Non-bank lender, Bluestone Mortgages, has announced its entry into the near prime space.
The move includes rate cuts of up to 2.25 basis points across its entire product suite, at a time when “PAYG and credit impaired customers are affected by the tightening criteria of traditional lenders”.
It comes off the back of extra funding through the acquisition of Cerberus Capital Management.
The Crystal Blue portfolio is being seen as particularly ambitious, comprising of full and alt doc products geared to support established self-employed borrowers and PAYG borrowers with a clear credit history.
Head of sales and marketing at Bluestone Mortgages, Royden D’Vaz, said, “The recent acquisition of the Bluestone’s Asia-Pacific operations by Cerberus Capital Management has enabled a number of immediate opportunities to be realised, most notably the assessment of our full range of products and to ensure they fully address market demands.
“We’re now in an ideal position to aggressively sharpen our rates based on the new line of funding, and pass on the considerable net benefit to brokers and end-users alike.
“The rate reductions have significant strategic implications as it places the company in a position to expand its operations into the near prime space as a natural extension of its specialist lending focus. This comes at an opportune time as a growing volume of self-employed, PAYG and credit impaired customers are affected by the tightening criteria of traditional lenders.
“Unlike big banks, we don’t have credit scorecards, which means we’re able to assess every borrower based on their merits and individual circumstances. We’re not one-size-fits-all by any means, which is increasingly appreciated.”
The move is being actively supported by the extension of the BDM, credit assessor and support teams to enhance access to decision makers to help brokers get more deals done, more often.
Bluestone’s is now focussed on actualising a number of imminent opportunities that address current market demands. The company says the series of rate reductions are the beginning of many initiatives that will enhance or expand the company’s portfolio.
Their analysis shows that LVR limits do have an impact on home prices. But the relationship is not linear, and needs to be binding to have significant impact.
This paper contributes to the international policy debate on the effect of macroprudential policy on housing-market dynamics. We use detailed New Zealand housing market data to evaluate the effect of loan-to-value ratio (LVR) restrictions on house prices. The main challenge in identifying these effects is that housing markets are affected by a range factors over and above LVR policy. For example, New Zealand experienced a raft of policy changes and macroeconomic shocks during the periods in which LVR policy changes were implemented. Many of these shocks and policies are likely to have affected the housing market. For example, when the first LVR policy was implemented, retail interest rates were rising alongside an increasing expectation for monetary policy tightening, while the New Zealand Treasury was adjusting housing-related policies at the time of the second LVR policy. This paper uses the exemption for new builds from the LVR restrictions as a natural experiment to identify the effect of LVR policy.
We find that, over the one year window around the new home exemption, the first LVR policy (referred to as ‘LVR 1’) had a 3 percent moderating effect on house prices, and this moderating effect is broadly similar across both Auckland and the rest of New Zealand.
Interestingly, our estimates show that LVR 2 (which tightened restrictions on Auckland properties and loosened restrictions elsewhere) did not significantly stop Auckland house prices from rising. By contrast, house prices in the rest of New Zealand (RONZ) increased by 3 percent due to the relative loosening of the LVR restriction. In LVR 3, the RBNZ further tightened the LVR restrictions on property investors nationwide. The moderating effect of LVR 3 was clearly seen in Auckland with a 2.7 percent reduction in house prices. This LVR 3 effect is both statistically and economically significant, as during the same period the average house price increased by 5.8 percent.
Overall, we estimate that the LVR policies reduced house price pressures by almost 50 percent. However, the effect of LVR policy is highly non-linear. When it becomes binding, LVR policy can be very effective in curbing housing prices.
UBS continues their forensic dissection of the mortgage industry with the release of their analysis of data from Westpac, which the lender provided to the Royal Commission. This was representative data from the bank of 420 WBC mortgages analysed by PwC as part of APRA’s recent review. APRA Chairman Wayne Byres found WBC to be a “significant outlier”, with
PwC finding 8 of the 10 mortgage ‘control objectives’ were “ineffective”.
UBS says for the first time information on borrower’s Total Debt-to-Income ratios (not Loan-to-Income) has been made available. They found WBC’s median Debt-to-Income at 5.4x, with 35% of the sample having Debt-to-Income ratios of >7x. Further 46% of the mortgage applications had an assessed Net Income Surplus of <$250 per week.
This data raises questions regarding the quality of WBC’s $400bn mortgage book (70% of its loans). While WBC has undertaken significant work to improve its mortgage underwriting standards over the last 12 months, we expect it and the other majors to further sharpen underwriting standards given the Royal Commission’s concerns with Responsible Lending. This could potentially lead to a sharp reduction in credit availability.
