these were under-utilised. Mortgage brokers should provide good narrative accounts in inquiry tools to assist in reducing the risk of not being able to demonstrate compliance with the responsible lending obligations.
- Confirmation of consumers’ requirements and objectives – In the majority of cases, the consumer was not provided with an explanation as to why the proposed loan had been selected. Mortgage brokers should provide to the consumer a document summarising the broker’s understanding of the consumer’s requirements and objectives and the reasons why the proposed loan has been selected for the consumer to confirm.
- Reasons for length of interest-only period – In most applications that were reviewed, there was a lack of evidence as to why specific interest-only periods were chosen. Where the underlying basis for an interest-only loan relates to a temporary financial situation, the interest-only period should reflect this.
- Specific requests and third-party advice – Often the reasons why a consumer had opted for an interest only-loan was unclear, and in a few cases the decision was based on advice from a third party. Mortgage brokers should confirm with a consumer that the consumer understands the operation and potential risk of the proposed products to ensure that the loan is not unsuitable.
- Benefits that rely on consumer behaviour – Some consumers were seeking interest-only loans to free up funds to pay higher interest debt more quickly. Mortgage brokers should ensure that a consumer knows what they must do to obtain potential benefits that are dependent on specific behaviour, as well as the potential costs if the action is not taken.
Based on ASIC’s findings, mortgage brokers should review their existing responsible lending policies, including any inquiry tools such as “fact finds”, to ensure that they are accurately collecting, recording and assessing whether particular credit products are suitable for a consumer based on the consumer’s requirements and objectives.