After a comprehensive review into the credit practices of lenders providing interest-only mortgages – which found that banks have been “falling short” of their responsible lending obligations – corporate regulator ASIC revealed plans to undertake a review of mortgage brokers in regards to interest-only lending.
Shifting regulatory scrutiny
Speaking at the
FBAA conference held in the Gold Coast in November, ASIC senior executive leader – deposit takers, credit & insurers,
Michael Saadat, warned brokers that the regulator would be shifting its focus.
“Going forward we intend to undertake a further review in the interest-only area moving on from lenders to brokers with a particular focus on brokers’ consideration of consumer requirements and objectives,” he said.
With brokers also advising consumers on interest-only loans, Saadat says it is only fair that the same scrutiny be placed on the third party channel.
“To share some feedback we have gotten from lenders and brokers in this space – and I will try and be completely open with you – ever since publishing our report on interest-only loans and getting the lenders to agree to make the necessary changes, I keep getting asked by lenders what is ASIC doing to make sure brokers will also make changes to their processes.
“When I have spoken to brokers, I’m asked what is ASIC going to do to hold lenders to the same account as brokers.
“It is important to remember that both lenders and brokers separately have responsible lending obligations to meet. It is not good enough for a lender to point the finger at brokers and it is not good enough for a broker to point the finger at lenders.”
Nothing to see here
The chief executive of the FBAA, Peter White, welcomed ASIC’s review, saying that it is only fair brokers are also investigated, however, he also said ASIC must remember that it is the lenders who ultimately write the rules – not the broker.#pb#
“Lenders make the loan and lending rules that brokers must follow and in line with the brokers own responsible lending obligations, the vast majority are not intentionally breaking the law and are applying responsible lending considerations to the loans they arrange for borrowers,” White said.
White also dismissed concerns raised by lenders to ASIC that by raising the bar on the information they require brokers to collect from consumers, brokers will shift business to lenders who need less information.
“At all times, brokers have the borrowers best interests at heart while also being aware of the borrowers desires which are not the influencing factor as they are not always in line with responsible lending obligations.”
Out of touch
When APRA and ASIC first expressed concern over the rise in interest-only home loans last year – suggesting this may be representative of a broader trend towards risky lending practices – Ray Weir, director of Finance Solutions WA wrote a letter to both regulators, saying there are many logical and safe reasons as to why a borrower takes out an interest-only loan.
So when Weir heard about the review of the mortgage broking sector in regards to interest-only lending, he told Australian Broker that he has not budged on his position, saying ASIC couldn’t be more wrong.
“As mentioned in my letter, there are several special occasions when owner occupiers want an interest only loan, even if it’s for the first 12-24 months while they sell other property, so they can ultimately make a sizable reduction in their home loan.
“If ASIC think it’s because lenders and brokers recommend interest only payments to reduce the commitment level and help borrowers get a larger loan, they couldn't be more wrong.”
According to Weir, if a borrower requests a standard 30-year loan with the first five years being interest only, then the lender’s serviceability calculator will automatically recalculate the loan repayments as if the loan term is 25 years. But by shortening the effective term in the serviceability calculator to 25 years – and consequently increasing the repayments – the loan amount the applicants can apply for is actually reduced if they insist on an initial interest only period.
“In other words the amount that can be borrowed is less for an interest only loan compared to a principal and interest loan. I bet ASIC don't understand this.
“I've found over the past 29 years as a broker that Government regulators often don't understand such intricacies of the mortgage industry.”
However, while there are many frustrations brokers, White says they should take this an an opportunity to educate.
“This is all about education on both sides but from our end, it is vital we continue showing them how we work and the practices we have in place to eliminate any need for potential restrictive or more stringent regulation.”
