Credit scrutiny tougher on broker-originated loans

Brokers are able to match the expenditure requirements of the lender, but the risk associated with the analysis would remain with the broker, according to Mr Kidd.

To eliminate the compliance risk, the Loan Saver director said brokers need to obtain substantial detail about expenditure using bank statements than what customers would be required to provide if they approached the banks directly. 

“A signed budget is in no way acceptable for an expenditure analysis,” the Loan Saver director said. 

Reflecting on recent dealings with lenders, Mr Kidd said that there have been cases where he has included a significant one-off expense in the required analysis, explaining in the notes that it is a one-off expense related to launching a new business, but the lender said the new small-business owner’s expenditure was too high to pass its serviceability assessment. This is despite the customer otherwise having a “clean” credit record. 

“Each lender we discussed the file with indicated that they would follow the expenditure noted on the statement of position. So, even after evidencing the singular expense, they would use the full amount,” the Loan Saver director said. 

“For compliance purposes, including this as a before and after expense would still result in a decline based on servicing.”

Mr Kidd continued: “If the clients go directly to the lender, they don’t need to do the expenditure analysis [using] bank statements. They’ll accept the client’s statement of position and the loan will go through.”

He has noticed that some borrowers have been able to obtain a loan directly through the bank that they could not through the broker. 

If clients have a better chance at getting a loan directly than through a broker, this would impact the channel they choose to use when seeking finance, according to the Loan Saver director. 

“You have to [demonstrate] that it’s not an ongoing expense, so you have to wait three months. But during that period of time, the clients are going directly to the bank and getting approved,” he said.

“So, bank managers are writing loans that were declined through brokers. There’s a widening gap between what can be funded through the lender and what can be funded through the broker.”

Further, the Australian Financial Complaints Authority (AFCA) has been assessing historical cases based on today’s credit policy requirements around expenditure, according to Mr Kidd. 

“AFCA is retrospectively applying today’s assessment criteria to loans written prior to the GFC. This is obviously a cause of concern,” the Loan Saver director said. 

“Brokers that are writing large volumes are at enormous risk of litigation.”

The Adviser has reached out to AFCA to clarify how it assesses historical cases.

[Related: Credit crackdown to offset boost from rate cuts]