ASIC has diagnosed a more 'acute' case of responsible lending compliance transgressions among low-doc brokers, and urged all brokers to document all interactions with borrowers.
Yesterday, the regulator released its first verdict on brokers' adherence to responsible lending legislation, based on the conduct of 16 mortgage brokers over the period July to December 2010.
ASIC found that, while brokers proved to be "generally aware" of and took steps to comply with responsible lending obligations, some were found wanting, particularly in the low-doc market.
Speaking with Australian BrokerNews, ASIC senior executive leader of deposit takers credit and insurers, Greg Kirk, said there was "room for improvement" in regard to responsible lending.
The report singled out transgressions including not recording a consumer's requirements and objectives beyond the immediate home loan, not taking steps to verify a borrower's income, not making proper inquiries into living expenses or not recording an assessment of repayment ability.
"For particular issues we identified, the problem is probably a bit more acute in relation to loans and markets such as low-docs," Kirk told Australian BrokerNews.
Summing up the findings, Kirk said that to protect themselves against potential disputes with the regulator, brokers needed to ensure their interactions with borrowers were documented.
"I think an element of a number of these risks is making sure that enquiries are made and are in fact documented," Kirk said. "Because if a borrower later comes along and raises a question with ASIC or an EDR, and says this loan was inappropriate, if a broker has made reasonable enquiries but don't have the records to show that, they are very vulnerable in that sort of dispute," he said.
However, Kirk also said there was as much positive news for the industry in the report as negative, as the NCCP had marked a period of "significant change". He listed requirements that have been placed on brokers, such as applying and attaining a licence, having training in place, being a member of an external dispute resolution scheme, and meeting new disclosure requirements.
"I would stress that we were looking at the first six months, and the regime had only just begun, so the responsible lending requirements were very new," he said.
"There's been a lot of ground to cover in 12 months, so we are definitely pleased to see the level of consciousness in regard to responsible lending," he said.
ASIC's more targeted focus on low-doc lending was a result of the practices that resulted in the US sub-prime crisis and the GFC, as well as ASIC's own research from 2008, which uncovered practices involving 'equity stripping' in the low-doc and no-doc segments of the market.
"Given that they were some of the drives for responsible lending obligations that were being put in place, we wanted to take an early look at them," Kirk said.
The ASIC review uncovered no evidence of equity stripping.