Some years ago we witnessed the emergence of Lo Doc (low documentation) loans. Initially, these were offered only by non-bank lenders, but as their popularity grew, mainstream lenders, such as banks, introduced Lo Doc loans to their suite of products.
A Lo Doc loan is one where the borrower self-certifies their income. This means that they provide no evidence of income to substantiate their capacity to service the debt. The lender relies solely on the income declared or self-certified, by the borrower to assess their ability to service the debt.
A Lo Doc loan was always designed for self-employed borrowers who either could not or did not want to provide evidence of income by providing copies of their last two years’ tax returns. Originally, there was a significant premium on the interest rate paid by the borrower as well as restrictions placed on the use of the funds. Once again competition amongst lenders led to the relaxing of lending policy, resulting in the mis-use of these loans. The Global Financial Crisis put an end to this reckless lending.
The premium paid in interest rates was high for self-certified loans because the lender believed they were taking a greater risk in lending money to a borrower who was unable to confirm an income source. While these loans have now disappeared from the lending landscape, it’s not improbable that we may see some form of return in the future.
It is important to note that a Lo Doc loan is not an opportunity for a borrower to misrepresent their income. The signing of a statutory declaration signifies that the borrower does earn the income expressed in the loan application. Anyone who knowingly submits a loan application by a borrower who has overstated their income is guilty of many offences, including mortgage fraud that carries severe penalties.
While a form of these loans may still available to self-employed applicants who don’t have updated financial statements available at the time they are applying for lending loan.