LAWS2201-4605-Christian Mikula Low Doc L

Slide 1: 

1 The Dangers of Low Documentation Lending 12 October 2007

What This Talk Will Cover : 

2 What This Talk Will Cover What is low doc lending? What is predatory lending? When can low doc lending become predatory lending?

What This Talk Will Not Cover : 

3 What This Talk Will Not Cover Who should regulate credit? Results or observations from any ASIC investigations

Characteristics of Predatory Home Loan Lending : 

4 Characteristics of Predatory Home Loan Lending Vulnerable consumers: urgent need for finance. Interest rates: 10%/month, 15% on default. Business purpose declarations required, irrespective of actual purpose. Court action immediately on default. Short term loans: 1-12 months.

Characteristics of Predatory Home Loan Lending : 

5 Characteristics of Predatory Home Loan Lending Lender conducts no/minimal inquiry into capacity to repay. Limited or no capacity to repay without refinancing loan or selling home. Intermediaries: arrange loans with little regard to capacity to repay, to earn fees/commissions.

Definition of Low Doc Lending : 

6 Definition of Low Doc Lending Originally, self-certification supplemented not replaced assessment of capacity: “[Borrowers’] financial statements or their tax returns may be dated, so what they do to complement getting a loan is they go through a self-certification process but they would be supported by all other documents relevant to the loan, a financial position statement and assets and liabilities.” - Peter Hall of Gemworth Financial, House of Representatives Inquiry, Transcript, p 9.

Changes in Overall Lending Environment : 

7 Changes in Overall Lending Environment Reliance on third parties to originate loans. Gradual relaxation of debt serviceability criteria. Wider availability of higher risk mortgage products involving higher loan-to-valuation ratios or self-verification of income sources. Movement towards alternative (desk based) property valuation methods. These factors influence the nature of low doc lending, and its broadening scope.

When does low doc lending become predatory : 

8 When does low doc lending become predatory Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413 No income disclosed for Mrs Elkofairi (Applicant) or Mr Elkofairi. Accountants letter provided for Mr Elkofairi only. “the total absence of any financial information … and the fact that no income was stated for either Mr or Mrs Elkofairi, should certainly have sounded a warning bell to a lender in respect of any borrowing, let alone a borrowing in the order of three quarters of a million dollars.” [Paragraph 55]

When does low doc lending become predatory : 

9 When does low doc lending become predatory Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41 Loan managed by RESIMAC Application assessed by Australian Mortgage Wholesalers AMW approved loan in breach of RESIMAC guidelines.

When does low doc lending become predatory : 

10 When does low doc lending become predatory Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41 “Given the fact that the plaintiffs were pensioners and that the Loan Application submitted to RESIMAC did not include sufficient evidence of the plaintiff’s employment or income, or full details of the loan purpose, this was a case which called out for simple inquiry of the plaintiffs as to whether or not they had been independently advised.” [Paragraph 29]

Low Doc Lenders and their Borrowers : 

11 Low Doc Lenders and their Borrowers PMI Australia states it will only provide Lenders Mortgage Insurance on a low doc loan where: Primary applicant is not a PAYG borrower, and Borrower must have had an ABN for their business, usually for a minimum period of 2 years.

Low Doc Lending and Brokers : 

12 Low Doc Lending and Brokers Brokers can use limited inquiries by lender to arrange inappropriate loans: "the increased reliance on third party mortgage originators and brokers to originate and, in some cases, perform the credit underwrite on a loan application has led to increased risk associated with residential mortgage lending. These parties' interests are often misaligned with the ultimate credit provider and LMI provider in the sense that they are remunerated on a commission basis and bear no real risk associated with the loan defaulting."- Genworth Submission to Inquiry, p 3

Low Doc Lending and Brokers : 

13 Low Doc Lending and Brokers "We have had a number of issues with some brokers whereby they will shop around from valuer to valuer until they get someone to give them the right price for whatever the right amount of money is." - Grant Warner, Australian Property Institute, Transcript p 35.

Low Doc Lending and Brokers : 

14 Low Doc Lending and Brokers “APRA has found that some lenders were less diligent in verifying borrower information on broker-originated loans than they were on branch-originated loans and is addressing this issue through its routine supervision process [of ADIs].” RBA and APRA Submission to Inquiry, p 5.

Low Doc Lenders and Approval Processes : 

15 Low Doc Lenders and Approval Processes Automated loan processing environment may mean that form prevails over substance: “Genworth Financial has reviewed hundreds of loan files in the past 12 months. Based on that review, we believe that the industry has, in an increasing number of cases, adopted a "tick and flick" mentality and failed to apply appropriate rigour and robustness in implementing appropriate procedures to verify or validate the accuracy of information contained on a loan application form." - Genworth Submission to Inquiry, p 3.

Low Doc Lenders and Approval Processes : 

16 Low Doc Lenders and Approval Processes “If you think about the early 1990s, 1992 and 1993, most of the players that I think are probably the cause of such interest or changes and the more innovative approaches that were mentioned did not even exist. So the truth is this is the first downturn in a cyclical sense where a lot of the non-ADI players have actually even been in existence. The lack of that experience base is an issue.” - Hon Nick Greiner, Chairman Elect PMI Mortgage Insurance, Transcript p 10.

Low Doc Lenders and High Risk Applications : 

17 Low Doc Lenders and High Risk Applications Refinances to consolidate are higher risk lending, as there is a higher default rate on owner occupied loans that were refinanced (Report, Paragraph 4.21). Borrower may have equity in family home, accumulated due to increase in property values during period of first loan. If they default then on Elkofairi and Khoshaba principles the lender is at greater risk of being characterised as lending on security if there were matters in the application to put it on notice in some way

Defaulting and Refinancing : 

18 Defaulting and Refinancing Refinancing may not be the best response to financial hardship: 'Only a small number of lenders proactively identify instances of borrowers in financial difficulties.' - Genworth Submission to Inquiry, pp 5-6.