Promoted by Loanworks.
Lenders must show that they've taken "reasonable steps" to verify loan applicants' financial data, or face having to justify why they didn't.
That's one of the key regulatory changes being mooted by ASIC in a consultation paper, released in February this year.
The law isn't the problem - adherence is
Commissioner Hayne concluded that the National Consumer Credit Protection Act 2009 (NCCP), which sets out the responsible lending obligations of Approved Deposit-taking Institutions (ADIs) is fine as it is.
But the Commission found that lenders haven't been complying with their obligations.
He said it’s not enough to solely rely on the HEM (Household Expenditure Measure) to tick the verification box. The industry needs to take effective steps to inquire about the borrower’s expenses or to verify the expense information the borrower had given.
"Reasonable steps" and the "if not, why-not" test
While the NCCP Act won't be changing, the regulations which govern responsible lending conduct - RG 209 - probably will.
ASIC said that new technology and processes will allow licensees “to simultaneously inquire into and verify the financial situation of a consumer."
Furthermore, under the proposed changes, lenders that don't utilise available information would need to justify their decision.
Verification in the new world order
Some ADIs are taking heed. Loanworks, a provider of loan origination software and services to the lending sector and a non-bank lender, is turning to aggregated bank data service providers like Mogoplus, to handle the verification of applicants' financial situation as part of their overall loan application assessment process.
Loanworks Director, Business Services, Andrew Duerden said using technology to enable verification allows lenders to upscale their verification mechanisms, without increasing headcount. "In order to remain competitive, lenders may need to replace their manual processes for assessing loan applications with digital automated processes," Andrew said.
Aggregated bank data service providers categorise loan applicants' bank statement data to identify and validate income and expenses. They provide that data to Loanworks, which then assesses it to determine whether or not the applicant can service the loan.
The verification of credit history, income and expenses is part of a wider service offering from Loanworks (the cloud based Loanworks Loans Origination solution) but is separate and distinct from the decisioning process - a condition of adhering to responsible lending obligations.
Loanworks integrates the loan application data along with identity checks, fraud checks, property location and value verification, into the running of what they call the "engine" driving the entire credit process.
The decisioning engine then analyses all of the above data against the lender's loan serviceability and credit rules (i.e. conducting a credit assessment of the loan application) and determines whether the loan application is approved, referred or declined.
A silver lining - millennials
The proposed changes come as lenders increasingly operate in an environment of tightening credit conditions and increased competition, but there are further benefits - beyond compliance - to moving towards a greater focus on technology in the sector.
As lenders embrace technology to enhance verification capabilities, they also open the door to a greater digital presence, and relevance to the increasingly important millennials market who according to Andrew Duerden, are looking for anytime, anywhere digital banking, digital authentication and faster credit approvals.
Verification tech adds up
Lenders who are stepping up their technology use to maintain their viability in the current environment are looking for ways to increase their return on investment.
Service provider Loanworks is responding to the demand, offering a package which it says "has all the attributes that millennials value". They're developing an online application platform that sits on a lender’s website. A loan application can be filled out in about 15 minutes, and approved, referred or declined in 3-5 minutes.
They're utilising aggregated data services not only to verify information to the standard required, but also to collect the data in the first place, speeding up the process for applicants.
They say this gives their customers the edge over those using competing technologies. An applicant using Loanworks’ technology is not required to submit any documentation. However, an applicant using competing technology is.
It remains to be seen what changes ASIC makes to their guidance on responsible lending. Whatever the final outcome, the lending sector is already committed to change. How that benefits them depends on how they face the challenges ahead.