The head of a non-bank lender has warned brokers that lenders will increasingly look at “brokers understating their expenses” as the regulator cracks down on benchmarking.
In November 2017, the chairman of the prudential regulator called on lenders to “devote more effort to the collection of realistic living expense estimates from borrowers” and give “greater thought” to the construct and appropriate use of benchmarks.
Speaking at the Australian Securitisation Forum 2017 last year, the chairman of the Australian Prudential Regulation Authority (APRA) said that the regulator had been “increasingly focused on actual lending practices” and “confirmed there is more to do… to improve serviceability measures, particularly in relation to the assessment of living expenses and the identification of a borrower’s existing debts” to ensure that borrowers can afford their mortgages.
Several banks have since brought in changes to their serviceability calculators since then, with Steve Kane, general manager at NAB, telling The Adviser recently that he believes a large part of the industry’, and regulators’, focus will be on “actual expenses” this year, and that more banks will bring out guides to help brokers highlight and explain unusual expenditure behaviours.
Likewise, the CEO of Mortgage Ezy, Peter James, warned brokers that lenders will increasingly be looking at “brokers understating their expense”.
“Lenders that aren’t adopting an actual expense of living yet, will soon do so”
Mr James said: “Certainly, we’re seeing more borrowers not qualifying [for loans], especially with banks, because of those actual expenses. So, one of the things that is going to happen more and more is that lenders will also look at brokers understating their expenses.”
The non-bank CEO warned brokers that “if it can’t be justified why the actual expenses are so low, compared to HEM and so forth, you may find difficulty getting that loan approved, just as for clients that are spending a lot more than the norm”.
He continued: “We’re actually finding that many brokers are still struggling with this, and [if] those brokers are severely underestimating those actual expenses (sometimes they’re being picked up when bank statements are being studied and sometimes they’re just picked up because they’re ridiculously low), that can cause all sorts of issues with credit scoring when they run those applications through the banks.
“So, I think because of regulatory changes, of which that’s just one example, you’re finding a much higher decline rate at banks that previously had really good conversion rates. And so, when brokers get a shock of a bank declining deals that they would have approved a year ago, this has provided the impetus for them to look around at other choices.”
He concluded: “This is one of the hot topics at the moment… and those lenders that aren’t adopting an actual expense of living yet, will soon do so.”
Mr James’ thoughts echo those of NAB’s Steve Kane, who had said that he believes the industry had relied on the Household Expenditure Measure (HEM) benchmark “way, way too much”.
Mr Kane said: “They should really detail all the expenses of that customer and explain how they are going to service that [loan]. That is very important and that is where the regulator is focusing as well. [So], we are going to see that not only from the adherence under NCCP and responsible lending via ASIC, but also [with] APRA focusing on what banks are doing and what lenders are doing… to ensure that they have evidence that a customer can repay their debt.”
He therefore recommended that brokers “ascertain, to the best of their ability, what the real expenses of the borrower or customer are” by ensuring that bank statements “match up” to what a customer has said.
ASIC is in the midst of a protracted court case with Westpac that centres on the allegation that it failed in its responsible lending duties by relying on a benchmark instead of actual expenses when considering serviceability.
ASIC’s case against Westpac has been rescheduled, vacated or set down six times since March 2017, and is now expected to be heard on 6 March 2018.