This raises two questions. First how much tighter will credit availability now be. We continue to expect an absolute fall in loan volumes, and this will translate to lower home prices.
Second, is this endemic to the industry, or is Westpac really an outlier? From our data we see similar patterns elsewhere, so that is why we continue to believe we have systemic issues.
Income is being overstated and expenses understated.
Customers have multiple loans across institutions and these are not always being detected, so their total debt burden is higher than the bank sees.
Combined these are significant and enduring risks. Chickens will come home to roost! Especially if rates rise.
The mortgage sector can expect a lower volume of loans in the short-term as banks tighten their lending standards, according to the CEO of an Australian property research firm.
The royal commission has found that the current process for ensuring home loan customers provide accurate information about their incomes, expenses, and debts is flawed, RiskWise Property Research CEO Doron Peleg said in a statement. This includes details gathered by mortgage brokers on the living expenses home loan customers declare in their applications.
Banks have already started to apply greater scrutiny to the living expenses disclosed by their customers. Westpac, for example, informed brokers that they need to require customers to submit more details about their spending when applying for a mortgage. They now need to break their spending down into 13 categories instead of six.
“In the short term at least, this is likely to result in a lower volume of loans, as seen in the UK which had a 9% drop in volume as a result of the 2014 Mortgage Market Review to address lax lending standards,” Peleg said.
Peleg also expects the duration of loan approvals to increase “significantly” and for borrowing capacity to drop. He pointed to figures from global investment bank UBS, which recently forecasted credit availability to drop by 21%-41%.
Peleg added that tighter standards also pose risks to property developers as some areas – especially properties at the top end of the market – are more exposed to price corrections. He said many borrowers need to rely on the current borrowing capacity to purchase these properties. “Significant reduction to the borrowing capacity may have a direct impact on these properties.”
According to the CEO, the demand of buyers on specific properties are based on lending approvals, pre-approvals, and risk assessments by independent research houses such as RiskWise.
“If the major lenders’ ‘black list’ some suburbs / postcodes or if there are multiple media releases from independent research houses that flag a certain area and property types as high-risk, based on their models, this might have a macro-impact on the market,” he added.
The Australian Prudential Regulation Authority (APRA) today announced plans to remove the investor loan growth benchmark and replace it with more permanent measures to strengthen lending standards.
The 10 per cent benchmark on investor loan growth was a temporary measure, introduced in 2014 as part of a range of actions to reduce higher risk lending and improve practices. In recent years, authorised deposit-taking institutions (ADIs) have taken steps to improve the quality of lending, raise standards and increase capital resilience. APRA has written to ADIs today to advise that it is now prepared to remove the investor growth benchmark, where the board of an ADI is able to provide assurance on the strength of their lending standards.
In summary, for the 10 per cent benchmark to no longer apply, Boards will be expected to confirm that:
lending has been below the investor loan growth benchmark for at least the past 6 months;
lending policies meet APRA’s guidance on serviceability; and
lending practices will be strengthened where necessary.
As with previous housing-related measures, this approach has been taken in close consultation with the other members of the Council of Financial Regulators. With risks in the environment remaining heightened, it will be important for ADIs to maintain prudent standards and close any remaining gaps in lending practices.
APRA Chairman Wayne Byres said that while the announcement today reflects improvements that ADIs have made to lending standards, there is more to do to strengthen the assessment of borrower expenses and existing debt commitments, and the oversight of lending outside of policy.
Mr Byres said: “The temporary benchmark on investor loan growth has served its purpose. Lending growth has moderated, standards have been lifted and oversight has improved. However, the environment remains one of heightened risk and there are still some practices that need to be further strengthened. APRA is therefore seeking assurances from ADI Boards that they will maintain a firm grip on the prudence of both policies and practices.”
For ADIs that do not provide the required commitments to APRA, the investor loan growth benchmark will continue to apply.
As part of these measures, APRA also expects ADIs to develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels, and policy limits on maximum debt-to-income levels for individual borrowers. This provides a simple backstop to complement the more complex and detailed serviceability calculation for individual borrowers, and takes into account the total borrowings of an applicant, rather than just the specific loan being applied for.
“In the current environment, APRA supervisors will continue to closely monitor any changes in lending standards. The benchmark on interest-only lending will also continue to apply. APRA will consider the need for further changes to its approach as conditions evolve, in consultation with the other members of the Council of Financial Regulators,” Mr Byres said.
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.
