1. finance
2. personal finance
3. lending
4. credit cards

Retail Lending Policy
RP 1.6: Capacity to Repay (NDI)
Published date:
20/05/2015
Version:
4
Authorised by:
Chief Risk Officer
Next review date:
31/05/2016
1. INTRODUCTION
Responsible Lending (reinforced by the Legislative framework and in particular the
NCCPA) requires P&N to ensure serviceability is evidenced. P&N will not knowingly lend
to a member who cannot meet the proposed loan repayments without experiencing
hardship (GP 1.11 Restructured Facilities).
The policy set out below includes some variants according to the product being used (i.e.
Personal Loan, Home Loan, etc.). This policy should be read in conjunction with RP 1.05
Income Assessment & Verification.
2. ASSESSING CAPACITY TO REPAY
Capacity to repay is measured using a ratio of Net Disposable Income (NDI) to total
financial commitments.
Net Disposable Income Test (NDI)
The ratio is an expression of income dollar over dollar expended, e.g. a ratio of 1.00
would indicate $1.00 earned for every $1.00 spent. It is calculated as:
(Total Net Household Income - Total Household Expenses)
Total Fixed Commitments
Net Disposable Income (NDI) Ratio
Ratio’s for the net disposable income test will be reviewed and set periodically by the
Strategic Credit Committee.
In the case of Mortgage Lending and Personal Loans joint incomes may be utilised only
when both parties are borrowers (in the case of Mortgage Lending and Personal Loans).
For Credit Card applications joint income may be used under certain conditions; please
refer to RP 1.05 Income Assessment & Verification for further information.
3. NDI THRESHOLDS

Home Loans:
LVR Band
<= 80%
> 80%
>= 1.01
>= 1.05
NDI Ratio
Amount of net income to cover maximum
total commitments (including this loan,
fixed commitments and household
expenditure).
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
Personal Loans and Credit Cards:
Product
Personal Loans
NDI Ratio
Amount of net income to cover maximum
total commitments (including this loan,
fixed commitments and household
Credit Cards
>= 1.05
expenditure).
Note [1]: Applications for existing members subject to auto-approval policy may
have a lower threshold as set by Strategic Credit Committee.
>= 1.05[1]
The threshold is currently set at 1.03 where the member meets the following
requirements:
 Existing customer
 Current lending with P&N
 No arrears on current lending products
A lower NDI ratio may only be approved as a policy exception under the DLA structure
where justifiable.
4. HOUSEHOLD EXPENSES
The Household Expenditure Measure (HEM) is used as a base level of household
expenses for carrying out NDI tests. This index is reviewed at least quarterly (by the
Strategic Credit Committee), in line with updated HEM data.
Buffers may be applied for certain borrowers (e.g. regional locations) to reflect varying
costs of goods from the typical base line used in HEM. The value and criteria of buffers
are set by Strategic Credit Committee and reviewed annually.
For the purposes of the NDI test the higher of the applicants stated living expenses or
HEM should be used. A robust conversation needs to occur with the applicant to ensure
that any expenses that they can not forgo in order to meet their loan commitments are
included in addition to the base HEM expense (an example of this is a member’s reliance
on child care in order to continue to work their current employment hours).
In circumstances where applicants are able to clearly demonstrate that their living
expenses are less than the HEM, discretion to accept the lower figure is assigned to
Officers with a Delegated Credit Approval Authority in terms of the Delegations Matrix.
5. FIXED COMMITMENTS
Total monthly financial commitments must include all regular financial commitments of
the borrower.
Note: Instances where a member holds more than a 50% share of a business, financial
statements are a requirement for verifying additional commitments/liabilities regardless
of whether income derived from the business is being used to service the loan.
For the purpose of carrying out an income ratio test, any payments that are made on a
fortnightly, quarterly, half-yearly or annual basis should be converted to a monthly
equivalent.
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Financial commitments include:








