Best guess not good enough when verifying expenses, says lawyer

by Julia Corderoy27 Nov 2015
ASIC is unlikely to make brokers obtain bank statements and credit card statements from consumers in order to verify living expenses, according to a leading financial services lawyer, but doing nothing to increase verification standards is not an option.

Speaking to Australian Broker, Jon Denovan, a partner at Gadens – who was also involved in the drafting of the NCCP – said ASIC does uphold higher standards as it is their job to protect consumers, but making brokers verify living expenses against banks and credit card statements is impractical.

“If that broker obtains a copy of a bank statement or a credit card, they are on notice of everything that is in it. That is a pretty big challenge because I, for example, have my next New York trip in there and all my Christmas presents. I might have a big spending month then go in a hole for six months trying to get my card back in order. So there is a difficulty if you get more documents because then you are on notice of everything in those documents,” Denovan said.

“If you are applying for a loan it is virtually an audit of your personal affairs and although, in a perfect world, you would like to protect consumers, I don’t think it is practical or achievable.”

However, Denovan said that was never ASIC’s intention. 

“[ASIC] started off an inquiry in relation to interest-only loans because they seemed to be growing, but as they were doing it they were asking ‘why would an interest-only loan meet a borrower’s requirements and objectives?’ Then they said while they were at it, they noticed that people just weren’t doing enough about living expenses.

“That was a meeting I had with Michael Saadat [a senior executive at ASIC] and he made it clear that those requirements applied to lenders and brokers. This was hardly news other than the fact it was now a focus area for ASIC.

“I was not told by ASIC when I met with Michael Saadat that you must get bank statements or credit card statements.”

But while higher verification standards won’t require brokers to obtain bank and credit card statements, Denovan told Australian Broker that doing nothing about increasing verification standards is not an option.

“For heaven’s sake, consumers lie. If you are going to buy a home, you are only to disclose one of your credit cards, for instance... Also, most people adjust their living expenses. 

“To simply get brokers to fill in a guestimate of their living expenses and then compare it to some poverty index is not sufficient. There is no doubt about that.” 

So what can brokers expect in regards to increasing the verification standards in regards to living expenses? Denovan says he is working on developing a process to initiate deeper enquiries.

“I’m working with Lixi to try and clarify some standards across the industry of what this ‘more’ might be,” Denovan told Australian Broker.

“What we are developing is a set of extra questions. We are working on something for brokers to increase their standards by asking additional questions – how much do you spend on broadband? How much do you spend on Foxtel? How much do you spend on childcare? All those ‘lumpies’.

“When we have got our solution we are going to take it to ASIC and they probably won’t give it their blessing but they might at least say it is not rubbish.”

Denovan also assured that bank branches will also be held to the same standards as brokers.

“The banks have exactly the same standard imposed on them,” he told Australian Broker

“A point is that banks will apply these standards in different ways in the same ways banks apply verification of identity in wildly different ways, and so the difficulty is why should brokers be duplicating this effort? Why would they go and collect or enquire about a whole lot of stuff and then flick the deal to the bank to have the bank not look at it? That is a huge inefficiency and the objective of protecting the consumer wouldn’t have been achieved because the bank is going to approve it anyway if the banks have variable standards. 

“But the banks have been told to lift their standards and [ASIC] is monitoring the banks very closely.”


  • by Broker 27/11/2015 9:17:05 AM

    So should I now ask for 1.3.6 months or 1, 2 or 3 years of savings and credit card statements?

    Will it soon become 5% genuine savings with perhaps a 5 year history for >80% loans!?

    According the Australian Broker Online survey 85% of Brokers say that ASIC don't understand the mortgage broking industry, ASIC, very easy to see why we think this!

  • by What The 27/11/2015 9:21:34 AM

    We should be able to live with the prospect client for a week, then we would have a better overall picture.

  • by Elisa 27/11/2015 9:23:58 AM

    Just a slight clarification, most lenders no longer use the Henderson Poverty Index, Mr Denovan.

    They use the HEM scales (slightly more discerning) and then you tend to look for expenses above and beyond.

    We already collect the last credit card statement as it is an indicator of fiscal management and I would imagine a lot of other brokers do the same.