The head of a risk services company has said that he “completely disagrees” that HEM would, or should, be “abandoned”, arguing that multiple sources of information are needed to accurately ascertain a borrower’s financial circumstances.
Writing in a blog entitled “The Future of HEM”, the director of QED Risk Services, Greg Ashe, pointed to The Adviser’s recent story in which Connective’s group legal counsel, Daniel Oh, suggested that the use of and reliance on the Household Expenditure Measure could “[be] abandoned completely or at least its relevance severely challenged” and provided a rebuttal to the assertion.
The head of the leading broker industry compliance firm outlined that he “completely disagreed” that HEM should be removed, arguing that more information, not less, is required to adequately and accurately understand a borrower’s financial situation.
Mr Ashe suggested that the recent “evolution of thought on responsible lending” has been triggered by the news that ASIC had agreed for Westpac to pay a $35 million fine for breaches of responsible lending obligations. However, he added that the key to this fine was not that Westpac relied solely on the HEM benchmark when assessing some borrowers’ capacity to repay home loans, but that they relied on the benchmark and “did not have regard to consumers’ declared living expenses”.
Speaking to The Adviser about his stance, the QED Risk Services director said: “The Westpac case was not about HEM, it was about the bank ignoring customers’ provided information when making their serviceability calculations.
“In this case, Westpac made an odd decision to undertaken a one-step process that seemed to just take the HEM number and use that, even though they had collected the client data.
“This was not about HEM being bad or inappropriate — and HEM is one of a very small number of tools we have to solve this expense verification conundrum.”
Mr Ashe added that, given the increasing scrutiny on expense checking, brokers needed as many points of data as possible and that reducing a data source could have a negative impact.
“HEM is not the silver bullet, bank statements are not the silver bullet, but together we can see if their outgoings are really low on their bank statements when compared to HEM and that could raise a flag that you need to ask a question.
“If you can see that, statistically, people earning the same amount in the same area as your customer are spending a lot more than them, you need to find out what that is about. It’s just about the conversation and knowing your customer and trying to understand where they are at.”
Mr Ashe concluded: “Throwing away HEM, I believe, leaves us dangerously exposed.
“The solution is more subjective and qualitative than purely statistical. There is no silver bullet; it requires analysis and understanding of a customer’s situation. And to have a clear understanding of what their situation is, you need more than one point of information, you need several points of data for reference.
“So, we need a more well-rounded approach to expenses, and the more data we can pull on, the better.”
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