23rd Credit Law Conference

Responsible Lending

Workshop

Chris Green - Senior Manager

Alistair Morton - Analyst

Deposit Takers, Credit & Insurers

October 2013

Responsible Lending - What we will cover.

• ASIC’s review, reports and compliance activities to date.

• Requirements and Objectives – the importance of revealing the consumers needs.

• Identifying and addressing inconsistent financial information.

• Who is responsible? - Interaction between brokers, lenders, licensees, credit reps and point of sale operators

• Low Docs – not a special case.

2

Responsible lending.

• The NCCP places the credit assessment focus on to

the consumer’s individual circumstances.

• Presents compliance challenges, particularly around

high volume credit products.

• Regulatory Guide 209 – Responsible lending conduct.

ASIC’S approach

• Facilitative approach following the introduction.

• More likely to consider enforcement action, given;

– the time elapsed since introduction

– the guidance and reports published

• Where people purposely engage in activities that are

contrary to the legislation, we will, and have, take

action.

• We have undertaken thematic reviews and published

our findings in a number of reports.

Activities to date – Reports &

Reviews

• Report 262 – Review of credit assistance providers

responsible lending conduct, focusing on ‘low doc’ home loans.

• Report 264 - Review of micro lenders’ responsible lending

conduct and disclosure obligations.

• Report 330 - Review of licensed credit assistance providers’

monitoring and supervision of credit representatives.

• Report 358 - Review of credit assistance providers’ responsible

lending conduct relating to debt consolidation.

• Coming soon – Review of credit providers; responsible lending

conduct, focusing on ‘low doc’ home loans.

5

Record keeping

Credit licensees are required to “keep 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 in a form that will enable the licensee to give the

consumer a written copy of the assessment if a request is

made under section 120. 132. 143.or 155 or 155 of the

Act”. (Pro forma 224)

The key concerns we identified were: -

• Insufficient information held on file .

• Timely access to records (including the records of

authorised credit representatives).

Responsible lending obligations

• Reasonable inquiry into a consumer’s objectives and

requirements.

• Reasonable inquiry about a consumer’s financial

situation.

• Reasonable verification of a consumer’s financial

situation.

• Unsuitability assessment.

Responsible lending obligations

Reg Guide 209 lists factors that are relevant to

scalability: -

• Potential impact on the consumer of entering into an

unsuitable credit contract or consumer lease.

• Complexity of the credit contract or consumer lease

• Capacity of the consumer to understand the credit

contract or consumer lease

• Whether the consumer is an existing customer or a

new customer

Responsible lending –

requirements and objectives

• Identifying a consumer's preferences.

– How is this undertaken?

• Does the consumer have enough knowledge to know

what they want?

– Prioritising conflicting requirements.

– Cost of certain features

Scenario - Consider a first homebuyer with minimum

deposit who states “I want the lowest interest rate and

an offset account, please.”

Responsible lending – consumer’s

financial situation

• Income

• Expenses

– Fixed

– Variable (living).

• Do you need to consider other factors?

Scenario – You have a 30 year housing loan application land

on your desk for a assembly line workers who is employed

by major manufacturing company in a regional town. It is

‘local knowledge’ that the factory’s owners are considering

closing the factory down. Any issues?

Responsible lending – consumer’s

financial situation - Income

Income

The level of inquiry and verification is dependent upon

the consumer’s individual circumstances.

• Scenario - You have a consumer who's income

fluctuates, for example you have received two pay

slips which have a significant variance. The loan would

service on the higher pay slip but not of the lower.

What would you do?

Responsible lending – consumer’s

financial situation

• Fixed expenses

– On going contracts or commitments - Generally

financial obligations that a consumer does not

have discretion to vary.

• Scenario - A consumer’s credit application shows a

continuing debt of $40,000 for a vehicle, with

repayments of $600 per month. – What do you need to

consider?

• How far can you rely on credit checks to discharge this

application.

Responsible lending – consumer’s

financial situation

Variable expenses

• making inquiry, and verification – two distinct obligations

• is it reasonable to rely on benchmark figures (and how

do you ensure they are reasonable)

• is it reasonable to rely on a consumer reducing their

variable expenses in order to meet serviceability?

• Scenario - A couple applies for a home loan and

states livings expenses at $2500 per month. The living

expenses need to be $2200 pm to meet the

serviceability criteria.

Responsible lending – consumer’s

financial situation

• Addressing inconsistent financial information.

– How far can you rely on the inquiry?

• Scenario – You attend a consumers’ home, they are a

young couple who are seeking to buy their first home.

They state they have no dependents, however there

are indications that children live in the house. – What

do you do?

Assessment of unsuitability

• The licensee must assess whether the proposed credit

contract will be unsuitable for the consumer.

Scenario –

• Consumer aged 63 currently has a loan at 12.5%, wishes to

refinance at a lower rate (offered 6.5%).

• The consumer would be able to service the loan if the

repayments are based over a 30 year period, based on current

PAYG income.

• The security property is worth about $400,000 and the consumer

has 30% equity.

• Would the loan she has been offered be unsuitable?

Responsible lending – Who is

responsible?

Common relationships

• Licensed broker – Aggregator – Licensed credit

provider.

• Authorised credit representative – Licensed credit

assistance provider – Aggregator – Licensed credit

provider.

• Car yard F&I – Licensed credit provider.

Findings from Report 330 – relying on information from

third parties.

Responsible lending – Who is

responsible?

• Scenario

– A consumer wants to purchase a second hand car, finance is

required and the car yard can assist the consumer with the

finance.

– The consumer wants to pay the car off in 5 years.

– During the course of the sale and the finance discussion the

consumer is offered a number of insurance products, which

he accepts and are financed into the contract.

– The total cost, with the insurances, means the consumer can

not afford the loan over 5yrs and the term is extended to

7yrs.

– The car yard submits the application together with supporting

documents, to the finance company, who approve the loan.

Loans promoted as low doc.

Is there still a place for “Low Doc” in the post NCCP

world?

Is it really “low” doc?

What challenges to responsible lending obligations

present to this product?

Low Doc – Income verification.

Common methods of verifying income.

• Business activity statements

• Business bank account statements

• Statement from third parties (such as accountants)

Serviceability models.

Low Doc – Income verification.

Relying on statements from third parties.

Examples

• “The Applicant has advised me verbally of their current

income and expenses.”

• “In my opinion, the Applicant understands their

obligations under the loan and based on the

information they have provided, the loan will not create

undue hardship.”

What are the potential issues with each of these

statements?

Responsible lending

• Where to from here?

– FOS has recently made its first determination in

respect to responsible lending.

– We will be releasing our report on credit providers’

responsible lending compliance in respect to low

doc home loans.

Other areas of focus: - – Motor vehicle finance.

– Small amount loans.

– Enhancement Act.

• Questions

Responsible lending

• Questions