Regulator changes rules, catches out bank

The regulator announced yesterday that Bank of Queensland has been forced to improve its lending practices following concerns about the way it assessed mortgage applications.

It followed ASIC’s decision last November to update Regulatory Guide 209 to make it clear that credit licensees must inquire about the consumer's current income and living expenses to comply with the responsible lending obligations.

ASIC’s concern with Bank of Queensland was that the lender was using a benchmark figure – the Henderson Poverty Index – to estimate the living expenses of mortgage applicants rather than asking borrowers about their actual expenses.

This practice was not consistent with responsible lending obligations imposed by the National Credit Act, according to ASIC.

“Bank of Queensland has updated its home loan application forms to obtain more information about a customer's living expenses,” the regulator said.

“The bank will carry out an assessment of the suitability of a loan using the higher of either the living expense figure supplied by the customer or an appropriate benchmark figure.”

ASIC’s decision to update Regulatory Guide 209 came in response to a landmark court case involving a payday lender, The Cash Store, and its funder, Assistive Finance Australia.

The Federal Court found the two firms guilty of breaching their responsible lending obligations in what was the first judicial decision on the application of the responsible lending provisions.

ASIC put into evidence 281 loan contracts that it selected at random – and the court found that on 99 per cent of occasions The Cash Store and Assistive Finance failed to make a preliminary assessment in accordance with the National Credit Act.

QED Risk Services director Greg Ashe forecast several months ago that this legal decision would give ASIC the confidence to be more aggressive this year.

Mr Ashe said ASIC had always assumed that credit licensees were obliged to inquire about a borrower’s current income and living expenses – but that the exact legal position had been unclear until the Federal Court ruling.

"I think we will start to see a focus on the average broker, with ASIC asking what they're doing about enquiring into their clients' living expenses ... because this is some new material for ASIC to go out with," Mr Ashe said.

ASIC acknowledged Bank of Queensland’s cooperation in resolving the mortgage lending issue.