New Comparison Rates Regulation

The comparison rate warning has been reviewed.

There will now be a short warning and a long comparison rate warning. The shortened warning can be used in credit advertising however the long warning must still appear in the comparison rates schedules. The warning should be given in the same form as the comparison rate unless the advertisement is on television, the Internet or other electronic display medium. The two warnings are alternatives (that is, either can be used).

The short warning is as follows:
'WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.'

The previous warning in regulation 33C has been adopted as the long warning without amendment. Download the regulations.

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ABS Lending Finance stats

The ABS has released its lending finance statistics for November 2004.

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ASIC gives 2005 Pie in the Sky financial scheme awards

ASIC has given its 2005 Pie in the Sky Award for outrageous financial schemes to
a so-called 'interest-free loan' that was offered to Queenslanders, with 220 people investing $2.4 million in The Carsworthy Scheme. People were told if they purchased a car through a car buyers club, and borrowed a little more from their financier and invested it offshore, the high returns would repay their car loans. In fact when the offshore investments failed to deliver promised returns, people were left to find their own repayments, often for very high loans which they would probably not have otherwise entered into.

For the runners-up, go here.

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APRA warns: “Bad loans are made in good times”

APRA Chairman John Laker recently gave a speech on the Australian Banking Industry.(PDF)

Key comments included:

Over the past five years, the total assets of the banking system – and here I include building societies and credit unions – have almost doubled but prudential indicators confirm that the system has, throughout, remained in very sound condition. Profitability has been strong, impaired assets are at cyclical lows, the system is well capitalised and, broadly speaking, risks are being prudently managed.

Faced with a slowdown in housing lending and strong competitive pressures on margins, banks and otherdeposit-taking institutions will obviously be looking elsewhere to generate returns... In the current environment, there is no room for complacency in lending practices.

Complacency can take a number of forms, and we in APRA have been seeing some more than we would wish. One sign is the setting of ambitious business plans and growth targets for housing lending as if recent years’ achievements can be readily repeated. Myopia, in other words. With growth in housing credit as a whole slowing, such targets can only be met by winning market share from competitors. Institutions will put themselves under undesirable pressure to dilute credit standards or to mis-price for risks if they seek to attain the unattainable.

Another sign is slippages in basic lending practices - in “bread and butter” banking. In housing lending, they cover such matters as:

• failure to independently verify customer data, particularly debt servicing ability, where loans are originated via mortgage brokers and other third-party channels;
• the use of various informal means of property valuation for loans on which lenders would traditionally require formal valuations;
• inadequate information systems which cannot capture electronically vital loan information for management and for reporting to APRA; and
• unsatisfactory error rates in compliance with the terms and conditions of lenders’ mortgage insurance.

The need to maintain robust credit assessment processes in household lending is reinforced by the reality that debt servicing burdens of households are now at record levels and that banks are no longer relying on conservative rules of thumb when assessing a borrower’s capacity to repay debt.

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