The corporate watchdog has given banks a warning about how they assess applications for home loans as it updated its guidance for responsible lending requirements.
The Australian Securities and Investments Commission is planning to update its guidance for the use of benchmarks to assess the expenses of borrowers ahead of granting a home loan.
Currently, many of the banks use a benchmark known as the Household Expenditure Measure to determine a borrower’s expenses.
Some banks use the measure as well as declared expenses, but if the HEM indicates the customer’s spending can be lower than declared, the banks will defer to the measure and ignore the declared expenses. This means that some people are granted loans they can’t afford unless they dramatically cut back on their spending.
ASIC has already flagged its intention to fight for legislative change if it loses a key court case against Westpac over the way it uses the HEM benchmark to assess loans. ASIC hopes the new guidance will give clarity to the market so that it does not have to take legal action against other banks over the use of the HEM.
All of the big four banks use the HEM to assume that every single one of their customers has spending habits that are in the bottom 25 per cent quartile in Australia.
The banking royal commission heard that up to 50 per cent of all home loans issued in Australia are assessed using the HEM rather than the bank going through declared expenses by the loan applicant to check whether they are reasonable or not.
All of the big banks claim they have reduced their reliance on the HEM, but not one has provided any information about what percentage of loans are currently assessed using the HEM.
ASIC said it viewed benchmarks as a useful tool for the banks, but there were issues in the current application of the measure when assessing home loans.
“Even if a licensee has reference to a benchmark figure to test whether information provided about general living expenses (e.g. food, clothing, communication and entertainment) is plausible, the licensee will still need to make inquiries about whether the consumer has expenses of the kind that are not included in the benchmark calculations and seek verifying information about those expenses,” ASIC said.
“For example, the HEM benchmark does not include a number of expenses that would apply to many consumers (e.g. mortgage payments, non-government school fees, alimony and maintenance, HECS-HELP payments and some medical fees and charges, which may not be covered in full by
Medicare benefits),” ASIC said.
“Licensees that have reference to benchmark figures should ensure they are aware of what expenses are, and are not, included in that calculation, and separately consider the excluded expenses.”