ASIC: ‘low-doc’ lenders risk prosecution

Lenders pushing ‘low-doc’ loans face increased risk of prosecution as well as higher credit risk, ASIC has warned.

ASIC commissioner Cathie Armour. Picture: Hollie Adams

Lenders pushing “low-doc” loans face increased risk of prosecution as well as higher credit risk, the Australian Securities & Investments Commission warned yesterday, as it vowed to use its new powers to enforce standards in the $1.8 trillion residential mortgage market

Deputy commissioner Cathie Armour warned investors to be wary of “low doc” or nonconforming loans, saying it was “fundamentally incompatible” with responsible lending laws to provide loans without taking reasonable steps to verify a borrowers financial situation.

Ms Armour said any consumer capable of repaying a loan should be able to take one out.

“But insofar as the phrase ‘nonconforming loans’ could be used as a euphemism for a low-doc or risky consumer loan, our warning remains: lenders and investors face not only higher credit risks, but also the risk of a regulatory response in these situations,” Ms Armour said.

Low doc — or low documentation — loans are designed for the self-employed and small business owners who may not have financial statements and tax returns usually required when applying for a mortgage. But they have fallen out of favour with mainstream lenders, with Commonwealth Bank and Bank of Queensland both exiting the market earlier this year

Ms Armour said responsible lending provisions that require lenders to ask about and verify the financial situation of a borrower and the suitability of the product for them, were designed to protect consumers rather than investors in residential mortgage backed securities. But they also provided “secondary protection” for investors by ensuring higher quality credit.

“This also means that a failure by a bank that either issues, or sells loans to issuers of, residential mortgage-backed securities to lend responsibly harms both borrowers and investors.”

The warning came at the Australian Securitisation Forum to representatives of the industry that writes loans and packages them into products that are sold to investors and which has become increasingly important as banks pull back from some areas of lending.

“As we begin to see some examples of mortgage stress, particularly as interest rates rise, it becomes more important for investors to be discerning about the securities they invest in. Investors must consider how the mortgage lender goes about lending responsibly,” Ms Armour said.

She told the forum ASIC had been given new resources, including $70 million in additional funding, product intervention powers allowing it to modify or ban certain products and riding instructions to take more matters to court.

“Industry should recognise that ASIC will have even greater capacity to pursue breaches of the law we administer and we have very clearly heard the message that the community expects us to utilise court processes as much as possible,” Ms Armour said.

The new focus on litigation follows criticism from the interim report of the banking royal commission into financial sector misconduct that ASIC had focused too much on enforceable undertakings to deal with misconduct, and a bruising appearance for chairman James Shipton in the witness box last week.

After admitting “mistakes” and an “over-reliance” on infringement notices and enforceable undertakings. Mr Shipton said the watchdog would step up its use of legal action.

The royal commission also dealt with a lending issues in four of its eight hearings, leaving open the prospect of recommendations for further reforms of the industry when the final report is delivered in February.

ASIC is also investigating mortgage fraud and cracking down on lending practices in the car industry.