The recent conclusion of the banking royal commission has highlighted that responsible lending practices need to be extended to the auto-finance industry.
The implications of this for entities making car loans is significant as 90 per cent of all car sales are currently arranged through finance, many of which have fallen short of responsible lending provisions.
According to the report it is not enough to use ‘likelihood of default’ as a measure of loan suitability.
Prior to making an assessment on whether a loan is suitable, the licensee must now take a number of steps to ensure responsible lending provisions are met.
These necessary steps include:
- making reasonable inquiries about the consumer’s requirements and objectives in relation to the credit contract;
- making reasonable inquiries about the consumer’s financial situation; and
- taking reasonable steps to verify the consumer’s financial situation.
The third step is particularly important as customers can easily make false or misleading statements about their financial position.
While lenders in the auto-finance industry have taken some steps in verifying an applicant’s income the same has not been done for their expenditure. Instead, they have relied on the Household Expenditure Measure (HEM) despite the fact that the commission found “three out of four households spend more on discretionary basics than is allowed in HEM.”
The commission has suggested that an applicant’s bank accounts and actual transaction data offer a source of income and expense verification far superior to HEM and other estimates.
So how can lenders acquire and use this data to verify an applicant’s financial situation in an efficient and scaleable way?
With the Open Banking regime set to be phased in from July, customers will be able to make their banking data available to service providers of their choice. This offers a significant opportunity in helping to solve the issue of responsible lending as it provides access to real time and historical data.
Basiq is an Open Banking Platform that ensures more efficient and responsible lending based on an applicant’s actual bank transaction data.
This can be done via Basiq's Affordability report which provides a full view of a customer’s financial position by combining and categorising their expenses, income, assets and liabilities across financial institutions into one single view.
This offers a more accurate, time and cost effective alternative to manual credit decision-making while ensuring that the commission recommended steps for responsible lending are being met.
For more on how Basiq’s Affordability can help with better credit decision-making contact
