The major bank has revised its home lending policy, including the way it calculates income and expenses using the HEM benchmark.
Westpac has announced home loan assessment changes in response to new industry guidance provided by LIXI in its consultation with lenders, based on the increase in the number of expense categories from 13 to 18.
Among the changes are amendments to the manner in which Westpac applies the household expenditure measure (HEM) benchmark, a new debt-to-income ratio, serviceability changes for margin loans, and a new approach to tax debt treatment.
The changes will be effective for new applications submitted from 20 August.
Westpac has stated that to ensure expenses are captured “more accurately”, it will be updating and adding new expense categories to “reflect industry guidelines” on the HEM values used for customer expense benchmarks.
Accordingly, Westpac will now:
- Apply income-based HEM bands based on total gross unshaded income, including gross rental income.
- Offset investment property expenses against rental income, and add the resulting available income to the taxable gross income to determine marginal tax rate and calculate net income.
- Change the definition of a dependent from “a child under the age of 18” to include “a child 18 years or over who lives with the applicant(s) and is totally financially reliant on the applicant(s)”.
New DTI ratio and referral rule
Further, Westpac has stated that where total liabilities are seven or more times higher than total gross income, the application will now be automatically reviewed by a credit assessment officer.
The DTI ratio will be assessed using total gross annual income, including gross unshaded rental income, and will include all liabilities on the application excluding leases and hire purchases, HECS, HELP and Trade Support Loans (TSL), company, partnership and trust liabilities.
Serviceability assessment changes for margin loans
Westpac will also be changing the way it assesses serviceability for margin loans, which will now be assessed on the higher of:
- 1 per cent of the balance, or
- the customer’s monthly declared commitment
However, the bank noted that margin loans will continue to be captured under “other” with business loans and tax debts.
New approach to tax debt treatment
Westpac is also making changes to tax debt definitions and how they are captured.
For tax debt Type A, commitments must be entered at 100 per cent of the monthly commitments when an applicant has a formal instalment payment plan in place with the Australian Taxation Office (ATO) to pay previous year’s tax.
For tax debt Type B, Westpac will no longer lend to customers where the amount payable to the ATO for the previous year’s tax is overdue at the formal application date or there is no formal payment plan in place.
Further, where there is an amount payable for the previous year’s tax bill that is not due as at the formal application date, tax bills will not need to be captured; however, applicants are required to address how the customer will pay the bill by the due date in the loan application comments.
Westpac revealed that it will also be making changes to commercial, SME or private wealth submission requirements later this year.
Westpac’s announcement came just days after the Federal Court rules in its favour in a landmark case against the Australian Securities and Investments Commission (ASIC) regarding alleged breaches of responsible lending obligations in its issuance of home loans through the use of the HEM benchmark.
Justice Nye Perram has now judged that a lender “may do what it wants in the assessment process”, noting that other provisions of the NCCP impose penalties if lenders make unsuitable loans as a result of that process.
Justice Perram also found that Westpac did take account of consumers’ declared living expenses, pointing to another rule in Westpac’s system, which compared declared living expenses to income, as a measure of suitability.
Westpac welcomed the Federal Court’s judgement, with the chief executive of the bank’s consumer division, David Lindberg, describing the decision as a “test case” relating to the broader lending industry’s responsible lending practices.
ASIC is also currently reviewing its responsible lending guidance (RG 209) and has commenced a second round of consultation in the form of public hearings.
The regulator is expected to publish its new guidance before the end of the calendar year.