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Disputes about low doc loans

 

There has been a lot of media discussion lately on banking in the post-global financial crisis climate. A lot of the focus has been on low documentation lending practices - also known as low doc loans. Low doc loans are a credit facility generally provided to people or small businesses that would have difficulty providing all the documentation that is usually required for a traditional loan.

Bringing low doc loan disputes to FOS – things to know

We have received disputes from applicants who say that they were granted low doc loans for amounts that they were not capable of repaying.

If we form the view that the FSP should not have provided the credit, we will assess what (if any) compensation is payable. However, even if we agree that the loan should not have been granted, it is very unlikely that the loan balance will be written off entirely. For this reason, applicants should continue to make payments on the loan while we are considering the dispute. The FSP does not have to stop applying interest or fees, and if an applicant does not continue paying off the loan, these costs will increase.

In order for us to properly review these disputes, there is certain information that we need applicants (or their agents) to provide.

Please tell us everything that you know about the loan

Just as each loan is a separate lending decision that needs to be reviewed and considered on its merits, each dispute that comes to us has different issues and circumstances for us to consider. For that reason, there is no “one size fits all” approach to the information we need when disputes are lodged.  

However, the more information an applicant provides when they lodge a dispute, the easier and faster it is for us to consider the issues. That’s because we don’t need to spend time asking for the information we need.

In the dispute form, we need details including:

  • when the credit was obtained
  • what the credit was used for
  • whether the credit was applied for with the assistance of a broker
  • the reasons why the loan should not have been granted
  • whether the loan is still current, and if it’s not, details on when it was repaid or refinanced.

This information is also useful for us to have:

  • copies of any loan contracts and associated documents
  • details of the applicant’s financial position at the time the credit was provided
  • any other available documentation to support the claim that the credit should not have been provided.

Disputes can be lodged online through our website at www.fos.org.au
 

What happens when the dispute comes to FOS?

This type of dispute is managed by staff with expertise in credit-related matters, who will consider whether it was appropriate for the lending institution – the Financial Services Provider (FSP) – to have lent the money.

If we conclude that it was inappropriate, we will consider what loss the applicant has incurred as a result of being lent the money. Our aim will be to put the applicant in the position they would otherwise have been in, had the credit not been granted. To do this, we will consider the purpose of the loan, how the loan funds were used, and any additional costs that were incurred. We will take into account any benefit the applicant obtained while owning the property; for example, not having to pay rent (or, in the case of an investment property, any rent received from leasing the property), and any claimed tax deduction. We will also take into account the applicant’s actions (or those of the applicant’s agents) and we may apportion liability between the parties.

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