Today we examine the Mortgage Industry Omnishambles. And it’s more than just a flesh wound!
Welcome to the Property Imperative Weekly to 17th March 2018. Watch the video, or read the transcript.
In this week’s review of property and finance news we start with the latest January data from the ABS which shows lending for secured housing rose 0.14% or 28.8 million to $21.1 billion. Secured alterations fell 1%, down $3.9 million to $391 million. Fixed personal loans fell 0.1%, down $1.2 million to $4.0 billion, while revolving loans fell 0.06%, down $1.3 million to $2.2 billion.
Investment lending for construction of dwellings for rent rose 0.86% or $10 million to $1.2 billion. Investment lending for purchase by individuals fell 1.34%, down $127.7 million to $9.4 billion, while investment lending by others rose 7.7% up $87.2 million to $1.2 billion.
Fixed commercial lending, other than for property investment rose 1.25% of $260.5 million to $21.1 billion, while revolving commercial lending rose 2.5% or $250 million to $10.2 billion.
The proportion of lending for commercial purposes, other than for investment housing was 45% of all commercial lending, up from 44.5% last month.
The proportion of lending for property investment purposes of all lending fell 0.1% to 16.6%.
So, we are seeing a rotation, if a small one, towards commercial lending for more productive purposes. However, lending for property and for investment purposes remains quite strong. No reason to reduce lending underwriting standards at this stage or weaken other controls.
But this also explains the deep rate cuts the banks are now offering – even to investors – ANZ Bank and the National Australia Bank were the last of the big four to announce cuts to their fixed rates, following similar announcements from the Commonwealth Bank and Westpac. NAB has dropped its five-year fixed rate for owner-occupied, principal and interest home loans by 50 basis points, from 4.59 per cent to 4.09 per cent. The bank has also reduced its fixed rates on investor loans by up to 35 basis points, with rates starting from 4.09 per cent. And last week ANZ also dropped fixed rates on its “interest in advance”, interest-only home loans by up to 40 basis points, with rates starting from 4.11 per cent. Further, fixed rates on its owner-occupied, principal and interest home loans have fallen by 10 basis points, with rates now starting from 3.99 per cent. This fixed rate war shows our big banks are not pricing in a rate hike anytime soon.
But we think these offers will likely encourage churn among existing borrowers, rather than bring new buyers to the market. For example, the ABS housing finance data showed that in original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 18.0% in January 2018 from 17.9% in December 2017 – and this got the headline from the real estate sector, but the absolute number of first time buyers fell, thanks mainly to falls of 22.3% in NSW and of 13.3% in VIC. More broadly, there were small rises in refinancing and investment loans for entities other than individuals.
The latest data from CoreLogic shows home prices fell again this week, with Sydney down for the 27th consecutive week, and their index registering another 0.09% drop, whilst auction volumes were down on last week. They say that last week, the combined capital city final auction clearance rate fell to 63.3 per cent across a lower volume of auctions with 1,764 held, down from the 3,026 auctions over the week prior when a slightly higher 63.6 per cent cleared. The weighted average clearance rate has continued to track lower than results from last year; when over the corresponding week 75.1 per cent of the 1,473 auctions sold.
But the strategic issues this week relate to the findings from the Royal Commission and from the ACCC on mortgage pricing. I did a separate video on the key findings, but overall it was clear that there are significant procedural, ethical and even legal issue being raised by the Commission, despite their relatively narrow terms of reference. They cannot comment on bank regulation, or macroprudential, but the Inquiries approach is to examine a series of case studies, from the various submissions they have received, and then apply forensic analysis to dig into the root causes examining misconduct. The question of course is, do the specific examples speak to wider structural questions as we move from the specific instances. We discussed this on ABC Radio this week.
From NAB we heard about referrer’s providing leads to the Bank, outside normal lending practices and processes, and some receiving large commissions, despite not being in the ambit of the responsible lending code. From CBA we heard that the bank was aware of the conflict brokers have especially when recommending an interest only loan, because the trail commission will be higher as the principal amount is not repaid. And from Aussie, we heard about their reliance on lenders to trap fraud, as their own processes were not adequate. And we also heard of examples of individual borrowers receiving loans thanks to poor conduct, or even fraud. We also heard about how income and expenses are sometimes misrepresented. So, the question is, do these various practices show up more widely, and what does this say about liar loans, and mortgage systemic risk?
