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The future of Lo Doc loans / responsible lending laws

Marty McDonald - Saturday, November 27, 2010

Having a look a Lo Doc loans today and how they will be affected by the new responsible lending laws that took effect for brokers in July 2010 and will take effect for lenders from January 2011.

Is this the end of Lo Doc loans in Australia? 

In practice this means a borrower who cannot provide a full 2 years tax returns (1 year with a select few lenders) and trading reports will have to prove their income via other documentation. It appears most first tier lenders are going down the business activity statement (BAS) path as an alternative for verifying income. Most first tier lenders come 01/01/2011 will require the borrower to provide their last 12 months BAS statements to show their businesses turnover. From business turnover and the industry the borrower is in the lender will "guess" at what is a maximum reasonable profit / income for the borrower, if the borrowers income declaration is less than the lenders maximum estimate of profit / income then the loan will be acceptable, if the borrowers declaration of income is greater than what the lender thinks is reasonable the loan will be declined. Some other lenders will be asking for business bank account statements and letters from accountants to achieve a similar result.

There are still be lo doc loans available through 2nd and 3rd tier lenders with less documentation required however it remains to be seen how they will overcome the "take reasonable steps to verify" requirement. Perhaps they will just rely solely on an accountants letter? Adelaide Bank who I would class as a first tier lender have so far not brought in requirements for BAS statements, they seems to have received legal advice that an accountants letter solely is sufficient verification. However the way I read ASIC's guidelines, this will not be in the spirit of the law and if challenged I think this would be deemed insufficient verification. Also just because a lender says one form of verification is acceptable we have the ridiculous situation of the broker also having to be satisfied that the verification is adequate. A legal and ethical mind field to be sure, however over time I am sure these requirements will be watered down as they will be unworkable in the real world if followed to the extreme letter of the law.

The responsible lending law changes will definitely be bad news for self employed borrowers who's businesses trade a lot in the cash economy and  who also have low turnover / profit on their books. Borrowing money is going to be much harder and or more expensive for them. They will certainly pay more in term of interest rates if they do not have the appropriate alternative documentation to support their income declarations such as BAS statements and business bank account statements. On the positive side the changes should mean there are less "risky" loans in the system and small business consumers should be protected from themselves.To use a sporting idiom, at the end of the day I don't think its the end of lo doc loans but it will certainly shake things up a bit. I am pretty sure lo doc loans are almost a thing of the past for borrowers seeking loans from first tier lenders (the big 4 at least). This will be music to the ears of non bank lenders who traditionally dominated this market before the credit expansion of the major banks in the mid 2000's. Lo doc borrowers who take a lot of cash in their businesses will be paying more like commercial rates of interest on their home loans, around 2% pa.more than standard borrowers. If they don't like it the onus will be on them to get their books and tax returns in order for at least 12 months.

So what now for those who need a Lo Doc loan?

Well I guess you either have to pay a bit extra or as I mentioned above get your books in order for at least 1 year. True Lo Doc loans will be unlikely to be priced at the same rates as full doc loans for the time being..


Regards,

Marty McDonald

About the Author: Marty McDonald is principal of mortgage broker “Mortgage Experts”. Marty specialises in assisting active property investors with loan structuring advice and implementation as well as helping credit worthy borrowers with slightly outside the box income and employment situations. Find Marty on and LinkedIn.

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