The use of and reliance on the Household Expenditure Measure could “[be] abandoned completely or at least its relevance severely challenged”, the group legal counsel of a major aggregator has suggested.
Connective’s group legal counsel, Daniel Oh, made the comments in a recent update to brokers, noting that Westpac had recently admitted to breaches of responsible lending obligations when issuing home loans to customers and agreed to pay a $35 million civil penalty to resolve Federal Court proceedings.
According to the Australian Securities and Investments Commission (ASIC), Westpac contravened the responsible lending provisions of the National Credit Act because of its automated decision system, citing that it “did not have regard to consumers’ declared living expenses when assessing their capacity to repay home loans, and instead used a benchmark (the Household Expenditure Measure)”, as well as failed to use the higher repayments at the end of the interest-only period when assessing a consumer’s capacity to repay the loan.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was also damning in its critique of the lenders’ policies when it came to ensuring customers can afford their home loans, with ANZ particularly being called out for their “lack of processes in relation to the verification of a customer’s expenses”.
Mr Oh reiterated that although Connective has required its authorised credit representatives to complete “thorough Household Living Expense (HLE) assessments since the NCCP Act with its responsible lending requirements was first passed”, he noted the recent Westpac penalty and stated that “many of the big banks did not follow and are now facing consequences for continuing to rely solely on the HEM”.
“The long-accepted HEM basis used by lenders with their servicing calculators is way overdue for an overhaul,” Mr Oh wrote in the broker update.
“The HEM is seen by APRA and ASIC as inadequate for use as ‘the’ benchmark living expense measure in determining whether a loan is ‘not unsuitable’ as far as servicing is concerned.
“The $35 million fine handed down by ASIC to Westpac is a further indication that the industry watchdog is serious about the responsible lending requirements of NCCP.
“The royal commission hearings to date have certainly supported ASIC’s point of view. It’s likely that when the royal commission’s Justice Hayne hands down his findings in February next year, that the HEM will be either abandoned completely or, at least, its relevance severely challenged.”
Speaking to The Adviser about these comments, Mr Oh elaborated that while he did not believe that Commissioner Hayne would necessarily “come out and talk about HEM specifically in the final report”, he said that he expected the report to centre around responsible lending more generally.
He continued: “So, I think, especially post that Westpac fine, by the time [Commissioner] Hayne hands down his findings come February with the final report, that HEM — and the usage of and reliance on HEM by lenders — may be abandoned completely or at least the relevance severely diminished.
“This settlement with ASIC and Westpac has further confirmed our views on living expenses generally and the fact that the use of HEM will be diminished.”
Likewise, Connective’s national manager for risk and compliance, Amanda Stirling, told The Adviser that it may not always be “realistic” for a customer to live on HEM figures and that brokers “shouldn’t be relying on HEM” but instead be “undertaking a living expense assessment and making the decision based on the evidence that they have been presented with — the bank statements, the debits that come out of the bank accounts, and what they can see to ensure that living expenses are accurately reflective of their customer’s situation”.
Ms Stirling added that if a broker is using HEM as the expenses figure, “there is a risk that the customer could end up in substantial hardship if it is not truly reflective of what their actual living expense position is”.
As such, she noted that Connective had held brokers to a “standard slightly higher than lenders or ASIC would expect”.
The group legal counsel concurred, adding: “You have to go back to the principles of what responsible lending is, and plugging in a HEM figure is not responsible lending… I think that people just failed to appreciate that times have changed and there has been a growing focus on this area and it’s just not good enough [to use HEM].”
Acknowledging that the additional requirements to interrogate consumer expenses and the “rework and tighter lending policies” can mean that brokers are now spending 50 to 100 per cent more time on loan applications than they were in the past, Mr Oh said that it was therefore “the key responsibility of aggregators to make it easier for brokers to be compliant”.
Mr Oh added that Connective had been making resources available to brokers to help them meet their responsible lending requirements, including by rolling out a new living expense assessments e-book for all mortgage brokers irrespective of their aggregator.