Loan repayments
Credit card repayments
Store account payments
Rent or board
Maintenance payments
Overdraft and line of credit payments
School Fees (In most instances it is unrealistic to assume this commitment can be
readily ceased; where the child is close to finishing school a practical approach
should be adopted)
Child Care
5.1 TREATMENT OF RENT OR BOARD
If the applicant or their spouse/defacto is not a home owner, rent or board must be
included in their fixed commitments. This should be the higher of the actual amount of
the rent/board paid or a notional rental expense of $150 per week ($300 per fortnight).
This amount, per applicant will need to be included in the serviceability assessment.
The notional rental expense of $150 per week ($300 per fortnight) does not apply if the
applicant is under the age of 25 and discloses that they live at home with family
rent/board free. The suitability assessment should adequately cover off on any planned
changes to the living arrangement that may occur within the life of the loan.
5.2 TREATMENT OF JOINT EXPENSES
Treatment of single applicants that have shared living expenses should be as follows:
•
Where the party not included in the loan is a dependent then for the purposes of
calculating serviceability 100% of the expenses should be used.
•
Where the party not included in the loan is a wage earner then the living
expenses may be apportioned. In apportioning expenses the following policy rules
apply:
1. The apportioning of living expenses extends to the payment of rent and
includes household bills, living expenses, etc.
2. Where the applicant is a joint borrower it is not acceptable to apportion the
applicants “share” of any loan repayment. Joint liability entails that all
parties to the loan have responsibility for the full amount of the debt.
Accordingly, the full amount of any loan repayment (including credit card
liability) must be used in the debt servicing calculation.
6. VERIFICATION OF FIXED COMMITMENTS
Responsible lending guidelines require P&N to carry out reasonable enquiries regarding
the applicant's ability to service their overall commitments. This applies to both existing
members and new members. The existing commitments of the applicant are captured
within the application and loaded into LendFast.
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The following rules apply to the 24mth veda check and obtaining 30 days transaction
history:
LVR <=80%
LMI, or >80% LVR (excluding WA Police
EPP)
Monthly Servicing Surplus <=$500
24mths veda enquiries to be checked.
30
days transaction
history
not
required.
24mths veda enquiries to be checked and
be obtained.
Monthly Servicing Surplus >$500
No veda check required.
30 days
transaction history not required.
30 days transaction statement history to
Ultimately, regardless of servicing surplus, the lender submitting the application needs to
be 100% satisfied that they have accurately captured the liability position of the
applicant. If they have any doubt as to the accuracy of the disclosure additional source
documents, such as transaction account or credit statements should be requested to
enable further investigation.
A transaction account is defined as the account/s that a member’s day-to-day living
expenses are transacted out of on a regular basis. This could mean multiple accounts are
required. The Transaction account must have an end date no older than 30 days from
the start date of the application and show a minimum of 30 days of account history. It
is preferred that the statements shows the name and address of the member however if
online statements are provided without this information it must contain at least one
income credit cross referenced to a payslip or loan repayment cross referenced to a loan
statement provided for refinanced loans.
7. CONDUCT OF EXISTING FACILITIES (EXTERNAL AND INTERNAL)
Good conduct is evidenced by arrears less than 21 days and/or any over limit balances
less than 21 days or over drawings on transaction accounts of less than $100.
Applications meeting these criteria will not need to be referred to a DCA holder for
review.
Where good repayment history is not demonstrated on commitments (via late payment
fees, current overdue values etc.) then the application must be reviewed by a DCA
holder. The DCA holder must decide if the applicant represents an acceptable risk to P&N
and this will involve a level of judgement taking into account the following issues:




