Non-majors update expense validation process

As of this week (starting 16 September), BOQ has adjusted its transactional statement requirements and expense validation process for home lending and top-up applications. 

When assessing living expenses, BOQ will now accept one month of transactional statements (for the purposes of living expense verification) for PAYG applicants with a loan-to-value ratio equal to or less than 80 per cent (and no lenders mortgage insurance [LMI]) that have no declared adverse credit history.

The bank has said that for non-PAYG/credit adverse clients, or those with LMI or a a loan with an LVR over 80 per cent, it will accept three months on transactional statements.

There is no change to BOQ’s existing policies on transactional statements required for income validation and refinancing purposes.

As well as this, BOQ has also told brokers that it is “simplifying” aspects of its expense verification process to “ensure [it is] focusing on areas with greater risk”.

It is therefore asking brokers to ensure that their notes from declared living expenses conversations include further details if they relate to any of the following:

• Undisclosed liabilities that are not shown on the application
• Any concerns with account conduct (such as overdrawn or dishonours)
• Details on the reason for any cash withdrawals or account transfers that are greater than $1,000
• Any differences between declared school/childcare expenses and what is on the statement 
• Any HECS / HELP debt that is not shown in the application 
• Any child support that is being paid that is not declared in the application 
• Any medical or nursing expenses that are not declared in the living expenses.

Specifically, brokers are being asked that should any of the above occur, the notes detail the reason for the item; whether they have been declared on the application; and whether the item is recurring in nature.

Heritage changes

Heritage Bank has also informed brokers that it is changing its process for validation of customers’ Living Expense Assessment (LEA).

As of last Friday (13 September), Heritage Bank has brought into place changes to its LEA “to ensure that Heritage Bank meets its responsible lending obligations”.

Heritage will now require only one month’s recent transaction history of the customer’s main transaction. This will be reviewed for “reasonableness” against the declared living expenses. 

The bank is advising brokers that if a customer is looking to reduce their discretionary expenses as part of their declared living expenses, the application notes will need to “clearly outline appropriate reasons for a reduction from historical levels”.

According to Heritage Bank, discretionary expenses are: 

• Entertainment 
• Dining/takeaway 
• Hobbies/recreation/gym 
• Clothes/footwear/Afterpay 
• Alcohol/tobacco 
• Subscriptions/pay TV

Expenses in focus

Several lenders have been updating and reviewing their expense validation and verification policies in recent months, as the focus on responsible lending and expenses continues.

The Lending Industry XML Initiative (LIXI), a member-based not-for-profit company that develops and promotes efficiency improvements and data message transaction standards for the Australian lending industry, has been actively consulting on its proposed changes to standard living expense categories, which are used by many lenders for their verification and/or serviceability processes.

LIXI is also seeking to update its living expenses categories in its new data standards, LIXI2.

While the company has acknowledged that the new data standards are being consulted on ahead of the finalisation of the regulator’s guidance around how expenses are used in mortgage applications, it added that industry needed a common path forward sooner rather than later. 

It is hoped that the LIXI2 standards would be finalised by the company’s annual forum tomorrow (18 September).

However, the adoption of the new standards by lenders would likely be a longer-term process.

Meanwhile, the debate surrounding the use of the Household Expenditure Measure (HEM) has also been under hot discussion, following ASIC’s decision to file an appeal against the Federal Court’s verdict in its responsible lending case against Westpac.

Last week, the Australian Securities and Investments Commission (ASIC) filed an appeal with the Full Federal Court of Australia against Justice Nye Perram’s decision to dismiss its case against Westpac, which related to alleged breaches of responsible lending obligations in its issuance of home loans through the use of the HEM benchmark. 

ASIC commissioner Sean Hughes said ASIC’s decision to appeal the verdict seeks to address “uncertainty” caused by Justice Perram’s decision.  

“The Credit Act imposes a number of legal obligations on credit providers, including the need to make reasonable inquiries about a borrower’s financial circumstances, verifying information obtained from borrowers, and making an assessment of whether a loan is unsuitable for the borrower,” he said.

“ASIC considers that the Federal Court’s decision creates uncertainty as to what is required for a lender to comply with its assessment obligation, nor does ASIC regard the decision as consistent with the legislative intention of the responsible lending regime.”

He concluded: “For those reasons, ASIC will appeal to the Full Court of the Federal Court.”

[Related: Connective enhances expense verification process]