What is Responsible Lending?

In Australia, responsible lending guidelines ensure that only borrowers who meet certain criteria are offered loans from financial institutions. These guidelines, such as the ones found in the National Credit Act of 2009, set forth standards for lending that are adhered to by both borrowers and lenders and are meant to afford protection to all parties involved.

A significant factor in lending is “suitability,” or whether a given loan is properly-suited to a borrower’s ability to repay over time. Both the Australian Securities & Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) provide oversight of financial entities and ensure a “fair, transparent and efficient financial system for all.” These agencies work together to keep financial markets running smoothly and fairly by overseeing banks, insurance companies, and pension plans.

These regulations are important for lending solutions in Australia to prevent overzealous lending to unsuitable borrowers and serve to protect banks and other financial institutions. This two-way street approach encourages credit standards within the financial institution’s risk appetite while making certain the customer can repay the loan. The assessment of suitability or unsuitability keeps lenders from entering into improper agreements with buyers who are likely to miss payments or default on loans for everything from homes to vehicles and consumer goods.

The National Credit Act requires specific information to be disclosed in loan applications. It also gives borrowers the right to apply for repayment arrangements in the case of financial hardship. Further, the NCA protects borrowers and lenders by creating a 30-day repayment period before court action such as repossession takes place. In short, these regulations exist to prevent unsuitable loans from occurring and offer remedies for cases where the borrower can no longer meet payments.

Changes Afoot in Australia

In September 2020, members of the Australian government outlined proposals that would alter the National Credit Act by loosening restrictions on the rights and responsibilities of lenders as the world begins to emerge from the COVID-19 pandemic.

Australia’s Treasurer Josh Frydenberg unveiled the proposed changes, arguing that the new direction would allow more consumer access to credit in a post-COVID world. Proponents of the changes said that regulations had become so strict that borrowers and lenders could no longer do what they do best: borrow and loan money. Others argued that the changes could lead to the sort of fiscal irresponsibility that led to the global economic crisis of 2008.

At present, these proposed changes have not occurred in part because people currently have relatively free access to funds. Across Australia and Oceania, the number of new mortgages is increasing due to a housing market that is heating up. This increase in demand has led to lower interest rates and, consequently, monthly payments are considered more affordable for borrowers than in years past.

The fact is that the risk appetite of lenders has naturally decreased since the start of the pandemic. These proposed regulations would ensure that the system remains fair so that those who could afford to borrow could do so. By removing some of the responsible lending obligations, the burden is shifted back to the borrower to provide accurate information on income and other assets to meet the serviceability of the loan.

The regulations would also strengthen consumer protection around the provision of small amounts of credit by requiring debt management firms to hold an Australian credit license. Proponents suggest the changes would increase competition in the market and make it easier for borrowers to obtain loans.

How Are Financial Service Providers Responding?

So, how are financial service providers responding to the possibility that these changes may one day be enacted? Firstly, many lenders are already reassessing how quickly the lending decision takes. Along with requiring less documentation for a loan, many are also looking at automating the lending process with online and mobile tools that provide for a shortened approval time.

The “old way” to determine a borrower’s suitability included tabulating income and assets, but new technologies have emerged, allowing lenders to see how borrowers spend money daily. One such tool is Envestnet | Yodlee’s Credit Accelerator, which provides non-standard data points for a comprehensive view of spending patterns.

Banks can use a variety of lending algorithms to calculate a risk appetite profile and to identify any potential red flags such as too many outstanding loans or risky behaviour like gambling. Aggregators like YCA provide detailed banking transaction histories, giving a clearer picture of income vs. expense. These tools even allow lenders to drill down to how much fast food a borrower orders to obtain a crystal clear picture of spending habits.

For example, a trend during COVID was for consumers to leap from one job or career to another, meaning their incomes fluctuated and often came from various sources. Tools like Credit Accelerator help identify changes in both income and spending behaviour. YCA Analytics can help flag those changes and output them in a PDF or JSON format for ease of reading. While different banks have different risk profiles and data points, YCA is flexible and customisable for how flags and parameters are set.

Envestnet | Yodlee’s Approach to Lender Responsibility

Envestnet | Yodlee supports lender responsibility by helping Australian, and New Zealand financial services companies more readily provide credit. How? By providing them with a real-time picture of a borrower’s financial position.

Lenders can easily tap into the API technology to embed the Credit Accelerator tool into their existing apps or services. Yodlee offers a host of other tools to make the lender’s job significantly easier, too. Just a few of the ways Envestnet | Yodlee works to provide secure, innovative protections include:

  • Account Verification: Quickly and safely verifies and connects financial accounts with reduced risk.
  • Financial Wellness Programs: Designed to guide consumers to better decisions and outcomes, this program offers New Zealanders and Australians financial education, advice and realistic, goal-based solutions to improve their financial wellness.
  • Bank-Level Security: To protect your financial information, we adhere to strict security and risk management standards.
  • Credit Accelerator: Offers a full financial view by enabling consumers to connect with their financial accounts to generate a comprehensive, accurate look into their financial position. Adheres to Australia and New Zealand’s Responsible Lending guidelines.

We are committed to adhering to relevant financial industry standards with comprehensive security, privacy, risk, and compliance programs in place. A dedicated team of security and risk practitioners ensures your financial data is protected at all times.

We also engage with independent third-party security auditors and our financial institution clients to conduct comprehensive audits. Over the past two years alone, our company has undergone more than 200 audits by financial institutions.

We’re proud to say that more than 1,400 companies across the world rely on us for innovative solutions for their millions of customers. The solutions are built to increase engagement, boost retention and drive revenue through clean, accurate and enriched transaction data.