The Hayne royal commission ended day three of its third block of hearings headed further into business banking thinking, using case studies on "responsible lending to small businesses" and with representatives from the majors on the stand.The focus was lending to people wanting to buy a franchise, and the role of guarantors. This included how the banks treat the information relating to guarantors, following case studies where the financial ombudsman service had ruled against the bank in favour of  borrowers, alleging misapplication of the banking Code of Practice.Kate Gibson, former general manager of small business banking for ANZ, continued on from her evidence yesterday about lending to a customer to purchase a gelato franchise, a business which had not delivered the cash flow expected. She confirmed that ANZ's policy was essentially to "understand the drivers of the customer's cash flow ..., and then analyse historical financial data and assess projected cash flow as the primary repayment source."Gibson took issue with the expectation by the FOS that ANZ should have benchmarked against applicable income to expense ratios used by the ATO. She noted that these are "ratios that talk to particular expense lines as a percentage of turnover. ...but give no indication of the variability of turnover."Her argument was that, if you took this to the logical conclusion,  no new business owner would ever get a loan if they had no assets against which the bank could be guaranteed of repayment nor a spouse or parents who had sufficient income independent of the business.Further, Gibson said, "FOS's view seemed to be that because there was no tangible security that was sufficient to extinguish the liability, that 'second way out' would rely on the income that was available to make the payments on the bank loan.  "And that in considering that serviceability, we should have regard to that individual director being able to afford all of their personal commitments and the entirety of the business loan."She agreed with the characterisation by Michael Hodge, senior counsel assisting the Commissioner, that "FOS was suggesting that it would be necessary - that the relevant income for that second way out would be that at least one director earn income from an unrelated occupation [to the business being purchased]."If that was really what was required of a bank, then it would have "a very significant and detrimental effect on the ability of small businesses to get credit", was one conclusion from the ANZ executive.A similar view was expressed by Alastair Welsh, Westpac's head of commercial banking.Welsh strongly disagreed with the reasoning behind a FOS determination - in this case that a Pie Face franchisee should not have been given a loan (and to much mirth, admitted he had never been to a Pie Face kiosk, so could not say what a small premises was like, in comparison to a 'normal' kiosk).Welsh took issue with the application by FOS of an interest rate "buffer" of three per cent to assess the serviceability of the loan, while Westpac