Follow your own credit policy on low-docs, warns lender

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Brokers should follow their own credit policy - not the lender’s - when dealing with low doc loans, says Pepper’s Mario Rehayem.

Jon Denovan from Gadens Lawyers said last week that, despite the recommendation in ASIC’s Report 262, some lenders and brokers still appear to be relying on accountants’ letters in order to determine whether an applicant qualifies for a loan.

Denovan said letters from accountants can satisfy the requirements to make reasonable verification of a customer’s financial situation, but only if they include specific information.

“Report 262 suggests that accountant’s letters should confirm the customer’s actual level of regular income, specifies the basis on which the statement is made, includes comments on previous earnings and the underlying information supporting the statement, and identifies the period for which the accountant has been engaged by the consumer,” he said.

Rehayem says Pepper doesn’t accept accountants’ letters as a form of income verification in their low-doc loan applications.

“An accountant’s role is not to express an opinion if the borrower is able or not able to afford the proposed loan, this is the lenders role. The accountant’s role is to confirm the borrowers actual level of regular income and needs to be in a position to specify the basis on which the statement is made.”

Rehayem says it’s the broker’s job to carry out a preliminary assessment and the lender’s job to carry out a final assessment. He says it’s important that these two roles are not confused.  

“If a lender requires an accountant’s letter that does not contain the sufficient questions for the accountant to answer, a broker should fill in the gaps and obtain as much information from the accountant to satisfy their own credit policy.”

He says brokers need to make sure that they’re consistently recording information while verifying a borrower’s income and should do so using multiple sources of income verification.

“Unfortunately at this point of time the vast majority of lenders that do accept accountants’ letters as a form of income verification are equipping brokers with a template that is insufficient to make an acceptable assessment, which is why a broker should always revert to their own credit policy.

  • Adrian on 19/11/2012 10:54:43 AM

    Its quite simple really. Both the Lender & Broker have the joint responsibility to "make reason enquiries" into a borrowers financial situation. Both need to achieve a strong level of comfort from these enquiries, that the income being declared by the borrower seems to be reasonable and accurate account of their true income position. There can be no "one fits all" approach, as everyone's situation is different. Provided both Lender & Broker can make sufficent commentary in their assessment, supporting how they gained the comfort that the income declared seems to be accurate, then their should be no problem. An Accountants Declaration / Detailed conversation with the accountant, can in a lot of cases be a lot more beneficial in verifying a borrowers income, than trying to work out an income based on silly percentages of a turn over figure! (which a lot of lenders adopt as the only process).

  • QEDRisk on 19/11/2012 10:28:27 AM

    I think that part of what does not help here is that the industry still uses the term "low-doc". We should adopt the mantra that there are only "loans" and that all borrowers need their income streams objectively verified.

    For brokers, this means having YOUR own methods and calculations that you use every single time on every single customer. I loathe the term "credit policy" for brokers as it has other connotations, but this is what Denovan et al are talking about.

    Make your own templates or find a provider that can supply them!

  • PeterT on 19/11/2012 10:27:24 AM

    Having seen a number of accountants letter produced by 'friendly' accountants, I agree with the article in saying that brokers shouldn't be accepting these at face value.
    It also goes both ways. I've seen plenty of accountants letters stating a low taxable income where I know there is more going on behind the scenes.

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