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ASIC's Review of interest-only home loans

Discussion in 'Property Finance' started by Terry_w, 22nd Sep, 2016.

  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    REP 493 Review of interest-only home loans: Mortgage brokers’ inquiries into consumers’ requirements and objectives
    Released 14 September 2016

    This report follows on from Report 445 Review of interest-only home loans (REP 445), which highlighted the importance of responsible lending practices for interest-only home loans.

    It describes the practices of 11 large mortgage brokers and trends in the market after REP 445. It identifies good practices as well as opportunities to improve brokers’ practices.

    Our reviews are intended to promote responsible lending and consumer confidence in the credit industry.

    Download the report (PDF 479 KB)

    http://asic.gov.au/regulatory-resou...s-into-consumers-requirements-and-objectives/
     
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  2. Bullion Baron

    Bullion Baron Well-Known Member

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    http://asic.gov.au/about-asic/media...breaching-home-loan-responsible-lending-laws/
     
  3. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    I had one of my files pulled by ASIC for that Review this time last year,and one can see why, looking from the outside.............

    fully owned PPOR

    regeared and lock nut to 80 % lvr for future investment purposes with 100 & offset,10years IO

    just as well we didnt take this to the 90 % lvr sans LMI with the medico client

    ta

    rolf
     
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  4. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Indeed - it's the issue with niche business/advice, it makes us look abnormal. So long as there is no structural regulations which come in which limit activities it's not a huge issue, just means we need to keep our noses clean and show the clients best interests are being met.
     
  5. euro73

    euro73 Well-Known Member Business Member

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    Question is, in whose opinion? If for example, ASIC believes I/O against a PPOR for any reason whatsoever isnt in the interests of the client.... then what...?
     
  6. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    It is in the best interests for a client to pay down debt.
     
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  7. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    unless............................

    its an IP and they have a ppor
    their current PPOR is to be a future IP
    Borrower needs a temporary hardship provision

    and many other reasons that such a generalised view can result in poor quality borrower outcomes.

    Certainly APRA's view would be the same as Terry here, but thats a very myopic approach, and based on a systemic stability POV.


    ta
    rolf
     
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  8. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Indeed it is myopic but I think as a broker you need to consider having a plan for the client to pay down debt starting with the non deductible.
     
  9. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Yep, agreed, debt needs to be managed in an appropriate and structured way because many people have average money skills.

    Our Full service planning clients are targetting their Non deductible debt to be gone ASAP so they can retire early.

    ta
    rolf
     
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  10. euro73

    euro73 Well-Known Member Business Member

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    Every one of my clients is doing this as well. Its the entire reason for purchasing cash cows. They produce extra income, and it is reinvested towards PPOR debt reduction. We cant assume salaries will keep climbing, or that rates will be 4% forever , or that Interest Only will be available forever, or that super and pensions wont be meddled with further

    In fact, we have to accept that salaries are stagnating, rates are and will continue to rise, P&I will be forced upon many, and super and pensions will be meddled with further...

    #decadetodeleverage
     
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  11. willy1111

    willy1111 Active Member

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    So now ASIC are the experts of being able to do a "proper assessment of a borrowers ability to repay a loan" as their "proper assessment" shows the borrower would have a monthly deficit.

    What really peeves me off is that they come up 1000's of pages of words/regulations/guides to make it extraordinaryly complicated so that they can go after those in the industry inorder to generate fines/revenue to justify their existence and continue to generate a livelihood for themselves.

    I'm yet to see ASIC put out a template on how to do a "proper assessment". Just fill in the boxes to do a "proper assessment". Instead one is expected to make reasonable enquiries...what is reasonable...everything is open to interpretation... which just makes everything messy. Come up with a template and make it simple.

    It is absolute obsurdity if you ask me.
     
  12. Bullion Baron

    Bullion Baron Well-Known Member

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    Is it the industry or regulator that adds the complexities?

    Expecting Westpac to take into account serviceability of repayments at the end of an interest only period doesn't seem unreasonable.
     
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  13. willy1111

    willy1111 Active Member

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    You've just proved the point I was attempting to make...you have determined it doesn't seem "unreasonable" to expect Westpac to take into account serviceability of repayments at the end of an interest only period.

    It's irrelevant what I think is reasonable...my point is "reasonable" or "unreasonable" is subjective, it is open to interpretation and varies depending on who you ask.

    It's the regulator adding complexity by producing 1000's of pages of words/regulations/guides for industry to comply with when they could
    produce a simple template/s for industry to follow to ensure the "proper" thing is done.

    Rather than make it black or white, they prefer to make it grey, which adds complexity due to "reasonable" being open to interpretation.

    Most interest only periods are 5yrs or greater, is it reasonable to assume income has increased over that period by say 15-20% and wholla now we have a monthly surplus on p&i after the interest only period oh but wait maybe the client has had 2 kids by then and so the expenses may be higher oh but wait now the client is eligible for family tax benefits so there is more income.

    What is "reasonable" to consider. Ask 10 people and they will give 10 different answers.

    It is the fact that reasonable is open to interpretation that I have an issue with and they (regulators) write 1000's of pages of words/regulations/guides when it could all be simplified with template/s and examples, and then there would be no room for interpretation of what is "reasonable". No need to go to court for a judge to determine what is "reasonable".