We always struggled to match the data from our independent household surveys with regards to loan to income, and loan to value, compare with loan portfolios we looked at from the banks. Now we know why. In some cases, income is over stated, expenses are understated, and so loan serviceability is a potentially more significant issue than the banks believe – especially if interest rates rise. In fact, we saw very similar behaviours to the finance industry in the USA before the GFC, suggesting again we may see the same outcomes here. One other point, every lender is now on notice that they need to look at their current processes and back book, to test affordability, serviceability and risk. This is a big deal.
I will also be interested to see if the Commission turns to look at foreclosure activity, because this is the other sleeper. Mortgage delinquency in Australia appears very low, but we suspect this is associated with heavy handed forced sales. Something again which was apparent around the GFC.
More specifically, as we said in a recent blog, the role and remuneration models for brokers are set for a significant shakedown.
Turning to the ACCC report on mortgage pricing, this was also damming. Back in June 2017, the banks indicated that rate increases were primarily due to APRA’s regulatory requirements, but now under further scrutiny they admitted that other factors contributed to the decision, including profitability. Last December, the ACCC was called on by the House of Representatives Standing Committee on Economics to examine the banks’ decisions to increase rates for existing customers despite APRA’s speed limit only targeting new borrowers. The investigation falls under the ACCC’s present enquiry into residential mortgage products, which was established to monitor price decisions following the introduction of the bank levy. Here are the main points.
Banks raised rates to reach internal performance targets: concern about a shortfall relative to performance targets was a key factor in the rate hikes which were applied across the board. Even small increases can have a significant impact on revenue, the report found. And the majority of existing borrowers would likely not be aware of small changes in rates and would therefore be unlikely to switch.
A shared interest in avoiding disruption: Instead of trying to increase market share by offering the lowest interest rates, the big four banks were mainly preoccupied and concerned with each other when making pricing decisions. It shows a failure in competition (my words).
Reputation is everything: The banks it seems were very conscious of how they should explain changes. As it happens, blaming the regulators provides a nice alibi/
For Profit: Internal memos also spoke of the margin enhancement equating to millions of dollars which flowed from lifting investment loans.
New Loans are cheaper, legacy rates are not. Banks of course are offering deep discounts to attract new customers, funded by the back book repricing. The same, by the way, is true for deposits too.
The Australian Bankers Association “silver lining” statement on the report said they welcomed the interim report into residential mortgages, which clearly shows very high levels of discounting in the Australian home loan market. It’s clear that competition is delivering better deals for customers, shopping around works and Australians should continue to do so to get the best discounts on the advertised rate. But they are really missing the point!
We will see if the final report changes, but if not these are damming, but not surprising, and again shows the pricing power the major lenders have.
So to the question of future rate rises. The FED meets this week, and the expectation is they will lift rates again, especially as the TRUMP tax cuts are inflationary, at a time when the US economy is already firing. In a recent report Fitch Ratings said that Central banks are becoming less cautious about normalising monetary policy in the face of strong growth and diminishing spare capacity. They expect the Fed to raise rates no less than seven times before the end of next year. And while still sounding tentative, the European Central Bank is clearly laying firm groundwork for phasing out QE completely later this year. They now also expect the Bank of England to raise rates by 25bp this year.
Guy Debelle, RBA Deputy Governor spoke on “Risk and Return in a Low Rate Environment“. He explored the consequences of low rates, on asset prices, and asks what happens when rates rise. He suggested that we need to be alert for the effect the rise in the interest rate structure has on financial market functioning, and that investors were potentially too complacent. There are large institutional positions that are predicated on a continuation of the low volatility regime remaining in place. He had expected that volatility would move higher structurally in the past and this has turned out to be wrong. But He thinks there is a higher probability of being proven correct this time. In other words, rising rates will reduce asset prices, and the question is – have investors and other holders of assets – including property – been lulled into a false sense of security?
All the indicators are that rates will rise – you can watch our blog on this. Rising rates of course are bad news for households with large mortgages, exacerbated by the possibility of weaker ability to service loans thanks to fraud, and poor lending practice. We discussed this, especially in the context of interest only loans, and the problems of loan resets on the ABC’s 7:30 programme on Monday. We expect mortgage stress to continue to rise.
