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.
The regulator stated that it considered an update “timely” in light of its regulatory and enforcement work since 2011, changes in technology, and the release of the banking royal commission’s final report.
ASIC opened consultation by inviting submissions from stakeholders within the financial services sector.
Among the requested reforms to RG 209 was a consideration of changes in a borrower’s spending behaviour when conducting a serviceability assessment for loan application.
In its submission to ASIC, Westpac – which is currently engaged in a Federal Court dispute with the regulator over its use of the Household Expenditure Measure – called for greater flexibility in the assessment of a borrower’s living expenses, claiming that responsible lending guidance should take into consideration a borrower’s willingness to adapt to changes in their financial position.
“Adopting a modest lifestyle for a period of time in order to acquire real property has been the means by which many Australians have secured long-term financial security,” Westpac stated.
“Experience shows that many customers are prepared to, and do actually, make lifestyle adjustments after acquiring a home and can then service their home loan obligations without substantial hardship.
“As such, Westpac submits that placing too much emphasis on the customer’s pre-application living expenses when determining suitability, without allowing scope for reasonable lifestyles adjustments (‘belt-tightening’), would have the effect of denying credit to many customers.”
ASIC 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’s first round of hearings in Sydney on Monday (12 August), chief executive of the Financial Rights Legal Centre, Karen Cox, rejected calls for considerations of changes to a borrower’s spending habits.
“I’m concerned that lenders are assuming too much about post-loan spending reductions,” she said.
“This concept that people will change their habits after a loan [is settled], in our experience, [is true] for some people, but [others] fail to do that because wrong assumptions have been made about that ability.”
Ms Cox questioned the level of rigour involved in assessing home loan applications under existing arrangements.
“Once upon a time, we would have said to people that if you want to get a loan, go and demonstrate a savings record of this much for this long,” she continued.
“I don’t really see why we can’t say, ‘It looks like your expenses are too high. I think you need to go away and demonstrate that you can reduce that for a period of time before you take on a liability of this size’.”
Ms Cox cast doubt over lenders’ ability to adequately asses a borrower’s capacity to adjust to changes in their financial circumstances.
“There are obvious things around addictive behaviours where people are spending large amounts on alcohol and cigarettes and other things, where changing is not simply a matter of a desire to change, it’s actually much harder to do that,” she said.
“But also, around other more basic things... If someone’s spending a lot on eating out, it may be because they’re working 80 hours a week and don’t have a lot of choice and would be difficult for them to do otherwise.
“I think we have to be really careful around this concept of belt-tightening and assuming that people will be able to do that.”
Ms Cox accused some lenders of failing to engage in active conversations with borrowers about their ability to service a loan, claiming that some credit providers were too reliant on benchmarks.
When asked if some level of reform to ASIC’s guidance to reflect a borrower’s desire to alter behaviour was appropriate, Ms Cox replied: “I’d be very worried about even endorsing the concept of belt-tightening to be honest.
“I would worry that lenders would then take comfort in that and say, ‘It’s OK that their expenses are high, we’ve had a belt-tightening discussion’.”
ASIC’s first round of public hearings concluded, with the second round of hearings to commence in Melbourne on Monday, 19 August.