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ASIC has celebrated the success of its responsible lending laws, which it said have delivered improved outcomes for low-doc borrowers.
An ASIC review of 12 lenders found that lenders have tightened their low-doc lending practices since the new laws were introduced in 2010.
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Some lenders previously relied on verbal guarantees that low-doc borrowers could meet their repayments instead of verifying their financial position, according to ASIC.
The result was that some borrowers couldn’t repay their loan, or could only do so by selling their home, it added.
ASIC said one example of the tightening of low-doc lending practices is that banks now perform better checks on information provided by brokers.
Another improvement is that banks now provide 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,” it said.
Lenders also now obtain more information to verify a self-employed borrower’s income, according to ASIC.
The tightening of lending standards has led to a sharp drop in the number of low-doc loans, ASIC said.
The regulator cited APRA statistics, which show that low-doc loans at banks have declined from 6.4 per cent of new residential loans to 0.7 per cent since 2010.
However, ASIC warned that the improvement in lending practices had not eliminated compliance risks.
Risks include lenders that don’t keep proper records or that perform limited verification of borrowers’ ongoing fixed expenses for other loans they may have.
Another risk is lenders relying solely on benchmark living expense figures rather than taking separate steps to inquire into borrowers’ actual living expenses.
Deputy chairman Peter Kell said ASIC has a strong interest in home lending practices and would take enforcement action if it found breaches of responsible lending laws.
[Related: Lender faces $7.7m fines in ‘landmark NCCP prosecution]
