ASIC has released its report (REP 493) ‘Review of interest-only home loans: Mortgage brokers’ inquiries into consumers’ requirements and objectives’ on the responsible lending practices of 11 large mortgage brokers when assisting consumers to apply for home loans with an interest-only period during the initial part of the loan (interest-only home loans).

The report focuses on how the mortgage brokers inquire into and record consumers’ requirements and objectives to assess whether an interest-only home loan meets their requirements.

It also examined how the changes implemented by lenders in response to the findings from ASIC’s report into interest-only home loans from 2015 (refer: Report 445) have flowed through to mortgage brokers.

Separate to this review, at the request of the Government, ASIC is currently conducting a review of mortgage broker remuneration structures, and the impact of these structures on consumer outcomes. ASIC will complete this review by the end of 2016.

Risk areas

ASIC found examples of practices that place brokers at risk of being unable to demonstrate compliance with their responsible lending obligations, and identified opportunities for brokers to improve their practices. Key compliance risks identified are as follows:
(a) Policy and procedures—Mortgage broker policies and procedures provided only general information rather than tailored information on specific products and loan features that may impose increased financial obligations or restrict repayment flexibility.
(b) Recording of inquiries—Record keeping was inconsistent and in some cases records were fragmented and incomplete.
(c) Narrative statement/rationale—Just over 20% of applications reviewed did not include a statement explaining how the interest-only feature of the loan specifically met the consumer’s underlying requirements and objectives. The level of detail in these statements varied considerably and, in some cases, where an interest-only loan was specifically sought by a consumer (including where this option was recommended by a third party, such as an accountant), the reason for this was not clear.
(d) Consumer understanding of risks/costs—In some cases, where the potential benefit of the interest-only loan depended on the consumer taking specific action (e.g. 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.

Responsible lending recommendations

The report details steps that mortgage brokers should take to improve their current practices, 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 was 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.
• Where the potential benefits of a loan feature might require the consumer to undertake specific behaviour, ensuring consumers were aware of the action they needed to take to obtain the potential benefit, as well as the potential costs should this action not be taken.