Broking groups have presented a unified front in their appearance before ASIC, calling for a standardised approach to expense verification.
Aggregators Australian Finance Group (AFG) and Connective, as well as broking franchise group Mortgage Choice, have appeared before the Australian Securities and Investments Commission (ASIC) in its second round of public hearings regarding its update to responsible lending guidance (RG 209).
All three broking groups renewed their calls for greater clarity in ASIC’s guidance, particularly in relation to the verification of living expenses.
Mortgage Choice CEO Susan Mitchell noted the disparity in the expense categorisation methods used by lenders, which she said complicates the home loan application process for brokers and their customers while also increasing the likelihood of error.
“What happens is you gather the expenses and you take them and have to rearrange them for a particular lender, and that introduces the opportunity for there to be an [unintentional] error,” she said.
Ms Mitchell highlighted that there was a LIXI Working Group in 2015, which involved stakeholders from across the industry, which agreed 12 expenses categories should be used (however, this is expected to be expanded out to 19 categories in due course), but these lenders later reneged on their commitments and applied their own categorisation methods.
“We [agreed on] a standard, but the lenders don’t adopt the standard,” she said.
“At the end of the day, you have to put the expenses in the categorisation that the lender requests so that [a broker’s] customer can complete the application and get the funds.”
The brokerage CEO said she would welcome assistance from ASIC to enshrine a new standard, but stated it should be designed and developed by the industry.
“I would be happy to be prescriptive in the area, that we come up with an industry standard and everyone adopts the industry standard, as opposed to you determining what it is,” she said.
“It might be better to let LIXI come up with that standard.”
Further, speaking to The Adviser following his appearance before ASIC, Connective director Mark Haron noted that clarity in ASIC’s guidance is particularly pertinent in light of recent developments.
Mr Haron pointed to the Federal Court’s decision to dismiss ASIC’s case against Westpac, in which the corporate regulator alleged that the bank had breached its responsible lending obligations in relation to its supposed reliance on the Household Expenditure Measure (HEM) to assess home loan serviceability.
The director said that greater clarity would provide brokers with legal protection, claiming that under current arrangements, stakeholders (including the Australian Financial Complaints Authority (AFCA]) possess different interpretations of responsible lending.
“I think what’s key for the industry is to have that level of surety around it so that, from a legal standpoint, we know that we are meeting our legal requirements in respect to responsible lending,” he said.
“[It] will also be vitally important in terms of brokers’ dealing with AFCA, where AFCA seems to have a different understanding of responsible lending than seems to be the current situation with the current RG 209.”
He continued: “A great example of that is the Westpac court case. ASIC said, ‘These are our rules,’ and the court said, ‘Those rules aren’t very good.’
“A broker is not Westpac; we don’t have the money to be able to take on ASIC in court like that. And that’s what worries me and why Connective, and a number of many others in the industry, are working hard on this consultation process with ASIC.”
Mr Haron also expressed support for greater consideration of a borrower’s propensity to alter their spending habits after a home loan is approved.
The Connective director stated that a borrower’s discretionary spending should not be forensically scrutinised in cases where their core expenses make up a small proportion of their overall income.
“If you take that as a percentage of their income, and it’s low – regardless of how much they’re spending above and beyond those core costs – it shows that they’ve got a lot of disposable [income] and discretionary income available to them,” he said.
“We don’t need to do forensic research on all their other expenses and try and explain how regularly they spend $4.50 on a cup of coffee.”
AFG’s general manager of industry and partnership development, Mark Hewitt, echoed Mr Haron’s sentiment, adding that borrowers generally prioritise their mortgage repayments ahead of other expenses.
“One of the biggest motivators [of an Australian] is to buy and own [their] own home. It’s an extremely strong motivator,” he said.
“People will forego a lot of things and a lot of pleasures in order to stay in their own home and keep their family under a roof.
“I am a big believer in people with a proven history and of good character doing what is necessary to stay in their house.”
ASIC’s second round of public hearings have now concluded, with the corporate regulator expected to publish its new guidance before the end of the calendar year.