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.
Ascertaining client living expenses
The easiest way to collate this information is to use the Needs Analysis in Mercury which has a section specifically devoted to understanding your clients living expenses. Refer to About Questionnaires and Managing Questionnaires in your Opportunity.
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
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.
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: