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Print Chapter 4 (PDF 217KB) | < - Report Home < - Chapter 3 : Chapter 5 - > |
Inappropriate lending
Inappropriate conduct of brokers
Unsecured consumer debt
Financial literacy
Life events
Committee conclusions
4.1 | The RBA estimates that there are 5.3 million housing loans outstanding in Australia. Of these, it estimates 11,800, or 0.22 per cent, are in arrears by more than 90 days. On the positive side these data demonstrate that there is just a tiny fraction of households not paying their mortgage. However, looked at another way, the data reveal that at least 11,800 households might be facing some degree of financial hardship. There are a range of possible causes for this, which will be discussed in detail below. |
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Inappropriate lending |
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4.2 | As a starting point, it is important to recognise that the vast majority of lenders—both ADIs and non-ADIs—conduct business and provide credit in an appropriate way. |
4.3 | It is widely acknowledged that ADIs, in particular, are not involved in inappropriate lending practices. Heidi Richards of APRA stated: |
4.4 | And the majority of non-ADIs also operate in a responsible way. Phil Naylor of the Mortgage and Finance Association of Australia (MFAA) voiced concern that the terms ‘non-banks’ and ‘non-ADIs’ are often used in a pejorative manner.2 Mr Naylor also stated: |
4.5 | The ‘appropriateness’ of a loan is highly subjective and dependent on the calculations and assumptions that underlie it. As noted in chapter 2, there are considerable differences, even within the ADI sector, as to how much a lender will lend. In fact, APRA has reported that the most aggressive ADI will lend up to twice as much as the most conservative. |
4.6 | The same is undoubtedly true within the non-ADI sector—there are lenders who are willing to take on more risk than others by lending greater amounts. The judgement on the appropriateness of a loan varies from institution to institution. |
4.7 | There are, however, cases where lending has clearly been inappropriate. These loans occur within a small segment of the non-ADI sector that preys on vulnerable people through the practice of ‘predatory lending’. This practice involves lenders providing loans to borrowers with no capacity to repay. The lenders charge excessive fees and commissions to establish the loan, and foreclose on the mortgage at the first sign of default. The borrower is either forced to refinance with another lender or to sell their home. In both cases the predatory lender will have stripped a significant proportion of the equity the borrower previously held. |
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4.8 | The Credit Ombudsman Service’s submission outlined what it sees in the marketplace: |
4.9 | Consumer groups report that they receive a large number of complaints from people with non-conforming, predatory-type loans.5 They also report that non-conforming loan products: |
4.10 | In addition to stripping a borrower’s equity in their home, predatory lenders can also diminish a borrower’s superannuation. APRA is required to release a person’s superannuation if the applicant can demonstrate that they face mortgage foreclosure. The RBA and APRA submission reported that applications to withdraw super have increased significantly in recent times: |
4.11 | The Finance Sector Union (FSU) is of the view that there has been, or at least there is the potential to be, an increase in inappropriate lending practices across all lenders because of the role of sales targets. Rod Masson of the union explicated this point: |
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Inappropriate conduct of brokers |
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4.12 | As the number of housing lenders has increased the role of mortgage brokers has become more important. Brokers act as an intermediary between borrowers and lenders, ostensibly trying to find the best deal for borrowers. |
4.13 | Again, it is important to stress that the vast majority of brokers are legitimate. However, evidence to this inquiry suggests that there are some who are not. |
4.14 | The MFAA noted that brokers have little effect on lending practices: |
4.15 | While this may be true there is a concern that lending standards tend to deteriorate when a broker is involved. The RBA and APRA, for example, stated: |
4.16 | The Consumer Action Law Centre also reported problems with mortgage brokers: |
4.17 | During the roundtable Grant Warner of the Australian Property Institute detailed questionable broker behaviour in relation to property valuations: |
4.18 | Carolyn Bond of the Consumer Action Law Centre described that brokers’ livelihood is based on selling loans, which does not meet well with the provision of appropriate advice: |
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Unsecured consumer debt |
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4.19 | There is often an assumption that mortgage defaults and repossessions are the fault of the lender or broker. However, in many cases the borrowers are at fault. Borrowers may, for example, overstate their income to obtain a low doc loan. In other cases they may overburden themselves with unsecured debt to purchase consumer items such as plasma televisions. |
4.20 | HBOS Australia explained that there has been a change in borrower mentality in recent decades: |
4.21 | The accumulation of personal debt often leads people to default on mortgage payments, or alternatively to consolidate debts by refinancing their mortgage. Genworth Financial outlined that refinanced home loans are much more likely to fall into default: |
4.22 | HBOS Australia has observed similar developments: |
4.23 | According to consumer groups some borrowers start at the top of the lending tree with mainstream lenders and refinance their way to the bottom. Karen Cox of the Consumer Credit Legal Centre described this process: |
4.24 | It is argued that one of the problems for lenders is that they have no way of knowing exactly what other personal credit commitments a person has at the time of granting a mortgage. David Grafton of the Commonwealth Bank gave a lenders’ perspective: |
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4.25 | Christopher Maclean of HBOS Australia expanded this point: |
4.26 | There is some discussion at present about introducing more extensive credit reporting arrangements in Australia. Nelson Yiannakou of the National Australia Bank outlined the potential benefits of these arrangements: |
