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CBA calls for more IO justification

by Reporter5 minute read
CBA, Commonwealth Bank of Australia

The Commonwealth Bank of Australia has made updates to its broker process when customers choose interest-only repayments.

As of this week, the major bank has asked brokers to ensure that they capture the customer’s reason for choosing interest-only (IO) repayments and complete two declarations. 

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Further, the bank stated that its IO simulator will now automatically display the common reasons for selecting IO repayments (“recommendation by an adviser”, “temporary cost [e.g. while on parental leave or paying educational expenses, etc.]” and “maximise negative gearing potential for investment purposes”). It warned, however, that any other reasons must be recorded on the form in further detail.

The bank highlighted that brokers must complete and submit the IO simulator, including selection of reason, for all customers who are considering IO repayments, irrespective of whether they choose to proceed with them.

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As well the above changes, CBA stated that brokers must complete two declarations when submitting IO loans.

The first declaration outlines that the broker has confirmed that the interest-only period aligns with the customer’s requirements, while the second emphasises that the broker has told the customer that during the interest-only period the principal loan amount will not reduce.

“I have also made them aware that at the end of the interest-only period, the repayments on the loan will increase to cover both interest and principal reductions,” the second part of the declaration reads.

These changes will roll out to all broker systems as of this week.

Several banks have been tightening up their processes for interest-only loans over the past few months, following closer scrutiny of the reasons why borrowers may take up IO repayments and controls put in by the prudential regulator last year.

The prudential regulator asked banks in March 2017 to restrict the flow of this type of lending to 30 per cent of total new residential mortgages, while ASIC’s review into broker remuneration stated that “brokers arranged at least 50 per cent more interest-only loans, and up to four times as many”.

While the remuneration review document states that this does not necessarily mean that they delivered poor consumer outcomes (and the chairman of ASIC has said that “you need to think about looking at what the banks are showing in terms of the results of their mortgage portfolios before you can really draw any conclusions from that statistic”), ASIC is reportedly of the belief that “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”.

What do you think about the major banks? The last 12 months have been challenging for the big banks. Rising funding costs have continued to pressure margins, leading to pricing changes towards the end of 2017. Meanwhile, regulatory measures and higher capital requirements are forcing the big four to tweak their policies. 

Which lenders have continued to deliver excellent product and service, and which lenders have communicated the myriad changes best?

This is your chance to let us know what you really think in the 
Third-Party Lending Report – Major Banks survey for 2018. 

[Related: Brokers ‘not recording the outcomes’ of IO discussions: ASIC]

CBA calls for more IO justification
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