Lawyer gleans insights from ASIC’s IO review

Sophie Grace Legal & Compliance director Sophie Gerber published a blog post on 6 November in which she detailed the regulator’s current review of interest-only home loans.

“The first stage of the review involved the collection and analysis of interest-only home loan data from 16 providers. These providers were a mix of large, mid-tier and smaller banks as well as non-bank lenders,” Ms Gerber said.

“The 16 providers reviewed by ASIC provided $14.3 billion in interest-only lending to owner-occupiers in the June 2017 quarter, which, though still a huge figure, is significantly less than the $19 billion provided in the September 2015 quarter. The drop is likely to be an indication of tighter lending practices in this area, particularly as ASIC continues to scrutinise these lending arrangements.”

Ms Gerber said that interest-only lending is “not inherently bad or unsuitable”, provided that the lending is responsible and entirely appropriate to the needs and resources of the client.

However, she explained that ASIC’s concern about interest-only lending stems from a number of features particular to these types of loans that can lead some borrowers to difficulty.

“The initially lower premiums may be an inducement for borrowers with lower capital or income but will result in higher premium payments once the interest-only period ends. In most cases, the premium will rise to a level beyond what they would have been, had the borrower initially opted for a principal and interest loan.

“ASIC is also concerned that the borrower will pay more over the life of the loan than they otherwise would have.”

The regulator is now carrying out the second stage of the targeted review, which will include a particular focus on individual loan files with a view to ensuring that these types of loans are provided in “appropriate circumstances”.

Mr Gerber said that lenders and mortgage brokers whose files will be reviewed have been selected based on several undisclosed criteria.

ASIC has confirmed that a lender or mortgage broker’s relative share of interest-only lending was a factor in the selection.

“ACL holders, in particular, mortgage brokers and lenders, should ensure that, as with any financial product sold to a client, an interest-only loan is suitable for the needs of the client to whom it is sold,” Ms Gerber said.

“Under their responsible lending obligations, ACL holders should ensure that the loan is affordable for the borrower, and if their client files were to be reviewed, they could demonstrate a reasonable basis for suggesting a client apply for an interest-only loan and should be explicit with the client about the drawbacks of this type of lending.”