Mortgage brokers have been warned they are putting themselves at significant risk by only collecting the minimum documentation needed to meet a lender’s requirements.
With the local mortgage market becoming increasingly complex as lenders announce new pricing and policy changes, brokers are being reminded to adhere to responsible lending requirements as they look to find the best deal for their customers.
Pepper Money's director of sales and distribution, Mario Rehayem, told The Adviser that brokers need to remember it is their obligation to collect as many supporting documents as possible from a borrower, regardless of what the lender’s criteria stipulate.
“The minimum requirement a lender may ask for is one form of income documentation. Brokers should not automatically default to this position and they should gather whatever number of documents they need to satisfy the requirement they have to make an initial assessment of a customer’s income,” Mr Rehayem said.
“The regulation clearly states that a broker is at higher risk by collating minimal documentation for income,” he said. “Whether that be full-doc or low-doc, to lessen the risk for a broker and ensure that they are putting a customer into a loan deemed not unsuitable, and that they have the capacity to repay and will not enter hardship, a broker’s obligation is to collect as many income documents as possible.
“For example, if a lender is only asking for an accountant’s letter that does not mean that a broker only asks for an accountant’s letter from their client,” he said.
Mr Rehayem added he does not believe the term ‘low-doc’ is an accurate description; instead, he suggests these types of loans are more accurately positioned as an alternative documenting loan.
The National Credit Act, commenced in 2010, introduced licensing requirements, general conduct obligations and responsible lending obligations for both lenders and mortgage brokers.
ASIC’s 2014 report on low-doc lending noted that brokers must make reasonable inquiries into an individual consumer’s specific circumstances and take reasonable steps to verify the consumer’s financial situation before making an assessment of the consumer’s capacity to repay the loan.
Recent reviews of the mortgage broking space by the corporate watchdog (REP262 and REP330) found that brokers and aggregators were aware of the new obligations and had taken steps to comply—however, the reviews also identified a number of areas where they were at risk of non-compliance.
“For example, one common risk identified in our various responsible lending reviews is poor record-keeping practices; this places credit licensees at risk of not being able to demonstrate they have complied with their responsible lending obligations and their general conduct obligations, including the requirement to comply with the conditions on their credit licences,” the ASIC report said.
Pepper Money’s Mr Rehayem said one of the greatest misconceptions among brokers is that professional indemnity insurance has got their back.
“I can assure you that in court, when push comes to shove, the only form of safety you have is your notes and record keeping – nothing more, nothing less,” he said.
“I would go so far as to suggest that every interview with a client be recorded, with the customer’s consent, and be kept as part of a broker’s files.”
For the past four years, Pepper Money has been giving away recording devices at industry events, helping brokers to protect their business with more accurate record keeping.