1. Mary Zakaria and Jayd Raffoul
Responsible Lending for Small Amount Credit Lenders
Welcome to the Credit and Investments Ombudsman’s workshop on Responsible Lending for small amount lenders.
I hope you have all enjoyed the day so far.
My name is Mary Zakaria and I have been working at the CIO for 3 years, currently working as a Senior Manager in one of our 5 Credit teams. Previously, I worked as a Senior Lawyer in a private law firm specialising in insurance law and litigation.
Presenting with me today is Jayd Raffoul who joined CIO last year and is a case manager in one of our credit teams.
Mary Zakaria and Jayd Raffoul

2. What’s today about? Inquiries and Verifications
Rebutting the presumption of unsuitability
When CIO uses benchmarks and why
Case Studies
Whilst there are many issues surrounding the responsible lending obligations on small about credit lenders, today we will specifically be discussing three issues which CIO considers to be relevant to lenders of small amount credit and something we see quite a bit of in the complaints that are lodged with us.
Namely:
Inquiries and verifications - what aspects of a potential customers financial situation should a SACL make enquiries into and what should they then go onto verify.
Rebutting the presumption of unsuitability – what should SACL do when a consumer approaches them that has had 2or more SACC in the last 90 days
When CIO uses benchmarks and why
Lastly, Jayd will go over a few case studies with you as no workshop is complete without a test 
We will most likely not have time to answer any of your questions in this session as there is a lot of material to cover, however there is a Q&A session specifically on RL for SACC later this afternoon at 4pm, which I think many of you are signed up for. Please come to the session and raise your questions then.
If you take nothing else from this workshop, I want you take this home. In order to comply with your responsible lending obligations you must all:

3. Make inquiries and verify!!
Make inquiries into and verify the consumers financial information you obtain before you provide a loan – when I say this I mean into both a consumers income and expenses, it us not enough to just one or the other.
As a small amount credit lender, the obligations is on you to make the appropriate enquiries and verify that information. It is not enough to say, well I asked the consumer and they didn’t have any expenses or other liabilities so we placed our standard percentage against it – No, no no!! This is where we see many small amount credit lenders fail in their obligations.
Make Enquiries and verify!
This will be our mantra for today’s session and I will have you chanting it by the end.

4. What are a small amount credit lender’s obligations?
make reasonable inquiries about a consumer’s requirements and objectives
make reasonable inquiries about a consumer’s financial situation,
take reasonable steps to verify the consumer’s financial situation, and
From 1 March 2013
4. obtain statements for accounts into which the consumer’s income is paid into.
The first thing I wanted to discuss was what a SACL obligations are?
Before making an assessment of whether the proposed small account credit contract is “not unsuitable” for a customer, you must do all 3:
1. make reasonable inquiries about the consumer’s requirements and objectives - for example the consumer needs the funds for an unexpected excursion that has popped up for their eldest child. With this requirement in mind you go onto the next point which is:
2. make reasonable inquiries about the consumer’s financial situation – using the same example as above , you would have to make enquiries about the consumer’s income and expenses, which we already know should have associated school fees and at least one dependent. If the results of the inquiries show otherwise, you need to make further inquiries of the consumer based on what you know of their stated requirements and objectives.
It is not enough for a SACL to meet their RL obligations by just making the enquiries, you must also:
3. take reasonable steps to verify the consumer’s financial situation. You need to take the next step and seek further documentation from the consumer to verify both their income and expenses as stated in the loan application form.
From 1 March 2013, a small amount credit lender must also:
obtain statements for accounts into which the consumer’s income is paid into (s 117(1A)).
This is to ensure that consumers are receiving the income stated. However in making your verification you need to consider whether obtaining only one statement from the consumer is enough to determine whether that consumer does not have a separate income stream going into another account or whether other fixed expenses and liabilities are not being paid from another account.
So what must you as SACL do to comply with your RL credit obligations?

