In a speech given to the Australian Securitisation Conference yesterday, ASIC commissioner Cathie Armour encouraged residential mortgage-backed securities investors to invest with lenders that surpass the minimum standards of the responsible lending provisions by focusing on offering suitably-priced loans.
“Responsible lending should not be a static, mechanical process devoid of common sense, nor a checkbox exercise,” she said.
“It should be a dynamic, evolving process that looks to continually improve credit quality through the adoption of new practices and new technology, underpinned by basic common sense.
“Investors in residential mortgage-backed securities should be looking to those lenders that make this commitment to ongoing improvement.”
Ms Armour said such investors should also be cautious of investing in mortgage pools with a significant proportion of low-doc loans, now commonly referred to as ‘non-confirming loans’.
Low documentation loans, or low-doc loans, are loans that can be obtained through the presentation of alternative documentation to traditional full documentation loans.
They are most often accessed by self-employed borrowers who find it difficult to provide the conventional proof of income needed to satisfy the lender’s loan suitability and credit assessment criteria.
“It must be said that the idea of a loan provided to a consumer after taking less than reasonable steps to verify the consumer’s financial situation (by obtaining and reviewing reliable documentation) is fundamentally incompatible with responsible lending,” said Ms Armour.
“Investors should be wary of the additional credit and regulatory risks that low-doc loans involve.”
She warned investors to be particularly astute when looking into residential mortgage-backed securities opportunities at this time, as the high level of household debt is increasing mortgage stress.
“As we begin to see some examples of mortgage stress, particularly as interest rates rise, it becomes more important for investors to be discerning about the securities they invest in,” she said.
“Investors must consider how the mortgage lender goes about lending responsibly.”
For investors who have already felt the sting of investing with lenders that had breached responsible lending practices, Ms Armour offered some hope.
She highlighted that although responsible lending provisions are not designed to protect residential mortgage-backed securities investors, ASIC’s commitment to protecting consumers under the National Consumer Credit Protection Act “affords investors some secondary protection”.
According to Ms Armour, ASIC will take into consideration the detrimental impact failure by banks that either issues residential mortgage-backed securities or sell loans to issuers of the asset class has on investors during its ongoing responsible lending work.
She said ASIC was committed to continuing its surveillance of lenders to ensure credit assessment processes are compliant with responsible lending provisions. This includes the surveillance of lenders that offer residential mortgage-backed securities.
“Following our work, we have seen the participating credit providers improve their processes for the collection and verification of information about the consumers’ financial situation,” she said.
“Industry can expect these kinds of surveillance activities to continue, and regulatory action to follow where breaches of the responsible lending provisions are identified.”