The biggest threat to the Australian mortgage industry

Many industry professionals will be hoping that cooler heads prevail when Commissioner Hayne’s final verdict is unveiled next month. It has been a challenging 12 months for the Australian financial services industry, with many casualties and a deeper sense of uncertainty about what the future will look like.

Unfortunately, the royal commission final report will be published in an election year; a notorious time for poor decision-making and short-sightedness by those who run the country. Once the two major political parties grow tired of punting the negative gearing debate around, they will no doubt pick up Hayne’s final report like a political football and continue their embarrassing mudslinging match until the last vote has been counted.

This is the real threat to the Australian mortgage industry; Hayne’s recommendations, on their own, pose little risk to the stability of the lending landscape and the viability of thriving, popular markets like the mortgage broking channel. But in the hands of politicians who will stoop to great depths to win a federal election, the recommendations from the royal commission could be catastrophic.

Here are a few things to look out for when the final report is published on 1 February:

Customer living expenses

The latest research from Digital Finance Analytics (DFA), which involves a survey of 52,000 households, has reported that approximately 40 per cent of home loan applications were rejected in December 2018, up from 8 per cent in December 2017. It’s fair to say that lenders have tightened up considerably.

One area that the royal commission focused on during 2018 was customer living expenses, specifically the use of the Household Expenditure Measure (HEM).

Clarity on mortgage broker duties

In his interim report, Commissioner Hayne noted that it is not clear what would be the content of a “customer first” duty for mortgage brokers.

“In particular, it is not clear how this form of duty is intended to differ from the duty to act in the best interests of the client that the Corporations Act imposes on financial advisers. Nor is it clear, if the two forms of duty are to be given different content, why the duty a mortgage broker owes to a borrower should differ from the duty a financial adviser owes a retail client,” he said.

Hayne made these remarks after considering evidence given to the royal commission in the form of a letter from former CBA chief executive Ian Narev to Stephen Sedgwick. The letter outlined that broker loans were associated with higher leverage, are more likely to be interest-only, have higher LVRs and higher interest costs than those originated by the bank directly.

“There is no reason to doubt the accuracy of these findings,” Mr Hayne said. “They were the findings that ASIC recorded in its Review of Mortgage Broker Remuneration published in March 2017.”

The big questions

In the 10th chapter of Hayne’s interim report, he posed 15 questions about consumer lending, which he will presumably clarify via recommendations made in the final report next month. These questions should be front of mind for anyone working in consumer lending.

As you will see, there is a clear focus on the role of the intermediary, the role of the lender and the responsible lending guidelines outlined in the NCCP Act:

• What duties does an intermediary owe to a borrower?
• What duties should an intermediary owe to a borrower?
• How can entities’ systems be improved to detect and prevent breaches of responsible lending obligations by intermediaries?
• Are “introducer” programs compatible with responsible lending obligations?
• Do broker contracts, as they stood at the time of the hearings, meet the statutory requirement imposed by Section 912A of the Corporations Act 2001 (Cth) to have arrangements in place to manage conflicts of interests? Do broker contracts, as now made, meet those requirements?
• What should be disclosed to borrowers about an intermediary’s obligations to the lender and to the borrower?
• What should be disclosed to borrowers about an intermediary’s remuneration?
• What steps, consistent with responsible lending obligations, should a lender take to verify a borrower’s expenses?
• Do the processes used by lenders, at the time of the hearings, to verify borrowers’ expenses meet the requirements of the NCCP Act? Do the processes now used meet those requirements?
• Should the HEM continue to be used as a benchmark for borrowers’ living expenses?
• Is the offer of a credit limit increase, where the customer has consented to receive such marketing, consistent with the NCCP Act obligation not to provide credit that is not unsuitable for the customer, having regard to their requirements and objectives?Is the offer of a credit limit increase based only on information held by the bank about a customer a breach of the NCCP Act obligation to take reasonable steps to verify the consumer’s financial situation?
• When an employee or intermediary is terminated for fraud or other misconduct, should a licensee inform their clients of the reason for termination?
• When an employee or intermediary is terminated for fraud or other misconduct, should a licensee review all the files or clients of that employee or intermediary for incidence of misconduct?
• Are certain types of add-on insurance, by their nature, poor value propositions for customers?

[Related: Post-RC tightening would dim hopes of housing recovery: KPMG]