The insurance industry has called for increasing transparency around Lenders’ Mortgage Insurance, after complaints to the Credit Ombudsman tripled in the past year.
According to COSL’s latest report on operations, 58 complaints were received regarding LMI providers in the last financial year – three times the amount in previous years.
The Insurance Council of Australia says consumer understanding of the product needs to be improved.
“While LMI is a well-known product, consumers need to understand the purpose of LMI, which is to protect the mortgage granted over the property not the consumer,” says the ICA.
The Insurance Council is in the process of launching a new literacy initiative to “empower consumers and businesses to make informed decisions about insurance”.
Insurance provider QBE says it has been working for a number of years with Government, regulators and consumer groups to increase the understanding of LMI.
"QBE LMI wholeheartedly supports increased transparency for consumers around the operation and value of lenders’ mortgage insurance.
"We also have a home buyer section on the QBE LMI website that clearly explains how lenders’ mortgage insurance works."
FBAA president Peter White says any move to improve consumer understanding of the product is a step in the right direction.
Next year all LMI transactions will require a one-page disclosure document, outlining the key facts of the products. This has come about through the FBAA pushing for increased transparency, says White, but he says the move doesn't go far enough.
"That key fact sheet will go partly down that path, but it completely depends on how they word it and what goes into that document. I'm nervous to say it will be the be all and end all."
The vast majority of borrowers are uninformed about what LMI actually is, says White.
"You ask someone what lender's mortgage insurance does and they might say that it protects the lender, if that. You'd be lucky to get that statement. People are uninformed about this product."
White is calling for "major reforms" of the product, including the way rebates are handled. Most borrowers are completely unaware they could be entitled to a rebate, says White.
"When you pay out your loan you pay back the lender every cent that's outstanding to them, plus any accrued interest in addition to any interest you've already paid along way... The lender's not entitled to any rebate. Any rebate that comes out of that should be paid back to the borrower, even if it's four years down track, it doesn't matter."