Page 1814 - Week 07 - Wednesday, 22 August 2007
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Standards for all home loans used to be overseen by the Australian Prudential Regulatory Authority and the Reserve Bank. However, non-bank mortgage providers, commonly referred to as subprime, do not have to meet the regulated standards, simply because they are not deposit-taking institutions. Given this deficiency in regulation, consumers of these products do not receive adequate protection.
My motion today requests that the ACT Legislative Assembly recognise the depths of the problem and calls on the ACT government to implement legislation to remedy it. The legislation which the Greens suggest that the government implement is similar to that introduced by the Greens in 2002 regarding credit cards. We think it is appropriate that the ACT government draft an amendment to the Fair Trading Act, requiring all home loan providers to undertake an assessment of a potential borrower’s capacity to repay the loan before providing them with that product. This is a necessary minimum response to a situation with the potential to further worsen the home affordability crisis that the ACT is currently grappling with. It is the dark side of federal and territory housing policies which emphasise home ownership, so that no-one currently has secure housing unless they have achieved full equity in their homes.
In late 2006, the Consumer Law Centre, CARE, researched the impact of non-bank home loan products on home ownership in the ACT. CARE initiated this research because in 2005 it saw a dramatic increase in the number of clients seeking assistance due to home repossession. CARE found that the increase in home repossession was influenced by a number of practices within the non-bank lending sector, including the use of low doc and no doc home loans by non-bank lenders. CARE will, I believe, be publishing an update to this report in several weeks. From its research to date, it is apparent that the trend has only got worse. While the figures for the ACT are not as bad as those for other Australian states and territories, they are getting dramatically worse. We do not want to be leading a race to the bottom.
Until around a decade ago, non-bank lenders and non-conforming home loans had little place in the Australian home loan market. But the financial deregulation of the 1980s and 1990s saw the arrival of niche, non-bank service providers in several profitable markets. In the last 10 years, non-bank lenders’ market share and non-conforming loans have grown to four per cent of the value of new housing loans, worth an estimated $8 billion. While non-bank lenders make up only four per cent of the home loan market, 68 per cent of actions for repossession in the ACT originate from the non-bank sector.
One must ask why home loans provided by the non-bank sector fail at a much higher rate than loans provided by banks and credit unions. The answer lies in the practice of no doc and low doc home loans, high interest rates and high fees. Applicants for no doc and low doc loans are not normally required to provide proof of income when applying for a loan. However, high-risk borrowers are charged higher interest rates than prime borrowers. Application costs can be as high as $30,000 and early exit fees can be $10,000 or more. These types of loans seem to be targeted at clients with poor credit histories, and are widely publicised. You just need to watch TV to see the number of ads proudly claiming that if the bank will not give you a loan, they will.
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