We’ve all heard the admissions of misconduct from major institutions at the Royal Commission, with their statements a sad reflection on the conduct and governance of the banks. Whilst these revelations have given the media their headlines, the reality is that the vast majority of lenders act with their customer's best interests at the forefront of their thinking.
Furthermore, it has been interesting to note there has been little or no discussion of the fact that over recent years, regulators have been taking steps to protect the interests of borrowers and address poor lending practices. As a lender dealing with loan applications on a daily basis, I have seen a quantum shift in policies and compliance as both regulators and lenders move to minimise risk to themselves and their clients as the nation’s home loan debt grows.
These changes have led to some long overdue reforms and there is no doubt that further changes will be recommended by the commissioner Ken Hayne. But in the interim, borrowers can have confidence in current lending practices and the protections already in place.
Broadly speaking, lending policy and compliance have seen the most change and it’s worth looking at each in isolation and how they impact borrowers.
Lending policies are set by the respective lenders but heavily influenced by regulators who use a number of methods to makes sure that Banks that meet their expectations. The recent imposition of caps on Interest Only lending being a clear example. In simple terms lending policies now more than ever ensure the loan provided is both suitable and affordable for the applicants with the following items illustrating that point.
Loan repayment affordability calculations
Lenders now assess loan repayments at an interest rate of around 7.5% to minimise the risk imposed by potential rate rises. With most new home loans attracting an interest rate of under 4.00%, rates would have to almost double to reach the level that repayment affordability is being assessed at. Any existing loans are generally also assessed at that level of interest rate for the same reason. By introducing these measures, lenders are mitigating the risk posed to clients by rising rates.
Living Expense calculations
This was the topic of much discussion at the Royal Commission but it has already been a point of action for the regulators and lenders for a number of years. The focus has led to lenders applying increasingly tougher assessments on living expense declarations and the application of minimum benchmarks in their assessments with the benchmarks being more sophisticated and significantly higher than in the past. The outcome of course has been to lower the borrowing capacity of many applicants shielding them from potential financial stress.
Compliance is driven by legislation and policed by ASIC. There has been a huge leap in the documentation required by lenders who have reacted by establishing or expanding departments to deal with this specific area. The purpose of the increased compliance requirements is to ensure that borrowers are clear on the details of the facility being provided, that the lender is doing their due diligence on the information provided and all fees and costs are being disclosed. It is also designed to minimise the potential for fraud. Again, this can be demonstrated by using two simple examples.
Bank statements are a document increasingly sought by lenders to confirm everything from income and living expenses on savings statements to limits, rates, terms and repayment types on loan statements. By verifying the information from formal documents such as statements, fraud can be minimised and the assessment completed using figures that reflect the applicant’s true position.
Documentation regarding assessment and decision rationale
Lenders are now required to fully document the loan process from start to finish and provide their applicants with a number of compliance documents during that process. Not only must they be able to justify their recommendations based on the information obtained and make reasonable enquiries into the accuracy of the information but they also must document that. Above all, they must be able to demonstrate that the loan recommended will not place the borrower under financial stress and in legislative language that the loan ‘is not unsuitable’ for the applicant. Good lenders have always done that but the legislative requirements in this area now mean that all lenders are required to provide rational explanation for their recommendations and document it.
So whilst the Royal Commission has exposed some disgraceful conduct that cannot be excused, steps have already been undertaken to minimise those occurrences and lending policies and requirements are constantly under review to ensure better borrower outcomes are ensured. So if you are seeking a home loan, take time to block out the hysteria surrounding the Royal Commission and take comfort in the fact that you are being afforded more protection than ever in relation to your lenders recommendations.
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