5. Make inquiries and verify!!
Excellent, lets move onto inquiries!

6. Inquiries and Verification
What are reasonable inquiries?
Meeting internal guidelines is not a test
What information do you need and what does it tell you?
Requirements and Objectives matter
In addition to ASIC’s RG 209, CIO has published a position statement (Position Statement 5) that runs through key requirements arising from responsible lending provisions and provides guidance as to how we will deal with complaints that a loan or consumer lease was unsuitable.
What is “reasonable” depends on a variety of factors – At its core, RL is about behaving reasonably, and the concept of what is reasonable defines the nature of enquiries that need to be made and the steps taken to verify information.
Understanding what it or isn’t reasonable requires lenders to be responsive to a variety of factors, including the nature of the product and the individual characteristics of the consumer.
Whilst small amount credit contracts are a low value facility, this does not suggest that a lower level of enquiries is required. In reality a consumer seeking a small amount loan may be more financially marginal, and may be exposed to more significant consequences in the event of default, meaning that greater care is required.
Satisfying internal guidelines is not the test - Don’t rely on checklists – Think about the information you need and what it tells you –
The next few points really go hand in hand. Having robust internal lending guidelines, that are designed to ensure compliance with the law, is of course critical, but it is important that lending staff are open to responding to a scenario or information that has not been contemplated, or to adjusting a standard process where there is a need to do so.
When deciding what enquiries to make about financial circumstances there will be a clear objective in terms of the things you want to know, but you may gather material that tells you (or opens up the possibility of) things you weren’t anticipating. Ignoring that additional information, or not pursuing a relevant line of further enquiry, can be risky. Merely gathering information in no way creates a safe harbour.
The key is that responsible lending requires an assessment tailored to the individual consumer, meaning lenders have to be responsive to the individual circumstances of each consumer. It would be far more convenient, and efficient, if consumers all fitted a mould or could be neatly categorised, but that’s not ever going to be the case and the nature of the obligations is designed to reflect that.
R&Os – Finally on this slide: A consumer’s requirements and objectives must be ascertained, but they do not exist in isolation. They serve an important purpose in giving context to an application, context which is critical in determining whether or not a contract is unsuitable, and which can in fact facilitate lending that might otherwise have the characteristics of unsuitability.
Generally speaking, you all feel comfortable with enquiring and verifying a consumers income however what we see a lot with small amount credit lenders is gaps in their assessments when it comes to making enquiries about and verifying a consumer’s expenses.
If a consumer lists that their monthly expenses are lower than what your internal guidelines say a person’s monthly expenses are, or what a benchmark such as HPI or HEM says that the expenses should likely be – what do you do?
You need to make further enquiries with the consumer and obtain information from them which verifies that the consumer’s expenses are in fact lower.
If you made the enquiries and can verify this, we will not look behind your assessment and recreate our own. You will be able to rely on your own assessment in any complaint.
However, enquiries only will not assist you! You must verify the expenses are in fact lower than either your own guidelines or a benchmark.
At this point I do want to stress that benchmarks are not a substitute for actual enquiries. What we are seeing a lot of is small amount lenders relying heavily on their own guidelines and benchmarks without making the enquiries at all.
So what do you need to do?

7. Make inquiries and verify!!
Excellent!! Let’s move onto the presumptions!

8. Presumptions of Unsuitability
Apply to small amount credit contracts:
Where the consumer is currently in default under an existing small amount credit contract, or
Has been a debtor under two or more small amount credit contracts in the 90-day period before the assessment
From 1 March 2013, statutory presumptions were introduced that, in specific circumstances, the consumer will only be able to meet their repayment obligations with substantial hardship.
These presumptions apply to SACC:
where the consumer is currently in default under an existing small amount credit contract, or
has been a debtor under two or more SACCs in the 90-day period before the assessment.
As part of your preliminary assessment, you will need to show that you have not only made the general enquiries noted before, but also that you have enquiries to either show that you have looked into the consumer’s credit history to determine whether they have taken out two or more SACCs in the preceding 90 days or defaulted on another SACC.
These inquiries MUST form part of your preliminary assessment!
Please note that if a consumer has had one or more small amount credit contract in the last 90-days that has since been repaid and then they come to you for another loan – this still counts as the consumer having had 3 small amount credit contracts within the last 90-days. This is also the case whether these loans have been taken out with you or another SACL.

