Page 1820 - Week 07 - Wednesday, 22 August 2007
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So how does this market operate? Generally speaking, low doc or no doc loans are offered to people who do not qualify for a conventional home or personal loan from banks or credit unions because of a poor credit history. These people often include the self-employed, who cannot or do not want to substantiate their income, people with irregular incomes, professional property investors or people who have been rejected by previous lenders, have a limited savings history or have a history of previous loan defaults.
Low doc or no doc lenders have responded to a niche in the credit market where conventional banks and other financial institutions have not been prepared to offer credit services because of their perceived higher risk. Generally, these loans attract higher interest rate payments to compensate for higher risk and are more sensitive to changes in economic circumstances, including changes in interest rates and consumer prices. Typically, interest rates on these types of non-conforming loans are between one and three percentage points higher than standard home loans. That is a significant impost.
Some major banks and credit unions have also expanded into low doc or no doc loans. This market initiative has resulted in some more competitive rates being offered to low doc borrowers, similar to the current standard variable rate for traditional loans, and offer many of the same features. Much of this activity has been in the small business sector, because small businesses often have no collateral, no income or no financial history. However, it does appear that some low doc or no doc lenders have entered the consumer credit market by offering loans to low-income families wanting to buy a home. It is this development that we are most concerned about—the provision of easy credit in the home lending market.
I would now like to turn very quickly to the issue of how these lenders are regulated. Commonwealth and ACT law already regulates the behaviour of lenders and brokers in the consumer credit market, and banks and other credit providers are required to be registered under the relevant commonwealth or ACT law. Finance brokers are required to be registered under ACT law. The conduct of banks, credit providers and brokers is governed by ACT law, which provides that they must not act inefficiently, dishonestly or unfairly. They must not engage in false, misleading or unconscionable conduct, and they must not make false or misleading statements about the provision of credit.
The ACT Office of Regulatory Services has had a low number of complaints about the activities of both credit providers and finance brokers. The complaints generally relate to poor service and fees and charges. In relation to credit card arrangements, because of the high rates of interest associated with these products, the ACT has imposed stringent requirements on credit providers in relation to assessment of a person’s capacity to repay a credit card loan. However, the national Consumer Credit Code also imposes strict disclosure requirements on credit providers. That code has been put in place legislatively by Queensland and has been adopted uniformly across the commonwealth and by the states and territories.
We believe that there are sufficient protections in this code to allow for action to be taken against low doc and no doc mortgage providers who act in a false, misleading or
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