The recent recommendations made by the Australian Securities & Investments Commission (ASIC) regarding how brokers handle interest-only loans should be applied across all styles of high-risk products, according to the Finance Brokers Association of Australia (FBAA).
On Wednesday, ASIC released a report on its review into how 11 large mortgage brokerages (responsible for 63 per cent of mortgage broking credit representatives) inquired into and recorded consumers’ requirements and objectives for the purpose of assessing whether an interest-only home loan met their requirements.
The review found that between July and December 2015, the number of new interest-only home loans fell from 43 per cent in the June quarter to less than 36 per cent in the December quarter, with the total value of these loans dropping by 15.6 per cent.
The percentage of interest-only loans with a term greater than five years dropped by more than half, from 11.2 per cent to 5.1 per cent.
Although ASIC welcomed the fact that the mortgage industry has, over the past year, adopted “better ‘responsible lending’ practices”, it noted “that there is still room for improvement”.
For example, the body found that nearly 80 per cent of applications reviewed included a statement summarising how the interest-only feature specifically met the consumer's requirements and objectives, but that more than 20 per cent of applications reviewed did not.
Further, ASIC found that some brokerages had:
- inconsistent record-keeping and, in some cases, fragmented and incomplete record-keeping;
- general, rather than tailored, information on products and loan features that could impose increased financial obligations or restrict repayment flexibility; and
- in some cases, where the potential benefit of the interest-only loan depended on the consumer taking specific action (for example, allocating additional funds to higher interest debt), it was unclear whether the consumer understood the potential risks/additional costs if the specific action was not taken.
As such, ASIC recommended that mortgage brokers take a number of actions, including:
- ensuring they understand the consumer's underlying objectives for requesting specific loan products and features;
- recording concise summaries of consumers' requirements and objectives and the reason why a particular product, features and lender were chosen;
- providing a statement summarising the broker's understanding of the consumer's requirements and objectives, which could also include the reason a particular loan is suggested, for the consumer to confirm before obtaining a loan; and
- where the potential benefits of a loan feature might require the consumer to undertake specific behaviour, ensuring consumers are aware of the action they need to take to obtain the potential benefit, as well as the potential costs should this action not be taken.
‘Just because the borrower wants it, doesn’t mean they should have it’
It is recommendations such as these that the FBAA’s Peter White thinks could be applied to other high-risk areas.
Speaking to The Adviser, Mr White said: “Although I was disappointed that ASIC thought there were quite a few areas where we needed to smarten ourselves up on, I think the recommendations are really good.
“One of the things that struck me was ‘Where else does this journey take us?’
“I think that the recommendations should be applied not only to the interest-only bracket, but maybe we should be looking at other styles of high-risk products, such as reverse mortgages, or lines of credit or offset accounts.
“We should see whether there is some parallel thought that we should proactively extend across other products to make sure that they are all ticking the right boxes as well, from a regulatory environment point of view,” he added.
According to Mr White, the danger of not applying the recommendations across other high-risk areas could mean that “the same habits or parallel habits are happening elsewhere”.
He said: “The reality going forward is that we need to remember that the product can't be unsuitable for the needs.”
Noting that it can be tempting for a broker to provide a client with what they want (for example, if a buyer specifically asks for an interest-only loan and it is available from the lender), Mr White said that “just because the borrower wants it, doesn’t mean they should have it”.
He concluded: “If there is no tax gearing benefit, no bridging finance benefit or any real tangible benefit for why it should be interest-only … we have to put the line in the sand and say 'That's all well and good, but you must take P&I'.”