ASIC has released Review of ‘low doc’ home lending following the introduction of the responsible lending obligations (REP410).

Separately, low doc lending was recently considered by the Supreme Court of NSW in Bendigo and Adelaide Bank v Stamatis [2014] NSWSC 1233 (discussed below).

ASIC’s review of 12 lenders found that lenders had tightened their ‘low doc’ lending practices since the introduction of the responsible lending laws in the National Credit Act.

The report found that:

• Lenders are providing ‘low doc’ loans to a narrower range of borrowers. ‘Low doc’ loans are only being offered to the self-employed or those who do not have a readily verifiable income, rather than borrowers with a regular income stream that can be readily verified by documents such as payslips.
• Lenders are obtaining additional information to verify a self-employed borrower’s income, such as business bank account statements and/or letters from accountants.
• Lenders have additional processes in place to ensure the reliability of information provided by mortgage brokers.

ASIC identified a number of ongoing compliance risks, including:

• poor-record keeping, including not recording the outcome of inquiries into borrowers’ requirements and objectives, and the relative priority of these objectives
• lenders relying solely on benchmark living expense figures rather than taking separate steps to inquire into borrowers’ actual living expenses
• lenders performing limited verification of borrowers’ ongoing fixed expenses for other loans they may have.

The Appendix contains ASIC’s suggestions for credit licensees to reduce their risk of non-compliance with the responsible lending obligations.

In Bendigo and Adelaide Bank v Stamatis [2014] NSWSC 1233 the mortgagors challenged the bank’s security over their home in respect of a loan mainly for their son’s benefit. The bank and its brokers were criticised for omissions in their paperwork. The trial judge found that the loan was unconscionable, that the son forged his parents’ signatures and that the parents did not ratify his execution.

The loan and the mortgage were set aside subject to requiring the mortgagors to repay the portion received for their direct benefit.

Justice Hulme made the following incidental comments:

“230.I should add that I have not found it necessary to rely on the fact that the granting of the loan in respect of which the Plaintiff sues was in wholesale disregard to guidelines that the Plaintiff had laid down for the granting of loans….It is sufficient to say that the breaches of the guidelines included loan serviceability (both annually and over its term), income verification, some of the guarantor, and a number of the documentation, requirements.

231.It may be conceded that the object of these guidelines will primarily have been to protect the Bank but they do provide a standard of reasonableness against which the documentation and conduct in this case may be judged.

232.Nor have I found it necessary to rely on the apparent failure to comply with the requirement that “100 points of ID required prior to settlement”. It is mind boggling that such ID investigation as was done, if any, appears not to have extended to checking the signatures against the signatures on the driver’s licence and passport provided for that purpose.

233.My conclusion also makes it unnecessary for me to deal with the other matters relied upon by the Defendants. However, I might observe that although in s 9(2) of the Contracts Review Act, attention is directed to matters largely different from those I have relied on in finding unconscionability, the ones on which I have relied provide fertile ground for a finding under s 9(1) that the $440,000 contract was unjust.”