Australia: Banking And Finance Update: Refinancing Examined By ASIC

Last Updated: 16 April 2008

ASIC has released report 119 titled "Protecting more than the family home; An examination of refinancing in response to mortgage stress".

The report draws on an examination of a small number of transactions where brokers arranged the refinance of home loans for borrowers in financial difficulties. The paper can be accessed by clicking here.

The report found that there were some vulnerable consumers who were readily inclined to trust brokers who told them that they could arrange a loan that would save their home. These borrowers did not make enquiries into the total cost of the refinance. In some cases, the fees were very high and the borrower was placed in a much worse position.

A key finding of the report is that, for both brokers and lenders, refinancing a loan which is in default is a high risk strategy. That is not to say that the defaulting borrower should not be refinanced – rather it is to say that the lender and the broker must ensure that the whole transaction makes sense for the borrower.

The report encourages borrowers to use brokers who are members of an ASIC approved external dispute resolution scheme, as are all MFAA members. Although not mentioned in the report, it would also be helpful if the lender was a member of such a scheme.

The report noted that some fringe lenders allowed borrowers to enter into a cycle of unaffordable loans where they default and refinance several times until the equity in their home has been exhausted. The majority of brokers involved in the transactions reviewed in the report were not members of an EDR scheme and so borrowers could only pursue compensation through court action.

The report recognises that only a very small number of brokers engage in equity stripping conduct. Brokers can avoid the risk of arranging refinances that are of no benefit of borrowers by:

  • providing realistic information to borrowers in financial stress, including advice that, in appropriate circumstances, their best option is to sell their home rather than refinance;
  • only recommending a refinance where that transaction has appropriate long term benefits for the borrower;
  • making sufficient enquiries to ensure that the borrower can repay the loan; and
  • disclosing the likely repayments, and the total costs and fees of the transaction so that the borrower can make an informed decision.

The report contains the following informative table:

If you are a broker arranging for borrowers to refinance

If you are a lender relying on information from brokers

1. Do not compromise your advice on what can be achieved by refinancing, just because the borrower is desperate. Borrowers in financial stress need realistic information and advice.

2. Ensure that the borrower is better off as a result of refinancing, and only recommend a loan that is appropriate with long-term benefits for the borrower.

3. Make all necessary enquiries to ensure that the consumer can repay the loan, including a detailed assessment of their income, assets and expenditure.

4. Disclose all the costs of refinancing, and all fees and commissions in writing, so that the borrower can make an informed decision.

1. Regularly review your risk management practices.

2. Identify 'high risk' applications and patterns of conduct, and monitor them more stringently. 'High risk' applications include refinances where the borrower is in arrears, and, for non-bank lenders providing low doc or no doc loans, can include refinances of home loans from a bank where the circumstances suggest the borrower may be in default.

3. Use your internal complaints handling procedures as part of this monitoring process.

4. If all communication with the borrower is channelled through the broker, consider whether this increases the risk of fraudulent applications, and adopt appropriate risk management practices.

5. If the broker arranges valuations for you, consider whether steps are necessary to monitor if the broker is valuation-shopping to ensure the estimate of the property value is sufficient to allow the loan to be approved.


Jon Denovan

t (02) 9931 4927


Vicki Grey

t (02) 9931 4753



Deborah Bean

t (07) 3231 1567


Brian McPherson

t (07) 3114 0250



Peter Grotjan

t (03) 9617 8538



Joe Claudio

t (08) 9223 9223


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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