ASIC's call for better responsible lending compliance easier said than done

The Australian Securities and Investments Commission's call for mortgage lenders to improve compliance with responsible lending requirements may be hard to meet, especially when it comes making inquiries about a borrower's requirements and objectives.

Commentaries on ASIC's review of interest-only mortgage lending, released last week, have highlighted the difficulty lenders face assessing whether a loan meets a borrower's requirements and objectives.

Under the current responsible lending rules, credit providers must make reasonable inquiries about a consumer's financial situation and their requirements and objectives; they must take steps to verify the consumer's financial circumstances; and they must be satisfied that the credit contract is not unsuitable for the consumer.

ASIC found a number of problems with lenders' practices. In 40 per cent of the files reviewed the affordability calculations assumed borrowers had longer to repay the principal on the loan than they actually did. Lenders used the full term of the loan to calculate principal repayments, rather than the residual term.

In more than 30 per cent of files reviewed there was no evidence that the lender had considered whether the interest-only home loan met the borrower's requirements.

There were numerous files where the stated objective of the borrower was "to purchase property," with no information about the reason an interest-only loan had been selected.

"Statements of this type do not support the decision to provide an interest-only home loan rather than another type of loan, and are inadequate as they suggest that the consumer did not have any objectives for the loan itself," ASIC said.

In a note to clients Gadens Lawyers said: "The most challenging aspect of the report is ASIC's expectation in relation to making reasonable inquiries into borrowers' requirements ad objectives.

"ASIC found that most lenders did not appear to be making sufficient inquiries in relation to requirements and objectives or, if they were, lenders were not recording their findings."

Gadens said lenders have struggled with the issue of what requirements and objectives apply to home purchase loans because, typically, borrowers will say their key and only objective is to purchase the home or get a home loan fast.

"For example, if a borrower states that their prime objective is to pay off the loan as fast as possible, the simplest and cheapest loan will be appropriate and lenders should not offer a more expensive multi-featured loan," Gadens said.

"This is a difficult concept because the cheapest loan may not be the best way to pay off faster because a loan with a redraw or offset may better achieve the requirement."

King & Wood Mallesons said the requirement to assess whether a loan meets the borrower's requirements and objectives was one of the more ambiguous obligations in the responsible lending process.

"ASIC comments that in the context of an interest-only loan recording the objective or requirement of a borrower is 'to purchase property' is insufficient because it does not address why an interest-only loan as opposed to a principal and interest loan would better meet the borrower's objectives," King & Wood Mallesons said.

"Without ASIC providing guidance on what is appropriate for each type of credit product it is hard to know what will satisfy the obligation."