David Jacobson1 March 2017

RESPONSIBLE LENDING: STRATEGIES TO SUFFICIENTLY VERIFY EXPENSES

Topics

Looking at the best ways to adequately determine the expenses of a borrower

Ensuring the borrower doesn’t overestimate their worth

Using benchmarks and infometric lending criteria –how does this meet legislative requirements?

Correctly including general living expenses

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What is the ideal?

What lenders want

Reality

Solution

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How do you do the assessment?

In undertaking the assessment, you must:

(a) make reasonable inquiries about both the consumer’s requirements and objectives and their financial situation; and

(b) take reasonable steps to verify the consumer’s financial situation.

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The 2 benchmarks benchmark testing is required

consider actual expenses against benchmark

Regulatory tightening

regulatory tightening of loan assessment procedures and responsible lending criteria after Cash Store

benchmarks do not replace the requirement to make actual inquiries about a consumer’s financial situation

What are reasonable inquiries?

the obligation to make reasonable inquiries and take reasonable steps to verify information is scalable — what you need to do to in relation to a particular consumer will vary depending on the circumstances.

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What do you look for? main expenses

variable or discretionary expenses

any existing debts to be paid from loan

the age and number of dependants the consumer is supporting

the consumer’s assets: property or cars they own

reasonably foreseeable or predictable changes

geographical factors

Joint borrowers using joint assessments for sole borrowers

A guarantor?

Cash Store case

Wholesale failure in lender’s process

ASIC methodology

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Variation between consumers all consumers

PAYG employees

self-employed consumers

refinance

reverse mortgagors

small amount borrowers

vulnerable consumers

Automated tools

Credit decisioning software

Comprehensive credit reports

CCMC report

Nimble

Inconsistent information

Consumer information differs from your information

Consumer information is outside standard range

Is information up to date?

Information from third parties

Conduct spot checks on brokers

Do not rely on third party information if you have reason to doubt it

APRA and housing loans

APG 223 – Residential Mortgage Lending

APRA expects borrower’s actual living expenses are higher than benchmarks

Apply prudential buffer

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Banking Code

COBP Review Report and responsible lending

Change cls 27 COBP

The approach of FOS: errors by FSP

look at the consumer’s current credit card balances, rather than the credit card limits.

the consumer’s living expenses are understated or based on an incorrect assumption about the consumer’s household (for example, assuming the consumer is not married, or does not have dependants).

The FSP does not take into account the amount of rent that the consumer will pay while their home is being built.

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CIO’s views more than just a snapshot of consumer’s current

financial position

include information that allows the person making the assessment to form a view on whether the consumer’s financial position could change during the term of the loan (and if so, how)….

Go beyond a checklist if initial inquiries prompt further inquiries

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Keeping records

keep a copy of all quotes, preliminary and full suitability assessments for funded loans and a record of all material that forms the basis of an assessment of whether a credit contract or consumer lease will be unsuitable for a consumer

Compliance monitoring and training

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What should you do? Use an index to estimate customers living expenses.

Also ask customers for their actual living expenses (Customer Stated Living Expense).

Compare the 2 figures with the higher amount then being used to calculate serviceability.

Adjust for actual and foreseeable circumstances, inconsistencies, scale for income plus buffer

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ENQUIRIES:DAVID JACOBSON07 3878 5098djacobson@brightlaw.com.auwww.brightlaw.com.aulearn.brightlaw.com.auDISCLAIMERYou should not act on the basis of this information without obtaining your own specific legal advice.