Responsible lending guidelines for customer-owned banks and mutuals
The Australian Securities and Investment Commission has released an updated document called RG 209, which clarifies the responsible lending guidelines for all financial service providers under the National Credit Act.
RG209 – Credit Licensing: Responsible lending conduct – provides clearer guidance around responsible lending obligations following the somewhat ambiguous outcomes of the Banking Royal Commission.
The updated guide offers clarity on principles that should sit behind a compliance framework, and highlights circumstances where ASIC expects lenders to be particularly diligent in understanding the customer’s requirements, and verifying information that they provide to the lender.
illion can help align your processing of customer requirements and verification with best practice, including the use of a multi-bureau approach and accurate income and expense verification.
In summary, RG209 says lenders should:
• Make reasonable inquiries about the consumer’s requirements and objectives in relation to the credit product.
• Make reasonable inquiries about the consumer’s financial situation.
• Take reasonable steps to verify the consumer’s financial situation.
ASIC notes lenders should undertake these inquiries and steps within 90 days (or 120 days for a home loan) before determining whether the credit product or credit limit increase is unsuitable for the consumer, and within 90 days (or 120 days for a home loan) before engaging in the regulated conduct.
In order to comply with these requirements, lenders should obtain ‘reliable information’ to enable them to meet their obligations to assess whether a credit product or increased credit limit is unsuitable for that consumer. They should not engage in the regulated conduct if the credit product or increased credit limit is unsuitable.
Ultimately the purpose of the new requirements is to obtain information for lenders to understand:
• Why a credit product is sought by the consumer, and what terms and features are important to them, so that lenders can determine whether the type, length, rate, terms, credit limit, special conditions, charges and other aspects of the proposed contract meet this purpose, or suggest contracts that do match the purpose for which the consumer has sought credit.
• The consumer’s ability to meet all repayments, fees, charges and transaction costs under the proposed credit product.
The verification requirements outlined in RG209 ensure lenders are considering reliable information when deciding whether a credit product or credit limit increase is unsuitable under the prescribed test of unsuitability.
ASIC says information is only to be considered if it is about the consumer’s financial situation, requirements or objectives and, at the time of the assessment, the lender had reason to believe the information was true, or would have had reason to believe that the information was true if the lender had made the inquiries or verification that was required. Following this process is likely to reduce the risk of unsuitable contracts resulting from mistake or fraud.
ASIC utilises more examples in their updated guide. While these provide quite helpful clarification, they are not intended to cover all scenarios, nor are they intended to be completely prescriptive.
The advice offered in the guide emphasises the need to base the level of inquiries and verification on the individual circumstances of the consumer and to have the freedom to take lesser steps when appropriate.
One example cited is about ‘Kerry’ and her application for a personal loan of $15,000.
She provided the lender with a copy of her bank statements and noted her income and expense information in the loan application. She advised that she had no liabilities other than her credit card.
The lender obtained her bank statements to confirm her income, but did not consider the information contained in the statements for any other aspect of her financial situation. The statements showed that Kerry had recently started making payments to another lender.
It would be reasonable for the lender to identify obvious inconsistencies between the bank statements provided and the application. The lender could not choose to rely on the declaration in the application that Kerry had no other liabilities and ignore the information in the bank statements.
The lender should weigh up both pieces of information to decide what is reliable. If the lender just relied on Kerry’s declaration, there would be a higher risk that it would fail to identify that she is unable to comply with the new financial obligations without substantial hardship, and that the lender is therefore required to assess the loan as unsuitable.
illion can help you align your processing of customer requirements and verification with best practice. Please contact us today.