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Financial literacy |
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4.27 | When a person takes on excessive consumer debt or gives false information to obtain a bigger loan, it may be due to a lack of financial literacy. Credit products, and in particular mortgages, can be quite complex. Many borrowers do not understand the implications of decisions about their mortgages. For example, many do not appreciate the huge difference to total repayments that a slightly higher interest rate can make. |
4.28 | Financial literacy is particularly important in a time where more households are taking on more debt. The Bank for International Settlements discussed this issue in early 2006: |
4.29 | David Wakeley of Virgin Money argued that increased financial education is imperative. He further argued that improving consumer financial literacy should be a joint task: |
4.30 | The Australian Government has taken up this task since 2005 with the introduction of the Financial Literacy Foundation. The foundation has developed an easy-to-use website and handbook as part of its Understanding Money campaign. The foundation has also worked with primary and secondary schools, as well as directly with workplaces. |
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Life events |
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4.31 | Another common cause of mortgage difficulty is an unfortunate and unforseen life event. The MFAA argued that in most cases a life event is to blame: |
4.32 | There are a range of unforeseeable circumstances that may affect a borrower’s ability to make mortgage payments, such as job loss, permanent injury or the death of a family member. |
4.33 | Peter Hall of Genworth Financial noted that unemployment rates are above average in the areas where defaults are the highest: |
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Committee conclusions |
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4.34 | Lenders and brokers are very often blamed when a person falls into mortgage default. There are certainly some cases—probably an increasing number—where the lender and/or broker is at fault. |
4.35 | The practice of predatory lending is disturbing. Credit’s regulatory framework should protect borrowers against such practices, but it does not appear to be doing so at present. The regulation of credit and consumer protection for borrowers is the subject of the next chapter. |
4.36 | There is no universal consensus on what constitutes an ‘appropriate’ loan. Different institutions—both ADIs and non-ADIs—are willing to take on different levels of risk. One lender’s appropriate lending practices will be different to the next. While there are big differences between the most aggressive and least aggressive lenders, given that the RBA estimates only 0.22 per cent of loans are in arrears, it is fair to say that in the vast majority of cases ‘appropriate’ lending practices have been undertaken. |
4.37 | Not discounting the incidence of predatory lending, in most cases of mortgage default it is likely that the lender was not at fault. Unfortunate events like job loss, marital breakdown and family deaths do occur. These events have a material effect on a person’s ability to make mortgage repayments. |
4.38 | Another important, perhaps underplayed, factor is unsecured consumer debt. People have an increasing propensity to take on debt to purchase expensive consumer items. If not paid in a timely manner, some of these forms of debt involve large fees and penalty interest rates. Where a person seeks to consolidate unsecured debt into their mortgage, evidence suggests that mortgage defaults become far more likely. |
4.39 | Some lenders have argued that the problem of excessive consumer debt could in part be addressed by introducing positive credit reporting. This would give lenders more detailed and accurate information with which to assess potential borrowers’ creditworthiness. However, there are a range of privacy concerns surrounding positive credit reporting. The committee notes that the Australian Law Reform Commission is currently reviewing credit reporting arrangements as part of its broader review of the Privacy Act. The commission is due to report by 31 March 2008. |
4.40 | It is apparent that some consumers do not fully understand the implications of their decisions when taking on excessive debt. The government’s establishment of the Financial Literacy Foundation appears to be a good step in improving consumer financial literacy. |
1 | Ms H Richards, APRA, Transcript of evidence, 10 August 2007, p. 5. Back |
2 | Mr P Naylor, Mortgage and Finance Association of Australia, Transcript of evidence, 10 August 2007, p. 8. Back |
3 | Mr P Naylor, Mortgage and Finance Association of Australia, Transcript of evidence, 10 August 2007, p. 14. Back |
4 | Credit Ombudsman Service, Submission no. 18, p. 2. Back |
5 | Care Financial Counselling Service & the Consumer Credit Legal Centre, Submission no. 4, p. 3. Back |
6 | Consumer Action Law Centre, Submission no. 8, p. 2. Back |
7 | RBA & APRA, Submission no. 7, p. 9. Back |
8 | Mr R Masson, Finance Sector Union, Transcript of evidence, 10 August 2007, pp. 22-23. Back |
9 | Mortgage and Finance Association of Australia, Submission no. 2, p. 1. Back |
10 | RBA & APRA, Submission no. 7, p. 5. Back |
11 | Consumer Action Law Centre, Submission no. 8, p. 4. Back |
12 | Mr G Warner, Australian Property Institute, Transcript of evidence, 10 August 2007, p. 35. Back |
13 | Ms C Bond, Consumer Action Law Centre, Transcript of evidence, 10 August 2007, p. 36. Back |
14 | HBOS Australia, Submission no. 3, p. 2. Back |
15 | Genworth Financial, Submission no. 6, p. 4. Back |
16 | HBOS Australia, Submission no. 3, p. 2. Back |
17 | Ms K Cox, Consumer Credit Legal Centre, Transcript of evidence, 10 August 2007, p. 53. Back |
18 | Mr D Grafton, Commonwealth Bank, Transcript of evidence, 10 August 2007, p. 58. Back |
19 | Mr C Maclean, HBOS Australia, Transcript of evidence, 10 August 2007, p. 69. Back |
20 | Mr N Yiannakou, National Australia Bank, Transcript of evidence, 10 August 2007, p. 69. Back |
21 | Bank for International Settlements Committee on the Global Financial System, ‘Housing finance in the global financial market’, CGFS papers, no. 26, January 2006, p. 34. Back |
22 | Mr D Wakeley, Virgin Money, Transcript of evidence, 10 August 2007, p. 76. Back |
23 | Mortgage and Finance Association of Australia, Submission no. 2, p. 3. Back |
24 | Mr P Hall, Genworth Financial, Transcript of evidence, 10 August 2007, p. 10. Back |
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