RG209 Update: Patterns not Payslips
Key takeaways from ASIC’s update to the Responsible Lending Guidance (RG209).
ASIC has just released an update to the Responsible Lending Guidance (RG209). The update aims to resolve industry concerns and clarify ambiguities around existing rules. We have been busy reviewing the 96 page document, and have identified four key points that validate our mission to provide a complete view of a customer’s financial picture.
Analysing income patterns
Rather than looking at recent payslips, lenders now need to observe patterns in an applicants income to determine their ability to service loans over a longer period. The example ASIC provides is a commercial fisherman who receives an income only during the 9 month fishing season. Simply looking at income from these 9 months will not be sufficient in gaining a full understanding of fluctuations in income. As a result, lenders will not only need to look at income history over an extended period of time, but will also need to analyse transaction data to identify patterns in income.
Supporting the “Gig” economy
Taking into consideration the increasing number of people working in the “gig” economy, the guidelines clearly state that lenders should:
- Identify and classify income as either regular or variable and;
- determine averages over a greater period of time for a more accurate forecast of income. For many lenders, these new requirements will significantly strain resources, by increasing workload and processing time.
Provide borrowers with an assessment report
An applicant can now request a copy of the assessment report from the lender free of charge. While there is already a licence condition to keep a record of all material used to make an assessment whether a product is “not unsuitable”, lenders will now need to have a “customer friendly” version on hand.
Consideration of Lifestyle changes
It’s not just income patterns that lenders will now have to take into consideration. The guidance provides examples where it is necessary to identify spending patterns related to a customer’s lifestyle , as spending may need to change in order to service a loan. Aside from having to review income and expenses over a longer period of time to identify patterns, this brings into question how lenders can verify that the necessary lifestyle changes have been made after loan approval.
The guidance also recommends that Lenders should utilise “digital data capture” services in conjunction with, or even in place of bank statements, to satisfy and verify their lending requirements.
How Basiq can help:
The updates to RG209 highlight current shortcomings in gaining a complete understanding of income and spending. Basiq’s mission has always been to provide a complete financial view of the customer and as a result we have been a step ahead in improving responsible lending practices and going beyond compliance via our Connect and Affordability products.
Ongoing Connectivity to Financial Data
Basiq Connect enables lenders to meet the new guidelines whilst improving efficiency in lending workflows. Using Basiq Connect, a customer can prove that their spending habits have changed if they consent to share their account data with the lender for an agreed upon period of time post-approval. Importantly, this eliminates the need to verify expenses or income using manual payslips and bank statements collated by the applicant, a process that is both lengthy and susceptible to fraud.
With this information, the lender can then refresh the data and run a new income report to ensure, for example, that wagyu beef, fine Shiraz and caviar are no longer on the menu. This is especially important in light of the August ASIC v Westpac judgement.
Verified and Complete Financial View
It is also possible to automate further with Basiq’s Affordability Report which automates the process required to meet the new obligations. The report combines Basiq’s market leading expense categorisation and income calculation to provide a detailed and aggregated picture of an applicant’s financial position based on their actual bank transaction data. Specifically, the report makes it possible to:
- build a complete view of income and spending (based on patterns), across financial institutions, in under two minutes;
- identify red flags which will require further investigation and subsequently;
- drill down further to gain a more in-depth understanding of customers.
- Provide applicants with a ready-to-go, customer-friendly copy of their assessment report.
Editor’s note: Since writing, mortgages and other large personal loans are no longer subject to ASIC’s responsible lending obligations, increasing the focus on borrower responsibility.
These changes are supposed to provide consumers with easier and faster access to credit but this is only possible if the focus on compliance pressure shifts to innovation. Basiq will continue to drive technical innovation to a) make accessing credit easier and b) help customers make better financial decisions.