What is responsible lending?

March 21, 2017

The inaugural Responsible Lending and Borrowing Summit 2017 recently took place on 28 February and 1 March at The Grace Hotel in Sydney. This was a much-anticipated event, organised by Informa Australia after overwhelming feedback indicating the need of a stand-alone event as a forum for banks, other lenders, as well as their legal advisors. SAI Global is proud to be an exhibitor at this conference.

While you may be aware that ASIC has just commenced civil penalty proceedings against Westpac for breaching home-loan responsible lending laws[1], did you know ASIC has in fact been investigating up to 11 banks over their home lending practices, amid concerns loans are being given to people that cannot afford to repay them?[2] The Summit was very timely in that it brought the industry together to explore why responsible lending is important, and how compliance to responsible lending laws helps both lenders and consumers.

So, what exactly is responsible lending?

“Responsible lending” is a reference to the responsible lending provisions of National Consumer Credit Protection Act 2009 (Cth). The key concept here is suitability, for instance, a lender must not enter into a credit contract with a consumer if the credit contract is not suitable for that consumer.

For a lender, to determine whether a credit contract is or is not suitable for a particular consumer is something often easier said than done. At the Summit, ASIC, Australia's corporate, markets and financial services regulator, told us at the keynote presentation that a cookie-cutter approach to compliance is simply insufficient. There are broad classes of lenders and consumers, and lenders have different business models and product types, and they conduct different credit activities. This means different lenders will need to take different steps to ensure compliance with the responsible lending obligations, taking into consideration matters such as the product or service that is on offer, and the unique circumstances of each consumer.

By way of example, a number of Summit speakers talked about the emergence of peer to peer (P2P) lending, and whether such lending would increase non-compliance. In P2P lending, lenders (investors) are matched with borrowers via an online platform. The operator of the platform usually manages the obligations of borrowers (such as the making of mortgage repayments) as agent for the lenders. P2P lending is a fast-growing industry that leverages cutting-edge modern technology, and it challenges the traditional methods of lending. P2P lenders, and other “new age” lenders such as those involved in crowd-funding, will need to carefully consider how they can satisfy ASIC that they comply with responsible lending obligations.

As the 2-day program of the Summit progresses, “process” was a word that was hot on everyone's lips. We live in a world that processes of all kinds are becoming more and more automated, and this includes the process of borrowing money. We learnt from the Summit that automated systems are used to process approximately 97% of applications for unsecured credit. If you find this surprising, did you know that credit cards account for 68% of applications for unsecured credit, and where an automated system is used at some stage of the credit assessment process, 65% of unsecured credit applications are approved?[3] There were a lot of dynamic conversations (at presentations as well as at round-table discussions) on how lenders can exercise the care and skill of a diligent and prudent banker in (for instance) selecting an appropriate credit assessment method and applying it to a borrower to form an opinion on the borrower's ability to make repayments.

The lending process is one process that can be well supported by technology. Imagine this - a lender who can easily search, review and manage commercial information from the likes of the various Land Registry, and effortlessly see the association (or the lack of one) between the home loan applicant and the property proposed to be security. Does this give the lender a much better chance of being responsible, diligent and prudent? The answer is yes. A lender who utilises commercial information management technology is much better placed to follow its responsible lending policies and procedure than a lender that does not have access to the same technology.

At the Summit, ASIC made a point by saying that it wants lenders to demonstrate they have responsible lending practices coupled with good record keeping. Technology that enables lenders to not only conduct inquiries about the consumer and verify the information obtained, but also securely store the information in an easy to retrieve manner is something lenders should look out for.

SAI Global is proud to have participated in this well-attended conference, and to have the opportunity contribute to better compliance in the banking, finance and legal industry. Over 2 days, among many exchanges, industry leaders shared with us how they see the market changing over the next 6 to 12 months, and clients shared with us their stories of how we have helped them analyse commercial information quickly to accelerate their review process and reduce risk of any oversights. Through attending the Summit, we can clearly see industry players can collaborate and support each other, and this can lead to industry-wide efficiencies, better decision making, and risk reduction for all parties.

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[1] See ASIC media release 17-048MR dated 1 March 2017 - http://asic.gov.au/about-asic/media-centre/find-a-media-release/2017-releases/17-048mr-asic-commences-civil-penalty-proceedings-against-westpac-for-breaching-home-loan-responsible-lending-laws/

 

[2] As reported by ABC News on 2 March 2017 - http://www.abc.net.au/news/2017-03-02/westpac-home-loans-asic-court-action/8317750

 

[3] See the January 2017 report of an Own Motion Inquiry by the Code Compliance Monitoring Committee into Code-subscribing banks' compliance with their provision of credit obligations under clause 27 of the Code of Banking Practice - https://www.fos.org.au/custom/files/docs/ccmc-provision-of-credit-own-motion-inquiry-report.pdf