James Frost| Australian Financial Review| 10 December 2019
Lenders should be asking customers to prove they can save money and afford loans by sending their children to public schools or cancelling their Netflix subscriptions under new responsible lending guidelines released on Monday.
The guidelines have been aimed at clarifying the obligations of lenders after a series of contradictory messages emerged from the courts and the Hayne royal commission over the last two years climaxing with the ‘steaks and shiraz’ judgement in August.
ASIC commissioner Sean Hughes said the examples provided by the regulator were aimed at striking a balance between giving lenders and brokers both maximum flexibility and detailed guidance. He declined to say whether ASIC had modelled the impact of the update on the flow of credit.
“The provision of credit is a decision for a lender and not a decision for ASIC,” Mr Hughes said. “These guidelines have been made to assist lenders make good lending decisions, we are not adding new or additional requirements that do not already exist.”
Mr Hughes said the regulator decided against applying prescriptive minimum standards because the credit risk ultimately lies with the bank and its representatives. A statement from Australia’s top financial regulators last week said that “appetite for some types of lending may have swung too far towards caution”.
In the first major update to ASIC’s responsible lending guidelines since 2014 ASIC is seeking to reduce the instances of consumers being lured into taking on unsustainable loans.
The regulator has included 39 detailed examples to accommodate the changing business landscape which has included new styles of employment and expenses.
In one example provided by the regulator the bank decides that a prospective borrower known as “Sarah” would not be able to afford the loan on the terms requested unless she moves her children from a private school to a public school.
Sarah then asks the bank if she can extend the term of the loan in order to keep her children in her chosen school.
In another example “Leah” applies for a $720 loan to pay for her car registration. After reviewing her spending habits the bank ascertains Leah has spent her entire pay packet every month so Leah agrees to suspend her monthly streaming services in order to service the loan.
Go beyond HEM
Banks are also being told by ASIC to go beyond a basic spending benchmark known as the Household Expenditure Measure or HEM when gauging the reliability of a customer’s submitted expenses.
ASIC concludes the HEM does not include spending on a large number of expenses such as medical bills, counselling services, life insurance, superannuation, HECS debts, lease payments, child support and spousal maintenance.
“It is important that you only use the estimates of spending on the kind of items that are included in the benchmark figure, and not a wider estimate of their total expenditure (otherwise the comparison is unlikely to give you useful information about whether the estimate of the consumer’s ‘basic’ expenditure is realistic),” ASIC said.
Australian Banking Association CEO Anna Bligh said the industry was pleased the regulator had avoided the route of black-letter-law and instead adopted a principles-based approach.
“This is an important document for the industry to guide each bank’s approach to responsible lending which we will now study closely to assess any impacts it may have on borrowing for customers.”
Ms Bligh said the guidelines would help banks focus on delivering appropriate credit in a timely fashion and would remove uncertainty that surrounded small business loans.
“The industry also welcomes ASIC providing greater clarity in some areas, such as where it is difficult to determine income from certain customers, such as small business owners and gig economy workers,” she said.
Muddying the water
Bankers, including NAB chairman Phil Chronican, have complained the regulator’s decision to appeal the famous “wagyu and shiraz” judgment had muddied the water on responsible lending, with the case to be heard by the full bench of the Federal Court in late February 2020.
Justice Nye Perram threw out ASIC’s case that Westpac breached responsible lending laws close to 300,000 times saying a borrower’s historical expenditure habits were not a reliable indicator of loan affordability. ASIC’s Mr Hughes said the guidelines may need to be revised at the conclusion of the appeal.
“We will revisit these guidelines in light of the full federal court judgment, depending on the judgment we may or may not need to revisit these guidelines but it’s too early to say.”
Financial Rights Legal Centre CEO Karen Cox said although the guidelines did not go as far as she would have liked they represented a significant improvement.
“They have made it clear that a lot of current lending practices are not up to scratch, nor do they meet the community or regulator expectations. The days of using the HEM benchmark as a substitute for genuine inquiry and communication with a potential borrower are over,” Ms Cox said.