Borrower code needed in responsible lending
The ASIC/Westpac case in responsible lending has highlighted that there should be some level of onus on the borrower to ensure integrity in the lending process.
Weighing in on the debate, SocietyOne CEO Mark Jones said the judgement brings back some balance into the discussion around how banks assess a customer’s capacity to repay a loan.
For Jones, the “pendulum over time” has swung too much towards the lenders, where “banks and finance companies have been asked to do more and more”.
“We have reached the stage where the amount of work we do to satisfy ourselves that our customers [are viable borrowers] is so much that the truth becomes a burden,” Jones said.
Drawing on overseas experience, Jones said that the onus should also be on the borrower to tell the truth about their expenses.
In the United States, borrowers have the obligation to tell the truth otherwise it is considered fraud. New Zealand’s Code of Responsible Borrowing sets out what borrowers are expected of them and while voluntary shows their commitment to borrowing responsibly.
Jones said his business has been impacted by borrowers not being entirely honest with their loan obligations which has involved a lot of time with the Ombudsmen. Although these cases were “outliers” it is an issue the wider industry does need to address.
“Over time the onus has been on the bank to prove that the customer was telling the truth. We need to get a bit of balance into the equation between the lender and the borrower,” he said.
He also took aim at the push for greater scrutiny of transaction expenses adding that some logic was now needed.
“Scrutinising historical expenses in a greater amount of detail does not indicate that a borrower can afford the loan in the future,” Jones said.
There needs to be both an obligation for a lender to act reasonably and equally for a borrower to think about their own situation
Indeed, in a now widely published statement around his decision on the ASIC responsible lending the case Judge Perram said while he may eat Wagyu beef everyday, he would make on more modest fare if he really wanted a new home.
A simpler example for Jones is around school fees.
Assessing historical expenses can’t track for example, if a child is to start private school education or when they leave school.
“Unless there is an expectation in the community that banks need to do a huge amount of work to understand a borrower’s detailed position, there needs to be both an obligation for a lender to act reasonably and equally for a borrower to think about their own situation.”
SocietyOne which just marked its seventh birthday last week has managed to achieve a track record in managing a quality loan book.
According to Jones, the loan book of Australia’s largest consumer lending fintech – it has written $690 million in personal loans to date – has outperformed its peers including the big four on loan quality.
Here Jones is careful to emphasize that the business does target the affluent sector and therefore “we would expect to be better”.
While it uses traditional data sets such customer data information and the HEM, it also uses its proprietary technology.
As a fintech consumer lender it uses sophisticated algorithms to assess the creditworthiness of applicants using a far greater range of data points than traditional lenders.
It was also the first financial institution in Australia to launch “risk-based pricing” in 2012. This involves using the individual credit history and other data of applicants to calculate personalised interest rates, based on their complete financial circumstances and ability to repay.
Jones’ comments come at a time when ASIC has already kicked of the first of its two-week public inquiry into responsible lending. The second hearing is scheduled in Melbourne on Monday.
In Society One’s submission it said that it favours a more principles-based approach rather than a prescriptive guidance.
“We find that there are many complexities in relation to the variables considered in performing a credit assessment and feel it would be challenging for ASIC to produce regulation or detailed guidance factoring in all the nuances that apply across the spectrum of credit providers and credit products,” the submission said.