Income verification critical for low docs: ASIC

Simon Parker

Low doc loans have been singled out as an area of compliance concern under the new NCCP requirements, an ASIC review of mortgage brokers has found.

The review, which looked at 16 mortgage brokers’ compliance in the six months since NCCP regulations were introduced, pinpointed low doc loans as an area at risk of non-compliance with the responsible lending requirements where credit assistance was provided.

The major risk in terms of non-compliance with the responsible lending for loans promoted as low doc was the steps taken to verify a consumer’s income, said Greg Kirk, senior executive leader, deposit takers credit and insurers, at ASIC.

“The requirement is for brokers to make reasonable inquiries about the borrower’s needs, objectives, financial circumstances and an active effort to verify those financial circumstances when assessing suitability for any proposed loan.

“The key risk identified was brokers taking inadequate steps to verify the consumer’s income and other financial circumstances,” he said.

Given low doc loans compliance with responsible lending required a bigger shift from past practice than standard mainstream home loans, the review placed particular emphasis on brokers who marketed themselves as providers of low doc loans, said Greg Kirk, senior executive leader deposit takers credit and insurers of ASIC.

While the brokers were aware that the review was taking place, low doc loans were still identified as a risk area when it came to these brokers complying with the responsible lending obligations.

“Loans promoted as low doc were a particular focus given the role these products played in the lead up to the US sub-prime crisis and in equity stripping as identified in ASIC’s March 2008 report, Protecting Wealth in the Family Home,” ASIC Commissioner Peter Kell said.

While overall most brokers were fulfilling the new responsible lending obligations and attempting to adhere, there was still room for improvement, the review found.