PROPOSED UPDATE TO RESPONSIBLE LENDING STANDARDS
By Rebecca Lowe
Last week the Australian Securities and Investment Commission (ASIC) released a draft consultation paper, proposing to update the responsible lending conduct standards imposed on lenders. The current guidance document has been in place since 2010 when the Responsible Lending Laws were first introduced, however with changes in technology and the recent final report from the Royal Commission, ASIC believes it is timely to review and update the document.
Some of the proposed changes in the consultation paper include:
Reduced reliance on HEM (Household Expenditure Measure) and other benchmarks
ASIC want to reduce lenders reliance of HEM and other benchmarks. HEM is a commonly used benchmark by lenders to determine a conservative level of household expenditure.
While ASIC acknowledge that automated systems and tools, including benchmarks, are useful in determining the likelihood of financial hardship, they are not to be a substitute for making reasonable inquiries into the borrower’s financial situation. In addition, where benchmarks are used, these are expected to be reasonable and lenders should look to reduce the proportion of their loan book that relies on these benchmarks.
Provision of a list of inquiries and verification steps considered reasonable
Currently the lending conduct standards document does not have minimum requirements regarding the inquiries and verification steps lenders must take. Initially the rationale behind this was to prevent less scrupulous lenders from ignoring other relevant issues that fell outside the minimum legislative requirements.
ASIC are proposing to now update the document with additional information to clarify areas which potentially remain a source of uncertainty.
Verification of a borrower’s financial position
While the current guideline lists a number of examples of the type of information that can be used to verify a consumer’s financial position, ASIC is concerned that this list gives lenders the impression that they do not need to take other steps or request additional information to verify the borrower’s financial position.
ASIC now want to update the document to expand their guidance on the types of information that can be used to verify a borrower’s financial situation and include a non-exhaustive list of the information that can be used.
Credit conditions have been tightening for some time now, with many lenders already having taken steps that address many of the proposals in the consultation paper. And while the proposals are not expected to largely change current lending standards and the availability of credit, the proposals will provide greater clarity to lenders on their obligations in meeting the lending requirements and likely create a more level playing field between bank and non-bank lenders.
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