Living expenses draw sharper focus

Speaking at the Australian Securitisation Forum 2017 on 21 November, 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.

Over the weekend, the Westpac Group became the latest lender to implement changes to its serviceability calculator (after AMP announced it was bringing in additional expense requirements).

The banking group has now updated its calculators to include more recent Household Expenditure Measure (HEM) table values for consumer mortgages for originations (including loan increase applications).

This means that loans sent to Westpac, St. George, Bank of Melbourne and BankSA will now be subject to the June 2017 quarterly HEM values published by the Melbourne Institute.

Lenders need to look at their own data

Living expenses and credit reporting have been increasingly coming under the spotlight as the ratio of household debt to income edges higher.

Speaking to The Adviser, Clive Kirkpatrick, the general manager for lending at Vow Financial, said that lenders should be doing more to track expenses.

He explained: “Banks already hold a whole bunch of information around their transactions, but they expect the broker to actually provide that information. For example, they ask brokers for bank statements, even if they already hold them. They ask brokers for living expenses, but they would already know what they are if the borrower is already a customer of that bank.

“If you apply for a loan with Westpac and you are already a Westpac customer, they can see your spending habits and where your money is going, but they just don’t look. Why do they ask the broker that, then?

“If the underlying lender gets better at understanding what information they have, it should make a much better process for the customer and result in more truth in applications.”

Likewise, the executive director of the Finance Brokers Association of Australia (FBAA) told The Adviser that the HEM benchmark is not always an appropriate measure of expenses.

Peter White said: “The whole HEM issue is something that has been challenging for a while. Since the NCCP came out, ASIC gave quite succinct direction that when you are calculating serviceability for a borrower, you need to take into consideration their real expenses for living and that might be a lot more than an ABS stat that is used in the HEM. And a lot of lenders ignored it.

“Brokers are trying to do the right thing and we get lots of complaints [from brokers] regarding broker-declined deals that then get approved by the branch if the customer goes to them directly. But the reality is that a broker can sit in front of somebody, go through their living expenses and see how they live. If their living expenses look frugal but they are living in an extremely lavish premises, then a broker can identify that and flesh it out a bit further to get a more accurate picture of expenses. Whereas, if you just use an ABS stat which is a generalisation of the marketplace across a cross section, it doesn’t pick up those nuances.”

Mr White concluded: “This is why broking on a face-to-face level will always have its place, because of the human elements. Otherwise, we could wind up in situations where people are getting loans that they cannot afford because their living expenses are not accurate.”

He also warned: “The whole HEM piece needs to be right because otherwise we will have a lot of people that are sitting in loans that they possibly might not be able to afford when rates go up, because they didn’t quite understand the Q&A on the living expenses, or because the HEM stat was used but it was completely inappropriate.

“So APRA’s comments in regards to HEM are bang on. They are a bit late, they should have done something on it earlier, but I don think it will take long for lenders to tighten up a bit on expenses (and we’re seeing the first moves now), and it’s important that they do.”

Touching on AMP’s recent announcement that it will require borrowers to disclose discretionary expenses in loan applications, Mr White said that he believed it was important to include those expenses, but it is also vital that one-off expenses are identified as such and that lenders aren’t calculating loans based on discretionary expenses, “because they are discretionary, and therefore not essential”.

“I understand that some discretionary expenses may be habitual,” the FBAA executive director said, “but it’s appropriate to understand the whole picture of a borrower’s spending.”

CCR could help deliver better lending decisions

Looking to the future, Mr Kirkpatrick from Vow suggested that the introduction of comprehensive credit reporting (CCR) next year could help ensure that credit decisioning is done on a more appropriate basis.

The general manager for lending explained: “The more data we have, the better our decisioning should be. So, that’s the big thing about comprehensive credit reporting, everyone is going to have more data at an individual level, so the next play after that is that the banks need to get much more sophisticated in their decisioning. They need to use that data to help make the decision because at the moment they don’t use the data appropriately, they have blanket policies that cover everyone… the same policy applies to the heated areas of Sydney and Melbourne as they do in Adelaide and Perth and Wagga, where there isn’t a housing crisis.

“So, I think that the whole issue around using better data will make better decisions, and more specific and appropriate lending decisions.”

He concluded: “The benchmark should be your benchmark, it should not be a blanket, industry-wide benchmark.”

[Related: Brokers call for closer scrutiny of living expenses]