The Finance Brokers Association of Australia
believes there is a need for greater transparency and disclosure on behalf of lenders and Lenders Mortgage Insurance insurers to make sure consumers are not being ripped off by having to pay LMI.
The Reserve Bank of Australia estimates more than one quarter of housing loans in Australia are subject to LMI.
In the financial year ending 30 June 2013, banks made an estimated 761,880 home loans, totalling $247.9 billion in lending, which indicates around 190,470 loans created in that financial year were subject to LMI.
But FBAA said in its submission to the financial services inquiry that there are many issues surrounding LMI, including consumers not being provided with LMI product disclosure statements, including any details regarding any commissions payable to the lender.
“Privity of contract is the apparent reason for this non-disclosure, as LMI essentially is a contract between the LMI provider and the lender, but it is contended that the consumer borrower has an interest in this insurance arrangement as they have paid for it, at the insistence of the lender.”
Consumers are also not provided with the option to choose which LMI insurer would provide the best rate for their loan, so LMI rates and premiums are not standardised throughout the country, FBAA said.
The association recommended an obligation be put on the lender – whose LMI premium is being paid by the borrower – to seek out the best value LMI for the particular loan risk.
FBAA is also concerned that lenders are entitled – in certain circumstances – to a refund of the LMI premium, but this process appears uncertain and from an LMI provider’s position, the responsibility of the lender.
“Lenders and LMI providers are operating in a way that is not transparent and not in the best interests of consumers. This lack of transparency gives rise to the possibility of lenders seeking to take advantage of consumers who are uninformed and unaware to seek refunds.”
The only way issues surrounding LMI can be addressed is for the federal government to investigate lenders and LMI providers to see how much consumer borrowers have suffered financially by not receiving refunds of LMI premiums, suggested FBAA.
To foster transparency, FBAA said details should be provided of the master policies between lenders and LMI providers, how LMI rates and premiums are calculated and applied, what benefits are received by the lender for writing LMI through the insurer, and the frequency with which borrowers may be entitled to request refunds from their lenders when loans have been repaid, especially when no loss or claim has been made on the LMI provider.
FBAA is also concerned the current system can lead to the lender and the insurer ‘double dipping’ when the consumer borrower is forced to pay for insurance again that is essentially for the same risk when refinancing again within 12 months on the same property.
“The obvious solution which would save consumer borrowers a substantial amount would be to introduce portability so that the LMI policy is in fact owned by the consumer borrower but that, upon a refinance, a different beneficiary of the policy (i.e. the new lender) is substituted.”