9. What do you need to obtain to rebut the presumption of unsuitability?
Further inquiries into other SACCs
Contact other lenders
Credit Files
Ask consumer
So, what do you need to do to rebut the presumption that the loan is ‘not unsuitable’? What enquiries to need to make to ensure that you have complied with this obligation?
Once the presumption is triggered and you need to rebut it, you should one or more of the following (ASIC Report 426):
Make further inquiries directly with the consumer about any current small amount loans, such as when the loan term ended and what the repayments were,
Contacting the other lender directly to confirm the details of the loan,
Obtaining the consumer’s credit file, and
Ask the consumer how they expect to meet the repayments without substantial hardship
If we are unable to determine that you have made such enquiries and it is shown that C held 2 or more SACCs in the preceding 90-days, it is presumed that the loans are unsuitable and you will have breached your responsible lending obligations.
So, back to our mantara what do you need to do? Let me hear you all say it?

10. Make inquiries and verify!!
Excellent!! Let’s move onto enquiries.

11. CIO’s use of benchmarks
“Why can CIO use benchmarks when we can’t?”
You will all no doubt have either received a written review from us when we have adopted the use of a benchmark or have spoken to one of your case managers in which they explained that we have been using a benchmark to determine what a consumer’s expenses where at the time that the loan was entered into.
I hear you ask, “if we can’t use them why can you?” And that would be a good question.
As I indicated previously, benchmarks are not a substitute for making enquiries about a consumer’s financial situation and verifying that information. As a small amount credit lender, if you rely strictly on buffers without making enquiries, you have breached your responsible lending obligations. It is not a choice.
If you assess a loan as not unsuitable and a consumer approaches us to say they cannot afford the loan we will be looking to see what information you have gathered and how you have used it.
If there is no information gathered to indicate to us how the assessment was made, meaning, what information did you collect from a consumer to show what their expenses were, we have no choice but to adopt a benchmark and try to estimate and retrospectively recreate the situation as it was at the time the loan was entered into.
In this situation we will use the higher of either HPI or HEM and give the consumer the benefit of the doubt that their expenses were in fact in that range.

12. Quiz
Now I will hand you off to Jayd to check and see if you have all been listening.

13. Now we’re going to run through some case studies covering the issues Mary has raised. The purpose of these scenarios is to highlight the common mistakes we see lenders making, and you give you some tips on what to look out for.
I would also like to point out that each assessment will depend on a consumers individual circumstances, and these case studies should be used as a guide.
Imagine Sally comes into your store, looking to get a $1,000 loan. After talking to Sally, you find out she is still paying off a $500 loan with lender X, and she just finished paying off a previous loan she had with you. In fact, the final payment was made an hour ago.
Now in groups of 2-3, we want you to come up with a list of information would you need to obtain from Sally to determine whether she is eligible for a loan?

14. Case Study 1 Sally comes into your store wanting a $1,000 loan.
She is still repaying a $500 loan with lender X.
She made the final payment for another loan she had with you an hour ago.
What information do you need from Sally to assess this loan application?
Okay so times up, let’s see what you have.
What is the first thing that came to mind even before you started to consider the documents you needed? Anyone?
Sally has had 2 SACCs already and is applying for another loan – there is a presumption that this new loan she is applying for is unsuitable!!
Ok, so now knowing this, would anyone like to share their ideas? If no one is willing, we will pick someone to start us off.
Here’s what we had:
Get copies of the bank statements, and assess them. Things to look out for:
Has her account been in default on a regular basis?
Is there evidence of gambling? While most you consider this to be a discretionary expense, it should still be a red flag when you are looking at whether this new loan would be suitable.
Does the bank statement cover all of Sally’s expenses? If you can see key expenses missing, ask why they’re not on the statement. Do Sally have another bank account she uses? Does someone else pay her expenses?
Get information on the loan Sally has with lender X:
You may need to obtain a copy of the agreement or the statements to see how much Sally is repaying.
Work out when the loan ends.
Proof that she paid off her other loan with you. This is more of a FYI, because it doesn’t make a difference whether the loan was paid off or if it’s still active. The presumption looks at the number of loans Sally had in the previous 90 days- whether they active or not.
After obtaining all the relevant information, you need to work out whether Sally could afford the loan. You need to work out whether Sally would have a surplus or deficit after making the repayments.
At this point, you should be keeping in mind that any surplus is not enough!
At the CIO, we generally consider a surplus of less than 10% of a consumers net income to be unreasonable. However we allow for the individual circumstances of the case to show why a smaller buffer is reasonable.
WHY DO WE GIVE 10% BUFFER?? As Mary explained, we have to retrospectively recreate the consumer’s financial situation and ensure that they can afford the repayments without suffering financial hardship. So when we’re forced to use a benchmark, a buffer will seem sensible as we’re working on assumptions rather than reality. If you actually make enquiries that allow you to be confident that a buffer is not required (or a smaller buffer is appropriate), then we can proceed on that basis.   

