Just days after APRA announced a crackdown on interest-only loans, ASIC is focusing on this area too, as “many lenders, including major lenders, charge higher interest rates for interest-only loans compared with principal and interest loans... [and] must ensure that consumers are not provided with unsuitable interest-only loans”.
The regulator also announced that eight major lenders* will provide remediation to consumers who suffer financial difficulty as a result of shortcomings in past lending practices.
As part of its work on interest-only loans, ASIC will shortly commence a surveillance to identify lenders and mortgage brokers who are recommending “high numbers of more expensive interest-only loans”.
Data will be gathered using ASIC's compulsory information-gathering powers from large banks, other banks, mutual banks and non-bank lenders.
The regulator said: “In an environment where many interest-only loans are now clearly more expensive than principal and interest loans, lenders and mortgage brokers must carefully consider the implications of providing borrowers with interest-only loans.
“While interest-only loans may be a reasonable option for some borrowers, for the vast majority of owner-occupiers in particular, an interest-only loan will not make sense.”
Past lending practices
In regards to the remediation work, ASIC's review in 2015 found that lenders were not properly enquiring into a consumer's actual living expenses when assessing their capacity to make repayments.
The lenders in question have reportedly improved their practices for enquiring about expenses to determine the consumer's financial situation and capacity to make repayments.
ASIC revealed that, rather than obtaining a single monthly living expense figure and then relying on a benchmark figure to assess suitability, borrowers' actual figures for different categories of living expenses (e.g. food, transport, insurance, entertainment) will now be obtained.
It is hoped that this will provide lenders with a better understanding of consumers' expenses.
In addition to typical hardship processes, lenders will individually review cases where consumers suffer financial difficulty in repaying their home loans, and determine whether they have been impacted by shortcomings in past lending practices. Where appropriate, consumers will be provided with tailored remediation, which may include refunds of fees or interest.
The regulator said: “As interest rates are currently at record lows, and were falling in the lead up to 2015 and during 2016, ASIC does not expect lenders to identify high numbers of consumers who are now experiencing financial difficulty due to past lending decisions. Nevertheless, these additional actions will ensure that consumers are not disadvantaged.
“To ensure that these remediation programs are operating effectively, ASIC is requiring lenders to audit their processes.”
ASIC deputy chairman Peter Kell added: “Home loans are the biggest financial commitment most people will ever make. In assessing whether borrowers can meet loan repayments without substantial hardship in the short and longer term, it is important that lenders can collect and rely on information which provides an accurate view of the consumer's financial situation. This is especially the case when interest rates are at record low levels.
“Lenders and mortgage brokers must also ensure that consumers are being provided with the home loan product that meets their needs. Lenders and mortgage brokers need to think twice before recommending that a consumer obtain a more expensive interest-only loan.”
*The eight lenders are:
Australia and New Zealand Banking Group Limited
Bendigo and Adelaide Bank Limited
Commonwealth Bank of Australia
ING Bank (Australia) Limited
Macquarie Bank Limited
National Australia Bank Limited
Pepper Group Limited
[Related: APRA tightens up on interest-only lending]