What the law requires for responsible lending is currently mess. To say that the requirements are scalable is no doubt correct, but working out what to do on a practical level is very difficult. Should bank statements be obtained every time? What else is compulsory given the law is not prescriptive in this regard?
There’s been lots of recent statements about responsible lending, but very few answers. ASIC is now calling for comments on their approach to responsible lending in RG209, and it appears new guidance will not be available until 2020.
In the Westpac case, ASIC alleged Westpac breached responsible lending laws by relying on a computer program which assessed living expenses using a HEM Benchmark scaled for the borrower’s geographic location. However, evidence showed that most of the 261,987 loans processed using this method would have been approved even if the declared expenses were taken into account. 5,041 loans would have been referred for assessment had the declared expenses been used, but there was no evidence before the court whether any of the 5,041 loans were, or were not, actually unsuitable for borrowers.
In light of those circumstances, it is easy to see why the court could not assess whether the agreed penalty was appropriate.
Although the key outcome from ASIC’s action against Westpac alleging a breach of responsible lending laws is that courts will not approve settlements unless satisfied that the agreed penalty is appropriate, many interesting observations emerged.
The key takeaway is that the concept of ‘one rule fits all’, such as methods of acquiring and verifying information, is not required by law. Arguably, blanket rules can’t apply because each borrower is unique.
Commissioner Hayne’s interim report was scathing of banks who did not verify living expenses using bank statements. It is likely that ASIC’s update to RG209, when finally issued, will suggest the use of bank statements to verify expenses in all cases.
No doubt there will be many more changes before there is clear guidance.
In the meantime, there is a great opportunity for brokers to show the value they bring to a transaction. All brokers need to lift their game to show that they are acting in their customer’s best interests and be ready to efficiently and accurately investigate customers’ requirements and objectives and assemble the information required by lenders.
Key tools include clear and open customer communication, effective check lists, and a critical eye to spot issues before submitting deals.
Commissioner Hayne acknowledged that brokers making a written assessment that a loan is ‘not unsuitable’ is an appropriate standard. ‘Not unsuitable’ is a critical term. It’s not the best loan (even Houdini can’t produce that from his hat), but it is one that will not put customers into substantial hardship. The MFAA’s Code calls it an appropriate loan.
Guiding customers through the labyrinth that is the Australian home loan market and putting the borrower’s interest ahead of their own will go a long way to showing the value that mortgage brokers bring to the home loan market and in particular borrowers.
Elise is a banking and finance partner at Dentons, the largest global law firm. Elise is part of the technology, regulation and compliance team and advises banks, non-bank lenders, aggregators and mortgage brokers n consumer and commercial credit regulation, compliance, distribution and licensing.
Elise takes a solution-focused approach to legal issues.