Understanding and verifying your client's true living expenses is a fundamental part of your Responsible Lending obligations under the NCCP Act.
The Australian Securities and Investments Commission (ASIC) has determined that using benchmark indicators such as the Household Expenditure Measure (HEM) alone is not consistent with these obligations as benchmarks do not provide any information about the individual consumer. This means you must make and evidence your enquiries about clients' living expenses. ASIC's guidance on your responsible lending obligations can be found here: RG 209 Credit licensing: Responsible lending conduct | ASIC. Additionally, it is important to note that the high living expense figure displayed in ApplyOnline is not an error but is determined by the lender’s policy and rules applied through ApplyOnline’s gateway. This system calculates Total Monthly Living Expenses based on these rules and includes them in serviceability alongside Total Net Monthly Income and Total Monthly Commitments.
Ascertaining client living expenses
As a rule of thumb, lenders will request a breakdown of expenses including (but not limited to):
Food
Utilities - gas, electricity, water
Phone and internet changes
Motor vehicle / public transport costs
Insurances - House and Contents, Health, Income Protection etc
Entertainment
School and education
Rates
Any discretionary spending Note: When entering expenses as weekly amounts in ApplyOnline, the system converts them to monthly figures by multiplying the weekly cost by 52 (weeks) and dividing by 12 (months). For example, a weekly expense of $100 would be calculated as: $100 × 52 ÷ 12 = $433.33 per month.
Understanding your target client
A common question is where does this stop and start, and to what extent are you expected to verify the information that the client has provided to you?
Remember that you are in the best position to understand your target client. If your client is an early twenties first home buyer, then they may not have dependents and school expenses. But if your target client is double income, middle class with two children in private schools, then you know that their expenses will be higher.
Given your expertise with your target client, you will begin to understand average living expenses for those clients. If they appear to have very low expenses, or conversely, very high expenses, you can initiate an informed and educated discussion about what they included in their monthly figures.
Transaction statements
Best practice for a Connective Credit Representative means collecting and retaining three months of transaction statements, regardless of the loan purpose. You are not expected to cross check each supermarket debit with the amount the client has declared on their monthly break down for grocery expenses. However, you do need to ensure that figures you rely on for your preliminary assessment are correct. To ensure compliance with Responsible Lending obligations, consider the following steps:
Make inquiries and take reasonable steps to verify the customer’s actual living expenses.
Obtain evidence such as bank statements or Open Banking data.
Discuss spending habits with the client to understand their financial situation.
Record verified amounts for each expense category and enter the total monthly living expenses consistently in loan application systems.
Ensuring Consistency Across Systems
When using multiple systems like Mercury and ApplyOnline, it is essential to ensure that the verified total monthly living expenses are consistent across both platforms. If you update the information in one system, make sure to reconcile it in the other so that both reflect the same verified amount.
Addressing Compliance Warnings
Preliminary Assessment
If living expenses appear alongside the mortgage in the Preliminary Assessment, mark the relevant checkbox and add a comment in the Actions Summary stating that the living expenses information is contained within the document. This will resolve the review note.
Compliance Tab Warnings
If the Compliance tab flags living expenses as “out” even though they are at or above the HEM benchmark, enter a note in the relevant field explaining that the expenses are not below HEM based on your assessment. For lenders using specific HEM benchmarks (e.g., NAB), verify the current benchmarks with the lender’s reference or your BDM to ensure alignment. If ApplyOnline flags declared living expenses as below the HEM benchmark but the lender’s servicing calculator shows they have passed, add a comment in the compliance declarations. For example, state: "In our lender’s servicing calculator, living expenses passed." This clarification will allow the submission to proceed despite the warning.
Isn't this financial planning?
We have often been asked whether this falls into the realm of financial planning? The thing to remember is that collecting information from a client on their spending habits is not providing them with advice. If you were to tell your client how much they should be spending in each category, then that would fall into the realm of giving financial advice.
Discretionary spending and deductions
If you need to have a conversation with your client about their discretionary spending, treat this in the same way as you do for discretionary deductions from the client's income.
For example, a client may make additional payments to super, or the social club, purchased leave, etc. Most clients are aware, especially if they are buying, that those discretionary items will need to be cut out or cut back in order to afford the loan.
Charity donations are considered discretionary spending and the client needs to understand that sometimes it is not always possible to keep up those discretionary payments in order to afford the loan.
Our Needs Analysis incorporates these items and it is important that you have a conversation with your clients about their living expenses.
There's more information about the steps you can take and tools you can use within Mercury Nexus to verify your clients' financial circumstances in these articles: Supporting documents to verify your clients' financial position and identity | Connective Wiki Open Banking | Connective Wiki Bank Statement Technology Policy for Connective Credit Representatives | Connective Wiki
FAQs
Are living expenses assessed against the HEM benchmark regardless of how they are entered? Yes, living expenses are assessed against the HEM benchmark whether they are entered manually or sourced via Open Banking. What should I do if a client’s declared living expenses are lower than the HEM benchmark? Do not rely solely on the HEM or the client’s declaration. Verify the actual living expenses using evidence such as bank statements or Open Banking data, and record the verified amounts in the loan application systems.