Connective’s national manager of risk and compliance has called on brokers to verify and document client commitments to reduce discretionary spending post-settlement to demonstrate compliance with responsible lending.
Ahead of the release of the Australian Securities and Investments Commission’s (ASIC) new responsible lending guidance (RG209), the regulator questioned stakeholders regarding the validity of what was described as “belt-tightening” measures – commitments from borrowers to adjust their spending behaviour post-settlement – and whether they could be considered in a serviceability assessment.
Some stakeholders, including chief executive of the Financial Rights Legal Centre Karen Cox, strongly rejected the use of belt-tightening commitments in the approval process.
Ms Cox questioned the level of rigour involved in assessing home loan applications under existing arrangements and cast doubt over lenders’ ability to adequately asses a borrower’s capacity to adjust to changes in their financial circumstances.
The legal rights advocate accused some lenders of failing to engage in active conversations with borrowers about their ability to service a loan, claiming that some credit providers were too reliant on benchmarks.
“I’d be very worried about even endorsing the concept of belt-tightening to be honest,” Ms Cox told ASIC.
“I would worry that lenders would then take comfort in that and say, ‘It’s OK that their expenses are high, we’ve had a belt-tightening discussion’.”
Despite such concerns, ASIC’s new guidance has permitted the consideration of lifestyle changes when assessing serviceability, provided that credit representatives or licences seek further information from applicants.
“If the consumer will need to make spending reductions and lifestyle changes to meet the financial obligations of the credit product, you may need additional information to enable you to determine whether the credit product will meet the consumer’s requirements or objectives,” ASIC noted in its new guidance.
“There may be some lifestyle changes the consumer would not be prepared to make to afford credit.”
In a webinar hosted by Connective to discuss the new guidance, national manager of risk and compliance Amanda Stirling urged brokers to ensure they keep records of belt-tightening discussions with clients to demonstrate compliance with responsible lending.
“The new RG209 actually references that a lot of customers will reduce their living expenses in order to service the loan, which is a new concept as far as ASIC is concerned,” she said.
“From our brokers perspective, a customer may be on a lifestyle at the moment where there’s a lot of discretionary expenses, which, in order to service the loan, they will reduce.
“[But] it’s about getting a commitment from the customer, not making any assumptions that the customer will without having a conversation, and importantly, really documenting that conversation and getting that customers feedback and buy-in that they will be reducing those expenses.
“If it’s a credit card or a personal loan, you would want to see something formalised, saying that the credit card has been closed down and cancelled so that you’re not taking it into consideration as part of the living expenses or existing liabilities.”
Ms Stirling went on to stress that belt-tightening considerations would not apply to non-discretionary spending.
“Obviously, with discretionary expenses there is an ability to cut and to change those expenses, there’s no ability to change mandatory expenses – your baseline expenditure for living.
“Things like utilities, can’t be cut out.”
This follows the introduction of guidance regarding the new best interest duty for brokers.
ASIC has stressed that information-gathering obligations in compliance with responsible lending are separate to obligations under the best interests duty.
According to the regulator, the process of compliance with responsible lending may be used to demonstrate compliance with the best interests duty but that such information alone “may not be sufficient to allow a broker to determine what credit assistance would be in the consumer’s best interests”.
ASIC is seeking public comment on its draft best interests duty guidance by 20 March 2020 and intends to publish final guidance before the obligations commence on 1 July 2020.