    One would think the point of regulation is to protect the consumer by ensuring industry does the right thing and carries out "proper" assessment of consumers ability to repay loan. So why doesn't the regulator document said procedure and protocols into a template/s and use examples so that industry has a non-disputable/non-interpretative/clearly defined road map to ensure "proper" assessment is carried out. The regulator is who industry answers to and the one who defines "proper" so they are in the best position to create these if that is what they were really trying to achieve.
     
    Last edited: 6th Mar, 2017
  14. Bullion Baron

    Bullion Baron Well-Known Member

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    I expect this would severely limit/reduce the types of loans that banks could offer which was my point. It is the banks driving the complexity, not the regulator.

    So instead of 1000's of pages of regulations they just provide 1000's of templates / examples?

    It honestly comes across like you have some sort of personal stake in this... were you wronged by ASIC or do you work for one of the banks?
     
  15. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    lets see what the ASIC's concern actually is


    I believe that one issue per se has been mis-represented if what I have seen ( and my interp is reasonable)


    "Westpac approved loans where a proper assessment of a borrower's ability to repay the loan would have shown a monthly deficit for home loans with an interest-only period, Westpac failed to have regard to the higher repayments at the end of the interest-only period when assessing the borrowers' ability to repay "



    Looking at a WBC servicing calc from 2013

    A 400 000 k home loan with a 10 year IO period at an actual rate of 5.26 % variable had a deemed repayment of 3373 per mth..................with a further servicing buffer of 800 per mth.

    Total demonstrated repayment capacity needed to be 4173 a mth

    The IO repayment would be 1760 a mth.

    Is that a proper assessment and having regard to higher payments when the IO period ends ?


    ta
    rolf
     
  16. Bullion Baron

    Bullion Baron Well-Known Member

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    That seems ok to me Rolf, I guess we will have to wait for the outcome of the hearings/further details to see what more there is to it.
     
  17. Bullion Baron

    Bullion Baron Well-Known Member

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  18. willy1111

    willy1111 Active Member

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    No I haven't been wrong done or have a personal stake...I am just sick of the government/regulators trying to turn everything into a nanny state and interfering in the free market when I think they really have little idea apart from all theoritical.

    They don't need 1000's of templates, it might be a 20 page questionaire or fact find like most of industry has had to guess or put together themselves in attempt to comply with their 1000's of page of words/regulations/guides in an attempt to comply and do the "proper" thing which industry doesn't know if it is right or wrong until ASIC come knocking and check.

    Banks certainly aren't adding complexity and the only reason they would limit products available is due to the regulator deeming the way they do things as not proper. It's the regulator redefining things and making them complicated.
     
  19. willy1111

    willy1111 Active Member

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    So in all of these situations, Westpac has used the HEM rather than the declared customer expenses.

    So the loan writer says to the client, if you continue spending this amount we will need to reduce the amount you can borrow by $100-200k or whatever amount necessary so you have a monthly surplus. Or if you want to borrow this amount you are going to have to have another look at your living expenses and see if there is any spending you are prepared to cut, but they can't go below the HEM. But due to the interest rate benchmark being 2-3% above current rates, the real repayment will be a lot less than the repayment we use for assessment so you may not have to reduce spending in real life by much. But if rates do increase then you may have to cut spending, is that possible or something you are able or willing to do?

    Yes they should have the responsibility to talk to the customer about this. But is it really going to make a huge impact on delinquency rates, etc?

    Lenders aren't stupid...they have already factored in a minimum for living expenses for each application, put in interest rate assessment buffers, etc to contain delinquencies and loans that go bad to an acceptable level. After all if too many loans go bad, they are the ones that lose money, and I'm pretty sure they will adjust there assessment metrics to bring it back to an acceptable level.

    Nanning regulatory interference here is going to do very little apart from ASIC being able to puff their chest up and say look at us, we are doing something, are't we great we are taking the big bad bank to task (to justify their own existence, I think it is laugable if we the tax payer and consumer didn't have to pay for their existence)
     
    Last edited: 6th Mar, 2017
  20. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Monthly shortfall based on "what" is the question though ?

    cant speak for bankers or other brokers, but our Preliminary Assessment methodology uses declared expenses even where they are patently low, as long as we have ensured that the expense can be clarified via other means - for eg net savings growth compared to income. BUT then the min HEM for that lender kicks in and used to assess the suitability of the loan

    On the other side, where the declared expenses are considerably higher than would be normal, we also make a specific enquiry, and if the declaration is clarified we use that higher figure in the Prelim Assessment, and because this figure i higher than the bank HEM, the higher than HEM figure is then used used to assess the suitability of the loan.

    Will be interesting to see how this case pans out because in recent times we have suggested "you cant afford this on bank criteria " to many a borrower due to not having deemed affordability, who have subsequently been approved at a "retail or direct" channel where that lenders servicing shortfall (where 'properly" assessed) was > 5000 per month. Often the NCCP doesnt apply because these are processed by a shroud called business/commercial banking on the basis that the 100 k loan sought will be used for "business" but the 1 to 3 mill in other lending acquired is used for regulated purposes.

    ta
    rolf




    ta
    rolf
     
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