HEM debate heats up as reform process continues

In February, the Australian Securities and Investments Commission (ASIC) launched a review to update its responsible lending guidance (RG 209), which has been in place since 2010.

ASIC opened consultation by inviting submissions from stakeholders within the financial services sector and has since commenced a second round of consultation in the form of public hearings, in which stakeholders that provided submissions have been called to provide further guidance.  

Appearing before ASIC during its first round of public hearings, representatives from Bendigo and Adelaide Bank-backed fintech lender Tic:Toc claimed that from their observations, borrowers were regularly understating their living expenses when applying for a home loan.  

“We still find that, through no fraudulent action of the customers, they consistently understate their living expenses,” Tic:Toc’s chief customer officer Faith Brockhoff said. “I would say we see that all the time.”

Ms Brockhoff added that following consultation with borrowers regarding their stated monthly living expenses, the lender has found that, on average, their expenses were $900 higher than initially reported.

“I don’t think that’s because they’re trying to deliberately understate their expenses. I think a lot of customers, until they’re actually presented with a discussion, haven’t actually given it the true consideration that they need to,” she added.

Further, Ms Brockhoff revealed that the living expenses calculated via Tic:Toc’s digital validation process were typically five times higher than the average monthly quantum calculated using the Household Expenditure Measure (HEM).

“We found that if we took the raw data from the data capture, as opposed to [assessing] what the customer stated [using the HEM benchmark], the customer’s raw scraping of their expenses was a ratio of five times higher than the HEM,” she said.

Tic:Toc’s chief enterprise officer, Daniel Price, noted that unlike the HEM benchmark, the digital validation process includes one-off expenses that may occur over the life of a loan, which may include a car purchase or travel expenditure.

“What we do see is that if you analyse someone’s expense base over a period of time, you need to be able to drill down to the individual level of expenses as opposed to taking aggregated views because the aggregated views are sometimes misleading,” Mr Price stated.

Tic:Toc’s guidance has come amid news that the Federal Court has dismissed ASIC’s responsible lending case against Westpac, which related to the major bank’s use of the HEM benchmark to assess interest-only home loan applications.

ASIC had alleged that Westpac contravened its responsible lending obligations by favouring the HEM benchmark to assess serviceability rather than using a borrower’s actual expense information that, in some cases, breached the HEM benchmark.

ASIC’s first round of public hearings concluded, with the second round of hearings to commence in Melbourne on Monday, 19 August.

[Related: ‘Belt tightening’ provision rejected at ASIC hearing]