Throughout 2015, the Australian Securities and Investments Commission’s (ASIC) focus has been on the Responsible Lending Practices of Australian Credit Licence (ACL) holders. While ASIC sought civil proceedings against many small lenders, they have also focused on the Responsible Lending Practices of Australia’s bigger banks.
In August 2015, ASIC released Report 445: Review of Interest-Only Home Loans. Report 445 outlines the Responsible Lending obligations for all lenders. This report comes at a time when interest rates and the housing markets are increasingly the focus of many in Australia. The report specifically addressed lending practices of ACL holders in relation to the interest-only home loan sector. In the current environment, interest-only home loans are increasingly popular, particularly with those on higher incomes.
ASIC reviewed how ACL holders assessed consumers, with a focus on the affordability of the loan over the long term. The review found that:
- In 40% of the sample reviewed, the affordability calculations assumed the borrower had longer to repay the principal on the loan than what they actually did
- In over 30% of the sample reviewed showed no evidence that the lender had considered whether the interest-only loan met the borrower’s requirements
- In over 20% of the sample reviewed, lenders had not considered the borrower’s actual living expenses when approving the loan, but relied instead on expenditure benchmarks.
Lenders have been warned by ASIC that in the circumstances where ACL holders fail to take on board ASIC’s comments, they are at risk of civil penalties as well as potential civil class action proceedings. Report 445 indicates that ASIC is not only targeting the lending practices of small lenders but also some of Australia’s largest banking lenders. The following three risk areas have been identified:
Objectives and Requirements Obligation
An ACL holder is required to assess whether a loan meets the objectives and requirements of a prospective client under Responsible Lending obligations. ASIC reiterates that a lender must make sure the objectives and requirements of the prospective client are consistent with the amount that is being sought under the loan.
Lenders are required to obtain detailed information regarding the purpose of the loan in order to be able to appropriately assess whether the loan adequately meets the prospective client’s objectives and requirements. For example, ASIC states in relation to interest-only home loans that a prospective client indicating they require a loan to purchase property is insufficient. The information must be detailed enough to describe why the prospective client is applying only for an interest-only home loan rather than a principal and interest home loan.
ASIC views expenditure benchmarks as an alternative to making inquiries into a consumer’s expenses to be inadequate. ASIC is of the view that expenditure benchmarks should be used only as means to prompt the prospective client for further information. Report 445 states that the practice of solely utilising expenditure benchmarks will not be tolerated.
Buffers and Floor Rates
ASIC notes in their report that ACL holders did not confirm prospective clients had sufficient income on top of their expenses and loan repayments so that they could withstand unprecedented expenses as well as interest rate rises. ASIC expects that a minimum interest rate buffer of at least 2% should be used and a floor rate of at least 7% be used.
In March 2016, an ASIC media release entitled “16-089MR Payday lender Nimble to refund $1.5 million following ASIC probe” reinforced ASICs view on Responsible Lending obligations. Nimble Australia Pty Ltd (Nimble) will be forced to refund over 7000 customers after ASIC found the company was not meeting its Responsible Lending obligations. ASIC found that:
- Nimble had not adequately assessed the financial circumstances of clients before providing them with loans;
- Nimble failed to identify instances where clients had obtained repeat loans in short periods of time; and
- Nimble failed to make proper inquiries of clients’ requirements and objectives and inquiries made were of a general nature.
The ASIC media release noted “ASIC encourages all participants in the consumer credit industry to take note. All credit licensees need to consider the individual situation of each borrower” to ensure they are meeting responsible lending obligations.