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Concerns raised over unconditional approvals

by Annie Kane5 minute read

mike felton new mb mike felton new mb

The MFAA is working to ascertain how lenders will treat borrowers with unconditional approvals that are facing “pre-settlement hardship” as a result of COVID-19.

As the economic fallout from the coronavirus pandemic continues, the broking industry has raised concerns around the treatment of borrowers with unconditional approvals who have lost their jobs.

While lenders and government have been releasing support packages for Australian borrowers given the economic impact of the ongoing coronavirus pandemic (COVID-19), nearly half (47 per cent) of businesses have made changes to their workforce arrangements, including reducing staff working hours or placing staff on leave/furlough (according to the Australia Bureau of Statistics).

Concerns have now been raised by brokers regarding loans that have been unconditionally approved but not yet settled – particularly those for Australian home buyers who may have been granted an unconditional approval on their mortgage but have since seen a change in their working hours or job security.  

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Speaking in a video update, Mike Felton, the CEO of the Mortgage & Finance Association of Australia (MFAA), noted that several brokers had raised concerns about whether lenders would honour the unconditional approval of loans that have not yet reached settlement – particularly if the borrower has an enforceable purchase contract.

Mr Felton said that brokers were particularly interested to know whether there would be a challenge to settle the loan should the borrower’s circumstances have changed in a material manner – for example, if they had lost their job or their income had changed in a material manner.

The MFAA CEO noted that the MFAA was consulting with lenders and the Australian Banking Association (ABA) regarding this “evolving” issue, but said that the association’s view was that despite the complexity of the issue, this was a form of “pre-settlement hardship”.

“We’ve had a number of discussions with lenders and the ABA, and it seems that some lenders are adopting the approach of doing what is in the customers’ best interests in the circumstances. So [they are] having that discussion with the customer, as to whether they wish to proceed or are required to proceed in terms of an enforceable contract and then, if necessary, settling that loan in accordance with the original unconditional approval,” he said.

Mr Felton added that there were three points that brokers need to bear in mind should such a situation occur: 

  1. Brokers have an obligation to notify lenders if they are aware that their clients’ circumstances have changed between their unconditional approval and settlement.
  2. Some lender contracts may include clauses that allow the lenders to re-evaluate and withdraw their pre-approval if there’s been a material change in the customer’s circumstances.
  3. Brokers will need to undertake a full responsible lending assessment if their customers ask them for their advice on whether they should proceed with settlement if their circumstances have changed since the original credit assistance was provided.

Mr Felton added: “This still has a fair way to work out. We’re not aware of [the] extent of the problem. But a number of you have raised it and so we will continue to stay abreast of developments.”

Lenders reviewing pre-approved mortgages

Several lenders have already begun changing their risk appetites, with some also telling the broker channel that they will be reviewing their existing pipelines of credit applications – including those that have been previously approved – to understand whether a borrower’s circumstances have fundamentally changed to such an extent that their credit profile of the loan security or borrower has been altered.

In a broker update, the chief lending officer of non-bank lender La Trobe Financial, Cory Bannister, acknowledged: “The uncertainty for borrowers’ jobs and incomes combined with lenders’ security rights being suspended (the moratorium on evictions and mooted rental holidays and mortgage repayment relief) – while an understandable emergency setting for the economy – will place many under financial strain...

“We expect that there will be applications which, as a prudent lender, we cannot approve or fund at this time and such approval and settlement will be postponed until further notice.

“We acknowledge that these reviews may cause inconvenience for some borrowers; however, we believe it is the only responsible course of action in light of current events. If we deem it appropriate to not proceed with an application at this time, we undertake to reconsider such applications as a priority when the economy and borrowers’ situations normalise,” the lender told brokers.

Mr Bannister added: “As a prudent credit provider, our job is to ensure that we do not advance credit to customers where that credit has the potential to result in financial hardship or undue stress on our borrower.

“For that reason, and as a temporary measure only until the present government restrictions are lifted in full, we are obliged to take cognisance of these issues in our approval and settlement credit processes,” he said.

[Related: Gateway tightens lending conditions]

Concerns raised over unconditional approvals
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Annie Kane

Annie Kane

AUTHOR

Annie Kane is the editor of The Adviser and Mortgage Business.

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