What if bank customers can never repay their loans?

ASIC has warned banks to take ‘all reasonable steps’ to keep borrowers in their homes.

The regulator said lenders had to do everything necessary to ensure that they engaged in lending efficiently, fairly and honestly. Picture: iStock

ASIC has warned banks to take “all reasonable steps” to keep borrowers in their homes and pursue a high level of engagement with customers in severe financial difficulty.

The advice was contained in a paper issued by the Australian Securities & Investments Commission on Thursday in relation to COVID-19 and financial hardship, ahead of the expiry of repayment deferrals in the coming months.

The regulator said lenders had to do everything necessary to ensure that they engaged in lending efficiently, fairly and honestly, with processes in place to ensure an orderly transition to repayments.

Some lenders, it said, had asked ASIC how to approach situations where the level of hardship was so severe that customers could never repay their loans.

“ASIC expects lenders to make all reasonable efforts to work with consumers to keep them in their homes if that is in their best interests,” the watchdog said.

“ASIC recognises that there will likely be some circumstances where offering a consumer further temporary assistance may make their situation worse.

“Such situations will need to be carefully identified by lenders and involve a high level of engagement with those affected consumers.”

In response to COVID-19, banks have been offering repayment deferrals for up to six months from last March.

The Australian Prudential Regulation has extended favourable capital treatment to the banks so that the deferral does not count as a period of arrears or impairment.

As part of its monitoring activities, ASIC said it was closely scrutinising how lenders were assisting customers in financial difficulty, and was meeting with a wide range of banks and non-banks.

It was also working closely with APRA to ensure its expectations of banks and how they were handling loans impacted by COVID-19 were aligned.

ASIC said that if a consumer identified that they would not resume full repayments on their mortgage, banks should make reasonable efforts to interact directly; for example, by a telephone call.

If the bank determined that further assistance should be offered, processes should be “flexible and empower staff to offer tailored assistance that genuinely addresses the needs of the consumer”.

“Lenders should keep records which set out the assistance options they are providing to each individual consumer,” ASIC said.

“In circumstances where a consumer’s repayment deferral expires and they miss a repayment, lenders should make reasonable efforts to contact the consumer and assess the appropriateness of further assistance being offered to them.

“Lenders should have in place processes that are easy for consumers to understand and navigate.”