The Royal Commission released their interim report last week from the investigation into Misconduct in the Banking, Superannuation and Financial Services Industry. The report has called into question how buyers are assessed for loans and is likely to mean serviceability will continue to tighten.
The report also called ASIC into question for failing to police the banking sector and highlighted issues with the way both bank workers and mortgage brokers are remunerated.
The 1,000-page report covers the first four rounds of public hearings, which focused on consumer lending, financial advice and SME loans.
One of the biggest headlines to come from the report was that banks and financial advice businesses collected over $1 billion in fees for advice that was never given, something Commissioner Kenneth Hayne said was the result of “inexcusable greed”.
“Too often the answer seems to be greed – the pursuit of short-term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?” the report reads.
The three-volume report resulted in 693 questions posed to the banking, financial services and superannuation industry. The questions included whether the current Household Expenditure Measure used by banks to assess suitability for 75 per cent of all loans is still viable, and if not what should replace it, whether bank employees should continue to be rewarded for selling products and how intermediaries should be remunerated.
The new ABA Code of Practice
As a result of the Royal Commission, ASIC has already approved the Australian Banking Association’s new Code of Banking Practice (COBP), set to commence operation on 1 July 2019.
The COBP focuses on new rights and regulations for consumers and businesses when it comes to lending and financial advice.
“In short, bankers have re-committed themselves to their responsible lending obligations,” said Nick Bendel, RateCity.com.au’s property editor.
“They’ve promised to be ‘diligent and prudent’ when assessing applications for new loans or increases in existing loans. Oddly, they’ve said they will ‘do this by complying with the law’,” he said.
This includes not approving co-borrower arrangements unless they’re convinced co-borrowers “understand the risks” and “are not experiencing financial abuse”, and eliminating fees and commissions on lender’s mortgage insurance.
The COBP will also see the independent Banking Code Compliance Committee investigating any alleged breaches of the code, make findings and recommendations relating to breaches and apply sanctions.
ASIC has also revealed it will publish the findings of its home loan shadow shopping exercise and the review on loan fraud in 2019.
How will buyers fare?
Despite serviceability becoming a topic of concern for buyers, and agents across the country reporting slower approval times on financing, Mr Bendel says agents shouldn’t fear the Commission, the COBP or any further restrictions on the horizon.
“It’s possible lenders will become a little stricter when assessing loans, which would make it harder for buyers to qualify for finance,” said Mr Bendel.
“But banks are in the business of lending money. They want to issue home loans to your buyers. So it’s possible nothing will change, or that lenders will tighten their credit policies in the short term but then loosen them when the heat’s off.”
In the short term, as the industry awaits the full fall-out of the Commission, agents should be urging buyers to allow plenty of time in case of financing complications, but also to be aware of factors which may affect their ability to secure financing.
@realty Finance Lending Channel Manager Raj Ladher says one of the biggest issues buyers face is accidentally tainting their credit score by applying with too many lenders.
Mr Ladher said borrowers also need to be mindful of ‘false’ pre-approvals from lenders.
“Some lenders do not fully assess the pre-approval and it is merely system-generated, which would have a higher fallover rate.
“Lenders are also constantly changing their policies, which means some pre-approvals may fall into old criteria and become null and void,” he said.
Mr Ladher said obtaining a pre-approval means that the bank has assessed the individual but not the value of a property.
“To navigate this potential issue, we would recommend getting a fully assessed pre-approval and organising a bank valuation on the property as soon as you finalise the purchase price,” he said.