Westpac has tightened its expense analysis for mortgages. Sound of door firmly shutting after the horse has bolted! I wonder is this might impact the current ASIC case on mortgage underwriting with Westpac? The bank will still apply either the higher of the customer-declared expenses or the Household Expenditure Measure (HEM) for serviceability purposes.
The Westpac Group has updated its credit policies so borrower expenses will need to be captured at an “itemised and granular level” across 13 different categories and include expenses that will continue after settlement as well as debts with other institutions.
The changes, which apply to all loans submitted to any bank within the Westpac Group from Tuesday (17 April), aim to “provide a more accurate view” of borrower expenses so that the bank can “better determine their financial situation and repayment ability”.
The move comes just weeks after the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry questioned whether credit providers have adequate policies in place to ensure that they comply with “their obligations under the National Credit Act when offering broker-originated home loans to customers, insofar as those policies require them to make reasonable inquiries about the consumer’s requirements and objectives in relation to the credit 25 contract, to make reasonable inquiries about the consumer’s financial situation, and to take reasonable steps to verify the consumer’s financial situation”.
Despite the commission raising questions over whether the use of benchmarks is appropriate when assessing the suitability of a loan for a customer, the Westpac Group changes will still apply either the higher of the customer-declared expenses or the Household Expenditure Measure (HEM) for serviceability purposes.
Expense types
Brokers are being advised that they will no longer be able to bundle living expenses.
Instead, for all loans submitted from Tuesday, 17 April, brokers will need to capture all applicable expenses over 13 categories during the needs assessment conversation.
“Absolute Basic Expenses” will be replaced with seven mandatory expense types. These are:
- Clothing and personal care
- Groceries
- Medical and health
- Transport
- Insurance
- Telephone, internet, pay TV and media streaming subscriptions
- Recreation and entertainment
There will also be an additional optional expense type, too. These are:
- Owner-occupied property utilities, rates and related costs
- Childcare
- Education
- Investment property utilities, rates and related costs
- Other
Notional rent
An additional category of rented property utilities and related costs will be applied if the customer’s post-settlement housing situation is either “rent”, “board” or “living with parents”.
Where an applicant has this type of post-settlement housing situation, if the monthly rental amount is stated to be less than $650 per month, a “notional” rent amount of $650 per month will be applied automatically to each applicant on the loan, regardless of marital status.
For other categories, the Westpac Group has outlined that a broker will still be able to enter $0 for an expense type, but for certain mandatory expenses, when $0 is entered into an expense type, the broker will need to select a reason to explain why the expense does not apply to the applicant.
Evidence
It will also be mandatory for the customer to provide evidence for other financial liabilities, including ongoing rent/board, child support and any secured or unsecured debts held with other financial institutions.
These can include documents such as bank statements, signed and dated rental agreements, letters from property managers, transaction listings, court order or child support agency letters.
For debts with other financial institutions, the documents cannot be more than six weeks apart from allocation date.
This documentation must be included in the loan application submission. Assessors will then verify the documents submitted.
The existing requirements for HELP, HECS and TSL debt will still apply.
Declaration
The customer must also now sign a “financial acknowledgment” as part of the loan offer documents indicating that all details relating to expenses and debts are true.
The bank said: “Westpac is committed to responsible lending and ensuring that we have a clear understanding of our customers’ financial situations.
“We are proud to work closely with our broker partners to continue to meet our responsible lending obligations and do the right thing by our customers. That’s why we are updating the Westpac credit policies to enhance the way we capture living expenses, commitments, and verify documentation.”
It added: “It’s all about looking after the customer by fully capturing their financial commitments to ensure they can adequality manage the mortgage liability they are potentially signing up for.”
How the changes will impact lodgements
ApplyOnline (AOL) and aggregator systems are currently being updated to cater for these changes.
The bank has outlined that any applications submitted before 17 April will be assessed as pipeline deals.
Applications saved or drafted in ApplyOnline before this date (or for applications resubmitted after this date) will need to be updated with the new expense type.
The banking group warned that any changes outside of the acceptable amendments under pipeline will require a reassessment and the previous approval may no longer be valid.
Brokers are being asked to check Westpac Broker Net or speak to their BDM if they have any further questions.
Crackdown on expenses
The move by Westpac marks the first wholesale change made by the major banks to tighten up their expenses collection process following the royal commission.
The commission was damning in its critique of the lenders’ policies when it came to ensuring customers can afford their home loans, with ANZ being called out for their “lack of processes in relation to the verification of a customer’s expenses”, and both Westpac and NAB revealing that there had been instances of their staff accepting falsified documentation for loans.
For example, it was revealed that there had been “at least 55 instances of Westpac staff either falsifying or accepting falsified supporting documentation in connection with home and personal loan applications, [and] a number of instances of Westpac staff receiving payments from referrers for the referral of customers to Westpac for loans”; while some NAB staff members were allegedly “charging NAB customers a fee for personal loans… made as cash payments under the table”.
It is expected that several other banks will follow in the footsteps of Westpac and make similar changes to their expense verification process in the coming weeks.