15. For the next example, we’re going to look at how you can work out a consumers living expenses.
Consider a situation where Jess comes into your store asking for a $1,000 loan. She says that her daughter needs braces and the money is going to cover the deposit.
You ask her what her living expenses are, and she gives you the following information:
She is currently renting with her husband, and pays $600 per week in rent,
She earns $75,000 per year, and
She spends $60 per week for petrol.
Besides the information given, what other types of expenses do you need to know about so that you can work out Jess’ living expenses?
Again, you’ll have a couple of minutes to work with the same 2-3 people.

16. Case Study 2
Jess wants a $1,000 loan to put towards her daughter’s braces.
She is renting with her husband, and pays $600/week in rent.
She earns $75,000/year, and
Spends $60/week in petrol for her car.
What other types of expenses would you need to know about so that you can work out Jess’ living expenses?
Would you like more time? If not, let’s see what you came up with.
Here’s what we had:
 Car costs- insurance, service
Phone bill
Insurance
Public transport
Food
Entertainment
School fees, associated costs
Electricity
Gas
What you need to remember is that no two people will have the same living expenses.
So when you are obtaining information about a consumers living expenses, you need to be thinking about their cost of living. Basically, this means that you need to find out how much money they need live comfortably.
When we are investigating complaint about responsible lending breaches, we often find that lenders are not calculating the living expenses correctly, or they are simply relying on benchmarks. Neither option is acceptable.
The reason why we chose this example for today’s presentation was to show you how you SHOULD be calculating a consumer’s living expense. Or at least get you thinking about the broad range of expenses that fall under living expenses.

17. In the next example, we’re going to look at the enquiries you make after obtaining a consumers bank statement.
Imagine Tom comes into your store wanting a $2,000 loan. He provides you with his bank statement and says the money will be used to repair his washing machine. He has also completed the front page of your application form.
For this example, we have provided you with an extract of his bank statement and a copy of the front page of the application form. In the same groups as before, we want you to review the statement, and work out what further enquiries you need to make.

18. Tom wants a $2,000 loan so that he can repair his washing machine.
Case Study 3
Tom wants a $2,000 loan so that he can repair his washing machine.
Based on the documents we have given you, what further inquiries do you need to make?
Here’s what we had:
Tom received a school bonus payment from Centrelink and made two payments to Central Sydney Girls High
Tom didn’t say how many dependents he had on the front page of the application form
Need to know the number of dependants
This impacts on the living expenses, because the more dependents, the higher the expenses.
You also need to get a copy of the Centrelink statement as this will form part of his income
Tom has regular withdrawals for his Opal account
What does he use his Opal card for?
If it’s for commuting to and from work, how much does he spend
Tom has received money from Quick Money
Ask Tom what this was for?
Was it for a SACC? If so get details- for example repayments, end date
Tom made 2 payments to a Coles Mastercard
Ask how much the limit was and the monthly repayments
Get a copy of the account statement
Tom has made 3 payments, referred to as Rent
The amounts change in amount and date
Confirm how much rent he is actually paying
Ask why the amounts aren’t consistent
Get a copy of the tenancy agreement to verify
Tom made a payment to Medibank Private
How much does he pay have to pay?
Income

19. In the next example, we’re going to be doing a bit of role playing, where you imagine that you are a CIO case manager.
Let’s pretend that Matt just made a complaint about Quick Money, a small amount credit provider. Matt is annoyed that Quick Money gave him an $800 loan because he hasn’t been able to make the repayments.
After requesting information from Quick Money, you see the following:
Matt earns $2,800/ month- this was verified through copies of his pay slips, and
Quick Money has used a default for the living expenses, they have calculated his living expenses to be 30% of his income- $840
In assessing the loan suitability of the loan, how would you calculate Matt’s living expenses?

