ASIC cracks down on low-doc brokers

The competition regulator says it’s concerned that some mortgage brokers aren’t complying with new consumer credit laws, particularly in the area of low-doc mortgages.

Australian Securities and Investments Commission commissioner Peter Kell has warned that although mortgage brokers have largely kept in line with the new responsible lending laws, “there is room for improvement”.

Although ASIC didn’t judge whether the loans in questions were appropriate and subsequently didn’t find any evidence of equity stripping, the regulator still found evidence of non-compliance, “particularly where credit assistance was provided for loans promoted as low documentation”.

Low-doc loans played a crucial part in the lead up to the subprime crisis in 2008. They are typically sought by the self-employed.

Specifically, ASIC found that there were some firms that weren’t recording a consumer’s requirements and objectives beyond the immediate purpose of the home loan, along with neglecting steps taken to verify income.

There were instances where companies only relied on statements from consumers to verify income, when providing credit assistance.

Additionally, there were instances where businesses did not inquire into a consumer’s living expenses, or into how that consumer would make repayments once the credit had been provided.

“ASIC considers that the inquiries and verifications a credit licensee must make to satisfy their responsible lending obligations are scalable depending on the circumstances of the consumer. In some circumstances, fewer inquiries may be needed,” Kell said.

“This does not mean, however, that inquiries and verifications may be scaled down simply because of the label applied to a product, such as low-doc.”

Responsible lending provisions were introduced in 2009 for brokers and in January for home lenders. They dictate that credit providers and other lenders must ensure consumers are able to repay their loans, and avoid lending where that credit will cause financial hardship.

ASIC said it focused on mortgage brokers in its review, rather than home lenders, because the responsible lending requirements weren’t introduced for them until January.

“A further review of how credit providers in the home lending market are now meeting their responsible lending obligations will commence in coming months.”

The move caps a busy period for ASIC, with the regulator this week releasing a report on why financial ratings services should be broken up.