Post on 19-Mar-2017
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.