20. Case Study 4 Quick Money’s assessment of Matt’s loan
Monthly income: $2,800
Monthly living expenses: $840 (default 30% of income)
As a CIO case manager, how would you assess Matt’s living expenses?
Again, you’ll have a couple of minutes to work with the same 2-3 people.
** give 2 minutes **
First up, what’s the big issue with Quick Money’s assessment? What’s the obvious thing they’re done wrong here?
They have relied on a benchmark figure instead of making actual enquiries. This is a clear breach of Quick Money’s RL obligations, and unfortunately a very common one we see.
But back to the question, what did people come up with? What would you do in this situation?
Well here’s what we would do.
Step 1 : would be to ask the consumer what their living expenses where at the time that they entered into the loan?
If the consumer does provide us with enough information for us to be able to determine that their living expenses were at the time, we have concrete figure to use in our assessment.
However, if the consumer is unable to provide CIO with the information requested, then
Step 2: we have to rely on the HEM and HPI indexes.   
After finding the relevant HEM and HPI we compare them against the figure Quick Money used.

21. Living expenses according to Quick Money: $840
Case Study 4 continued
Living expenses according to Quick Money: $840
Living expenses according to HEM: $1,309
Living expenses according to HPI: $1,540
Once we compare the living expenses, we use the highest amount. Which in this example would be HPI.
So in our assessment, we would use $1,540 as Matt’s living expense.
Unfortunately, it is very common for lenders use a default amount for the living expense. Whatever benchmark you use, while it may be true and generous for some consumers, won’t be true for everyone. RL is about knowing the individual circumstance of each individual before you make each individual decision to lend.
So the message I want you to take from this example is make sure you ask the consumer what their living expenses are. Relying on default percentages is not only a breach of the RL obligations, but also means you are probably entered into unsuitable loans. RL is not a question of odds- it’s a question of knowing what you’re doing each time.

22. For the last example were going to give you a bit of a break, and show you what we do when a lender uses a default housing expense.
As Mary covered earlier in the session, part of your RL obligations requires you enquiry about the consumer expenses and to verify the information. Despite this, we often see lenders relying on a default, such as 20% of a consumer’s income, to determine the housing expense. I should point out that when we refer to housing expenses, we mean rent, mortgage, board etc.
Now this can get a little confusing, so feel free to interrupt me if I have lost you.
Let’s use an example where Quick Money resorted to a default 20% of income to work out Luke’s housing expense. Since he was earning $3,200/month, they have worked out his rent to be $640/month.

23. Case Study 5 Luke’s income: $3,200 per month
Luke’s housing expense: $640/month (default 20% of income)
How do we work out the housing expense?
Since Quick Money didn’t ask the proper questions and work out what Luke was actually paying, we have ask Luke to give us this information. If they can’t (which is often the case), then we have to rely on HPI.
Work out housing under HPI
HPI excluding housing: $3,727.97
HPI including housing: $
Difference: $720.59
 We only use HPI because unlike HEM, HPI has an option to include housing.

24. Work out housing under HPI HPI excluding housing: $1,483.00
Case Study 5 continued
Work out housing under HPI
HPI excluding housing: $1,483.00
HPI including housing: $2,203.59
Difference: $720.59
From this slide, you can see that if Luke was living on the poverty line, he would be paying $720.59/month in rent.
Now that we have this figure, the next step is to compare it to the amount Quick Money used.

25. Compare HPI housing to Quick Money housing Housing from HPI: $720.59
Case Study 5 continued
Compare HPI housing to Quick Money housing
Housing from HPI: $720.59
Housing from Quick Money: $640
According to Quick Money’s calculations, he is only paying $640/month. Since Quick Money’s housing expenses was lower than the housing portion under HPI, we have to use the HPI housing expense in our calculation.
Just like the example before, if Quick Money’s housing expense was higher than the HPI housing expense, then we would use that figure.

27. Please come and see us in the Q&A session at 4pm
Thank you
Please come and see us in the Q&A session at 4pm