The
The
The
The
dollar value of the delinquency
frequency of the delinquency (how often has it occurred)
term of the delinquency (the longer the term the higher the risk).
overall financial position of the applicant/s.
8. ADVERSE CONDUCT ON EXISTING P&N BANK FACILITIES
The Lendfast system assesses P&N account conduct and only flags “significant” adverse
conduct for the attention of the DCA for referral to the Risk Manager for acceptance.
Applications with over the limit or arrears history on P&N accounts and not flagged for
“significant” adverse conduct may be auto approved by Lendfast (if no other fail points
are noted) or accepted in terms of the DCA Matrix (if other fail points are noted).
“Significant” adverse conduct is deemed as:
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
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
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Current arrears greater than 30 days past due. If confirmation of cleared arrears
is given and providing no other significant flags are raised then adverse conduct
is not considered “significant”.
Three or more late payment fees within 12 months.
Any payments greater than 60 days late (2 months late)
Three or more payments greater than 30 days late.
The criteria for significant adverse conduct are set by the Manager Credit Management in
conjunction with Senior Manager Credit.
9. MORTAGE SECURED REVOLVING CREDIT FACILITIES (EQUITY/INVESTOR
ACCESS)
The monthly commitment for mortgage secured revolving finance facilities is to be
assessed on the approved limit for the facility not the balance. The monthly commitment
is to be based on the Secured Overdraft Qualifying Rate percentage against the relative
credit limit as set by the Strategic Credit Committee which will equate to a principal and
interest repayment over 30 years.
10. UNSECURED REVOLVING CREDIT FACILITIES
The monthly commitment for revolving finance facilities is to be assessed on the
approved limit for the facility. Under no circumstances should the commitment only be
based on the balance outstanding at the time of the application. The monthly
commitment is to be based on 3% of the relative credit limit.
Types



of revolving credit facilities include:
Credit cards
Store cards/accounts
Unsecured overdrafts/lines of credit
11. CHARGE CARDS
The cardholder is obligated to repay the full debt on the due date to the card issuer,
usually on a monthly basis. A three month statement to evidence payments are being
met is required.
12. MARGIN LENDING
Where the member has a margin loan there is no requirement to include the debit
interest paid in respect of the margin loan as a commitment; dividends received from
any shares held as security for the loan should be similarly discounted.
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13. HELP/HECS DEBT
HELP/HECS debts are deducted from gross pay before tax. If the net pay of the
applicant is being used for servicing (e.g. via the use of salary credits) there is no
requirement to include the HELP/HECS debt as a commitment as it has already been
deducted from the applicant's gross pay.
However, in all other instances a repayment amount needs to be included as a
commitment in the servicing test. The following table outlines the % rate to be applied
to the gross income amount to calculate the HEC/HELP debt annual repayment:
Gross Annual Income
Below $53,345
$53,345 - $59,421
$59,422 - $65,497
$65,498 - $68,939
$68,940 - $74,105
$74,106 - $80,257
$80,258 - $84,481
$84,482 - $92,970
$92,971 - $99,069
$99,070 and above
% Rate Applied to Calculate Annual HELP/HECS
repayments
Nil
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
*Table based on ATO HELP debt repayment thresholds and rate for 2014/15.
14. MORTGAGE SECURED LOANS – SERVICABILITY ASSESSMENT RATE
Servicing capacity for mortgaged secured loans is to be assessed with repayments being
calculated at the Serviceability Assessment Rate (SAR). This SAR will apply on
Mortgaged secured loan products and shall not be less than either the actual loan
interest rate or P&N Standard Variable interest rate. The use of this SAR will at all times
ensure the borrower is not adversely impacted by an increase in interest rates.
The SAR used is at the discretion of the Strategic Credit Committee and subject to
quarterly review and also in the event of an interest rate change. The Strategic Credit
Committee may set the SAR independent of the affordability rates set by mortgage
insurers. Practical considerations will determine the way in which SAR are utilised.
Mortgage secured loans include:



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
Concessional
Fixed rate
Variable rate
Packaged products
Introductory/”Honeymoon” products
Interest Only products
Mortgage secured loans exclude:


Reverse Mortgages
Capitalised portion of Bridging Loans
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15. PERSONAL LOANS
Monthly commitment used in assessment on personal loans must incorporate all monthly
fees. For this purpose a buffer is used on top of the product rate in calculating the
repayments for assessment. This buffer is set by Strategic Credit Committee in
accordance with the applicable fees for the product(s); the buffer is currently 0.5%
above the product rate.
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