Responsible Lending

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Every living expense can play a potentially crucial role in whether Sydney home buyers get their loan.
Despite the recent credit loosening, home loan applications are a huge hurdle before getting approvals.
There are numerous questions about the home buyer's current situation and their plans with any purchase on past bank statements likely to trigger spending analysis by the bank. 
Their forensic line by line scrutiny on spending includes everything from UberEats, Netflix, betting, pets, and the ongoing financial impact of children or, as a recent Saturday Telegraph front page reported, even the pursuit of IVF treatment.
Lendi managing director David Hyman watches bank requests seeking more information from loan applications. Before the Royal Commission, on average 40% of loan applications came back from the lenders with more information required.
During the Royal Commission period, around 52% of all loans applications submitted were coming back seeking greater details.
 This peaked in April this year at 63%. 
Significantly since the election and APRA’s changes to serviceability guidance, the trend has settled. Data from Lendi applications submitted in July and August show the rate of more information required has dropped to 29%.
Even the boss of Mirvac, Susan Lloyd-Hurwitz, who earns over $4.5 million, has found the questioning "tortuous" when recently settling on a $770,500 investment apartment.
Lloyd-Hurwitz said the scrutiny was "painful" and could "get non-sensical".
Last week, Treasurer Josh Frydenberg said that the bank's being too zealous in the wake of the Royal Commission.
Frydenberg warned it was beginning to penalise "hard-working families" trying".
"Common sense dictates that a sensible balance needs to be struck because an unduly restrictive application of these obligations can do as much harm as an overly lax one," Frydenberg said.
"Clearly, the risk that the provision of credit may cause substantial hardship to some should not result in a significantly reduced ability to access credit by the vast majority of borrowers," the Treasurer added.
The tighter lending restrictions is one of the reasons why listing volumes are at 20 year lows which the RBA governor Philip Lowe says is hurting the economy.
"With fewer of us moving homes, spending on new furniture and household appliances has been quite soft," Lowe said.
"So too has expenditure on moving costs and real estate fees. More broadly, the correction in the housing market has also affected the economy through its impact on residential construction activity.
Stung by the Royal Commission exposure of liar loan fraud, the banks moved to tighten their procedures and policies last year.
But last month the Supreme Court judge Nye Perram wisely noted that borrowers could always cut back on their spending after getting their new home.
"I may eat wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare," he colourfully noted while deciding for Westpac and against the Australian Securities and Investments Commission (ASIC) on a legal question of what Westpac should consider before responsibly giving someone a loan.
The latest data from APRA shows that riskier lending including loans with a high LVR or interest-only, remain a low proportion of new mortgages.
Most loans are based on the banks making lender serviceability assessments that incorporate an interest rate buffer of 2.5% above the current lending norm, to take into account potential repayment increases in higher loan rates and the borrower capacity in the years ahead. 
This article first appeared in The Daily Telegraph. 
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Every living expense important in securing a home loan

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Allegations from the corporate regulator that Westpac breached its responsible home loan lending obligations almost 260,000 times have been dismissed by the Federal Court.
The Federal Court dismissed ASIC's responsible lending case against Westpac.
ASIC had alleged that Westpac breached responsible lending laws using an automated process that relied on the Household Expenditure Measure benchmark, rather than using each applicant's individually assessed living costs.
Last September Westpac agreed to pay a $35 million settlement to ASIC in admitting breaches.
But the court rejected the settlement after the parties did not agree on what the responsible lending laws required.
Justice Perram dismissed ASIC's case against the bank today, awarding costs against the regulator.
The parties had previously jointly approached the Federal Court seeking orders that Westpac contravened the responsible lending provisions of the National Credit Act because its automated decision system:
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<li>did not have regard to consumers’ declared living expenses when assessing their capacity to repay home loans, and instead used a benchmark (the Household Expenditure Measure); and</li>
</ul>
<ul>
<li>for home loans to owner occupiers with an interest-only period, failed to use the higher repayments at the end of the interest-only period when assessing a consumer’s capacity to repay the loan. For example, for a loan of $500,000 at 5.24% with a term of 30 years and a 10-year interest-only period, the assumed repayment using the incorrect method is $2,758 per month, whereas the actual repayment after the expiry of the interest-only period using the correct method is $3,366 per month.</li>
</ul>
The litigation related to Westpac’s home loan assessment process during the period December 2011 and March 2015.
For 50,000 home loans, Westpac received, and did not use, consumers’ actual expense information that was higher than the Household Expenditure Measure.
For 50,000 home loans, Westpac used the incorrect method when assessing a consumer’s capacity to repay a home loan at the end of the interest-only period.
Of these 100,000 loans, Westpac should not have automatically approved approximately 10,500 loans.
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