Will the Combined Industry Forum’s reforms be enough to lift standards and improve the issues identified?
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Inadequate verification of a customer’s expenditure was one of a number of “troubling issues” raised about the home loan process during the first hearing of the banking royal commission Tuesday (13 March).
Karen Cox, coordinator at the Financial Rights Legal Centre in Sydney, said the organisation speaks to more than a thousand people a year in relation to their home loan. Most of them call because they are struggling to pay, she said.
No matter which channel the loan was initiated through, there was “a lack of questions and verification about expenditure”, she said.
While the income side was calculated appropriately, the expenditure side was not. She said the centre has observed that very broad questions about expenditure are asked, expenses are not broken down and a benchmark is used instead of the consumer’s actual expenses.
“There is also very little evidence that expenditure has actually been verified in any way,” Cox said.
“You really need to see what a person’s expenses are to determine to what extent they are able to afford to keep up with that loan without substantial hardship.”
Over the last two to three years, she said an increasing number of people have been calling about interest-only loans. When asked why they got an interest-only loan, there was often no explanation, she said.
Cox moved on to talk about broker-initiated loans specifically. She said there are problems with people being upsold a larger loan than was necessary or being steered into loans with more expensive features than were required.
“At the worst end of the spectrum we see consumers’ details being massaged or even completely falsified by brokers,” she said.
When asked if the centre receives a larger proportion of people calling in regards to hardship with loans originated through brokers, Cox said it is difficult to estimate. “But I would say that the larger proportion of problematic home loans we see have been initiated through brokers, and that we see people much more likely to be in trouble on broker-initiated loans.”
Industry already working to lift standards
The Combined Industry Forum (CIF) released its recommendations on commissions last December, attempting to satisfy the government, ASIC, consumers and brokers. It will continue to work ahead on these reforms even as the banking royal commission and Productivity Commission continue.
The group proposed amending the standard commission model with the objective being to “avoid financial incentives that encourage consumers to borrow more than they need or will use, for example by basing commissions on facility draw down net of offset”.
It also recommended that volume-related and campaign-based bonuses be phased out by the end of 2017, an issue identified in ASIC’s remuneration review as potentially giving brokers increased incentive to put customers in larger loans.
Some of the other reforms proposed include: lenders reporting back to aggregators on ‘key risk indicators’ of individual brokers; trail being withheld if a loan is more than 60 days in arrears, or if it was calculated using inaccurate and fraudulent information; and brokers and aggregators needing to disclose ownership above 20%.
The CIF has also defined a ‘good consumer outcome’ for the first time. It describes this as when “the customer has obtained a loan which is appropriate (in terms of size and structure), is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan”.
