Background
The update to RG 209 has been released by ASIC.
The objective is to promote responsible lending obligations. The release covered scope, inquiries and verification, in particular, assessing credit products and record keeping.
Key Highlights
Whilst some areas remain subject to specific interpretation, there were some key areas that included:
Application
Only applies to "consumer purposes" credit, and not business lending (small or otherwise). The purpose of the loan, and not the borrower type or security provided, is also the key determination of its application.
In terms of processing applications for credit products, responsibilities can be met using online tools or a face-to-face approach.
Inquiries & Verification
Clarification around the extent and nature of inquiries and verification steps needed. Makes reference to customising this based on the customer type (e.g. High Net Worth compared with First Home Buyer) and the type of credit being sought.
Less verification potentially too for existing customers.
Specifies more structure and inquiry where "red flags" of potential harm exists. Must investigate small surpluses, weak net asset positions, excessive transactions after salaries etc.
RG 209 highlighted that inquiries and verification are more than a "point in time" analysis. Income and expenses should be considered in the context of the loan life.
There are a number of pragmatic overtures, especially for the self employed, that were highlighted as good means to substantiate income.
Some guidance about the use of benchmarks (including HEM) as a way to check the plausibility of expenses. Some will still be looking for more direction, but it does highlight the ability to allow for "discretionary expenses". In other words, to consider the circumstances that may change after the credit sought is taken out. "We recognise that consumers will often expect and be willing to make some changes to their outgoings to afford a credit product..."
Lenders are still of course free to set their own guidelines.
Assessing Credit Product Suitability
A context away from point in time, to considering "likely future position". This increasingly positions mortgage brokers as financial advisers.
There is welcome clarification about exit strategies and the role that income generating assets can be applied in assessment.
There is an obligation to demonstrate the link between requirements & objectives, and the features, benefits, cost of the loan product. There are specific examples that address Offset accounts (i.e. where there is a higher rate for offset are their likely to be sufficient savings?) and interest only loans.
"Mortgage Prisoners"
A very proactive commentary about refinancing existing customers to a lower rate loan, who have showed good conduct over an extended period. Whilst there are other factors to consider; "a refinance will be suitable where the customer has regularly made payments on the home loan when they fall due, the amount of repayments will reduce following a refinance to a lower interest rate, and there have been no adverse changes to the customer's circumstances". Over to the lenders here.
Written Assessment
ASIC has prescribed its view of a "written copy of assessment" for which the purpose is to provide the customer with the information to understand how you have assessed a credit product as "not unsuitable". ASIC can also ask for a copy of this assessment at any time.
An example format is provided, and in essence collates many parts of existing processes and disclosures. A little more to play out here.
Summary
The update will not please everyone, especially those looking for a top-down approach and the removal of areas subject to interpretation.
It reinforces and further highlights the need for lenders and brokers to understand their customers, and to act responsibly.
However, many of these developments are opportunities to better segment both customers and situations, and it will be a busy 2020 as lenders respond.
Some sound leadership will be a vital ingredient for the sustainable success of the industry.