Banks fight changes to loan criteria

A PUSH by the corporate cop to tighten up how expenses are calculated in home loan applications is likely to make it tougher to get a mortgage, the major banks have warned.

The big four lenders have defended the use of general household expenditure benchmarks when writing loans, saying trying to identify an individual’s living expenses using their bank statements is not feasible and would not provide an accurate picture.

The views are contained in submissions to the Australian Securities and Investments Commission as part of its review into responsible lending obligations.

The submissions were released by ASIC yesterday as it said it would “test the views of stakeholders” in public hearings next month as part of a sweeping consultation process on responsible lending rules.

A major point of friction between the banks and ASIC is the use of the Household Expenditure Measure, known as HEM, to calculate a borrower’s expenses.

Under the measure banks assess mortgage applications based on broad demographic information – such as typical incomes and expense profiles in the suburb of the property being purchased – rather than a borrower’s specific monthly outgoings.

The banking royal commission criticised banks for defaulting to HEM rather than diligently analysing a customer’s household expenses.

Westpac is facing off with ASIC in the Federal Court over allegations it breached responsible lending laws more than 260,000 times by using the benchmark to estimate a borrower’s

living expenses rather than their self-reported expenses.

In its submission to ASIC’s review, the banking major said it was not possible to build up an accurate picture of living expenses by reviewing transactional account data.

Using transactional account data risked misclassifying expenses, did not explain cash withdrawals, did not show if an item was a one-off or ongoing and was not a fail safe way of measuring future expenses, Westpac said.

The banking giant warned that requiring banks to build up a highly detailed view of any borrower’s living expenses would make getting a loan more difficult.

“It is likely that if this approach were adopted, customers would be subject to extended application periods and increases to the potential cost of credit due to the proposed changes to documentation and record-keeping,” its submission said.

ANZ warned that reviewing a customer’s full transaction history was not practical, pointing out the average monthly credit card statement could contain between 100 to 300 living expense transactions.

“It is likely that such a review may be resource intensive without a commensurate improvement in the quality of credit decisions,” its submission said.

“This is especially where the confirmation is being conducted in relation to smaller discretionary expense items... which could be reduced by the consumer in the future.”

National Australia Bank said assessing a borrower’s expenses was “not as simple as checking a customer’s declared figure against a line item in a bank statement”, while CBA argued a more detailed check of customer expenses was only needed when a customer’s stated living expenses came in below the HEM benchmark.

IT IS LIKELY IF THIS APPROACH WERE ADOPTED, CUSTOMERS WOULD BE SUBJECT TO EXTENDED APPLICATION PERIODS WESTPAC SUBMISSION