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New Responsible Lending Rules in the making cont.

This week saw the end of the public hearings into responsible lending to identify the updates to the Guidance.

Here are some key highlights from the Melbourne hearings.

The day began with the Consumer Action Legal Centre:

  • Argued that, for the consumers with whom they deal, there is no way for them to tighten their belts after the receipt of the loan;

  • There is very little assessment of discretionary spending, even though the industry has a wealth of data on the consumer’s past behaviour;

  • There should be guidance around minimum level inquiry (this echoes many of the calls from the Sydney hearings last week.);

  • Mortgage brokers should be able to be trusted to give the right loans;

  • People are unlikely to make complaints because it does not seem worth it because they don’t believe they will get satisfactory results.

Next up was the Consumer Credit Legal Services WA:

  • Concerned that lenders don’t look adequately at indebtedness of prospective borrowers;

  • Thinks bank statements are good starting point for the financial situation to be verified;

  • Banks tend not to be intrusive at the application level but at the point when the borrower is making a claim for financial hardship;

  • Challenged the ‘tick the box’ approach to the application process;

  • Mortgage broker-initiated loans should be double-checked by lender;

  • Distinctions of financial hardship; and

  • Customers who are not in a vulnerable situation at the start of their loan can often find themselves in a vulnerable situation.

Then we heard from Lixi Limited, responsible for the standards and categories lenders have been using to assess potential borrowers in a standardised way:

  • They explained the 12 existing lixi categories can compared like-for-like with the Household Expenditure Measure; and

  • The standards and the categories developed for members in the industry are voluntary so they cannot comment on how widely their categories are used.

Next was the Melbourne Institute that developed the widely-used HEM:

  • HEM developed in 2010 to replace the Henderson Poverty Line (HPL), the measure banks were using to assess whether borrowers were above or below the poverty line; and

  • Indicated the problem with the HPL was that it was dependent on just one figure that did not acknowledge variability in households.

The hearings moved on to brokers and broker aggregates with Mortgage Choice:

  • Brokers with the standard approach to categories by lenders have reworked their categories according to the lender and are happy for ASIC to prescribe an industry standard in this space;

  • Lender calculators are a black box for mortgage brokers; and

  • Don’t use hem but use bank statements.

Then Connective:

  • Highlighted the variation of standards when it comes to loan application approvals by the lender;

  • Also use bank statements;

  • Said that loan-like products that don’t fall under the National Consumer Credit Protection Act 2009, like After Pay and Zip Money, can pose issues in assessing borrowers’ expenses;

  • Do their own fact-finding re the HEM, since not all lenders are using this as a measure; and

  • Are looking for a minimum base of inquiry concerning the HEM.

Then Australian Finance Group:

  • Concerned that too much forensic investigation into consumers’ financial situation might be time consuming and painful for the consumer;

  • Believe that borrowers can do some tightening if they need to;

  • Don’t see HEM as benchmark for financial hardship but as more as a plausibility benchmark; and

  • Challenge is that borrowers understate their expenses.

The hearing then moved onto Australian Financial Complaints Authority:

  • Made mention of the report they released earlier this year that indicated that, in eight months, they have received 54,000 complaints with 18,000 of those related to credit card, home loans and personal loans;

  • Over 2300 complaints specifically pointed to responsible lending;

  • Rules and guidance should not be watered down;

  • Looking for clear separation in guidance when dealing with consumers and when dealing the small businesses;

  • Do not call for more prescription but more illustrative case studies; and

  • More definition around scalability and the minimum requirement of inquiry.

Then on to Auscred Lending:

  • Want something more principles-based rather that prescriptive;

  • More definition around the concept of ‘suggestion’;

  • Have called scalability of verification for prospective borrowers with known history; and

  • Suggests that macro prudential changes have impacted the borrower stability for certain products.

The day concluded with two members of the big four, starting with National Australia Bank (NAB):

  • Argued that bank statements don’t make for easy categorisations;

  • Have stripped to 6 categories to make 16 categories of 10 categories to improve engagement with consumers;

  • Argued that discretionary expenses are hard to identify; and

  • Agreed with brokers that greater standardisation would improve the process for lenders and brokers.

Australia and New Zealand Bank (ANZ)

  • Have 14 categories instead of the 16 of NAB and, like NAB, use the measure that is comparable to NAB;

  • They don’t seek a deep forensic investigation borrowers’ financial history;

  • Processing a prospective buyer has gone up and the bank is attempting to bring it back down;

  • Do income verification against the HEM; and

  • Believe that consumer will tighten up their belt post loan.

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