Assessing your client's living expenses
By Bae Bastian
baebastian@ozemail.com.au
ASIC recently published amendments to Regulatory Guide 209 about the inquiries to make to support the conclusion a proposed credit product is not unsuitable. ASIC replaced phrases such as "for a given transaction" with words like "in relation to a particular consumer". It placed the spotlight firmly on the need for appropriate assessment of the specific needs and circumstances of the individual consumer.
At RG209.33, ASIC makes it clear appropriate inquiries may include inquiries about the individual client’s discretionary spending. This means relying on published indexes, such as HPI or HEM, is not enough - you need to make inquiries about a client's actual living expenses.
COSL's Position
In its Position Statement 5 on Responsible Lending the Credit Ombudsman Service Limited (COSL) said:
"A licensee may use the figures obtained by the calculator to verify a consumer's self-reported living expenses, but it should ensure that it makes reasonable inquiries about the consumer's actual living expenses prior to relying on such information."
(http://www.cosl.com.au/publications
/position-statements/position-statement-5/)
FOS's Approach
The Financial Ombudsman Service (FOS) recently published its Approach to Responsible Lending. In relation to the use of benchmark living expense figures, FOS says:
"We expect an FSP to add a buffer to the expenses estimated by the published index (that is, they should estimate higher expenses). This is because most published data records an individual’s minimum expenses. If a consumer has income lower than those minimum expenses, the consumer would be living in poverty, and FSPs (financial services providers) should expect consumers to live comfortably above this level."
(http://www.fos.org.au/publications/our-approach/the-fos-approach-to-responsible-lending/).
FOS provides case studies that highlight the relevance of correct assessment of a client’s individual financial goals and current living expenses.
• In FOS Case 282649, FOS considered a lender had not acted responsibly when it offered a car loan to customers who were approaching retirement and had little equity in their home because it gave no consideration to how they would make a substantial balloon repayment in five years' time
• In FOS Case 302478, FOS considered a home loan was unsuitable as, after refinancing their existing debts, the borrowers would not have had sufficient funds to achieve their objective of constructing a home on their block of land
(http://www.fos.org.au/resolving-disputes/decisions/)
In FOS's case study of Will, a 20 year old living at home who wanted to buy a car, the lender relied on the information Will provided in his loan application and its own generic data to determine his living expenses. By obtaining the loan and buying his car, Will's debt increased from $10,000 to $50,000. FOS considered the lender did not meet its responsible lending obligations because:
• It did not contact Will's employer or make inquiries about Will’s needs and objectives (other than to have a high performance car)
• If the lender had contacted Will's employer, it would have discovered he was only casually employed and his income was mainly based on incentives
• The lender failed to make any inquiries about Will’s employment opportunities and how he might repay the substantially higher debt he was incurring
• The lender failed to take into account Will's future expenses if he moved out of home, which was a reasonable prospect for a 20 year old and
• Will had no savings, so his expenses must have been greater than the generic data the lender relied upon.
Some of these factors would not be disclosed in a loan application, but FOS obviously expects a holistic consideration of a client's needs and objectives that may include specifically considering whether the estimate of living expenses is realistic.
To meet your responsible lending obligations, you need to be alert to whether the calculation of a client’s living expenses is realistic given what they have told you about their current circumstances and their plans for the future.