There was more discussion this week on Housing Affordability. The Conversation ran a piece showed that zoning is not the cause of poor affordability, and neither is supply of property. Indeed planning reform they say is not a housing affordability strategy. Australia needs a more realistic assessment of the housing problem. We can clearly generate significant dwelling approvals and dwellings in the right economic circumstances. Yet there is little evidence this new supply improves affordability for lower-income households. Three years after the peak of the WA housing boom, these households are no better off in terms of affordability. In part, this may reflect that fact that significant numbers of new homes appear not to house anyone at all. A recent CBA report estimated that 17% of dwellings built in the four years to 2016 remained unoccupied. If we are serious about delivering greater affordability for lower-income Australians, then policy needs to deliver housing supply directly to such households. This will include more affordable supply in the private rental sector, ideally through investment driven by large institutions such as super funds. And for those who cannot afford to rent in this sector, investment in the community housing sector is needed. In capital city markets, new housing built for sale to either home buyers or landlords is simply not going to deliver affordable housing options unless a portion is reserved for those on low or moderate incomes.
But they did not discuss the elephant in the room – booming credit. We discussed the relative strength of different drivers associated with home price rises in a separate, and well visited blog post, Popping The Housing Affordability Myth. But in summary, the truth is banks have pretty unlimited capacity to create more loans from thin air – FIAT – let it be. It is not linked to deposits, as claimed in classic economic theory. The only limit on the amount of credit is people’s ability to service the loans – eventually. With that in mind, we built a scenario model, based on our core market model, which allows us to test the relationship between home prices, and a series of drivers, including population, migration, planning restrictions, the cash rate, income, tax incentives and credit.
We found the greatest of these is credit policy, which has for years allowed banks to magic money from thin air, to lend to borrowers, to drive up home prices, to inflate the banks’ balance sheet, to lend more to drive prices higher – repeat ad nauseam! Totally unproductive, and in fact it sucks the air out of the real economy and money directly out of punters wages, but make bankers and their shareholders richer. One final point, the GDP calculation we use in Australia is flattered by housing growth (triggered by credit growth). The second driver of GDP growth is population growth. But in real terms neither of these are really creating true economic growth. To solve the property equation, and the economic future of the country, we have to address credit. But then again, I refer to the fact that most economists still think credit is unimportant in macroeconomic terms! The alternative is to continue to let credit grow well above wages, and lift the already heavy debt burden even higher. Current settings are doing just that, as more households have come to believe the only way is to borrow ever more. But, that is, ultimately unsustainable, and this why there will be an economic correction in Australia, and quite soon. At that point the poor mortgage underwriting chickens will come home to roost. And next time we will discuss in more detail how these scenarios are likely to play out. But already we know enough to show it will not end well.
Given the tenor of the Royal Commission responsible lending inquiries this week, which focussed on the complexities of brokers and lenders complying with their responsible lending obligations, we believe the future will be distinctly digital. Our banking innovation life cycle road map calls this out.
To illustrate the point, there was a timely announcement from the Opica Group who have a new, and they claim Australia’s first responsible lending engine” (RELIE). This from The Adviser.
A new artificial intelligence-based expenses verification engine has been launched for brokers and lenders to ensure responsible lending and compliance obligations are met.
Billing the tech as “Australia’s first responsible lending engine” (RELIE), the Opica Group has launched the platform to help “protect any broker or lender from a breach of their responsible lending requirements”.
According to Opica Group founder Brett Spencer, the platform is needed because “lenders traditionally have been very quick to put blame on brokers for any application that goes sour”.
Mr Spencer said that following a tighter regulatory environment and “greater scrutiny being placed on our industry by regulators”, the group identified that “brokers needed something that provided them some protection”.
As such, it built the RELIE platform to enable brokers (and lenders) to perform a “RelieCheck” that could prove they had done the adequate checks into expenses and the consumer’s ability to service the loan.
How it works
The RELIE engine makes use of a specially built artificial intelligence engine, Sherlock™, which analyses a consumer’s banking and credit card transaction data over a period of 12 months and automatically provides “income verification, an understanding of the client’s mandatory expenditure, and therefore their ability to service a loan”.
According to the group, the key differentiator of the RELIE platform when compared to credit checks is that it uses machine learning to categorise transactions, allowing for the differentiation of transaction types, including mandatory versus discretionary expenditure and recurring versus one-off spending.
It also automatically highlights areas of concerns within the transaction data such as undisclosed debts, spikes in expenditure of high-risk categories such as gambling, and possible changes in life circumstances such childbirth.
Mr Spencer commented: “With the advancements in technology and legislation crackdown, we saw an opportunity to protect brokers and automate significant components of an applicant’s income and expense verification process…
“We believe that running a RelieCheck will protect any broker or lender from a breach of their responsible lending requirements.”
Speaking to The Adviser, Mr Spencer elaborated: “While a credit check simply looks at your credit worthiness, a RelieCheck looks at the consumer’s 365-day spending and income transactions and interrogates the data from a responsible lending perspective.
“It then presents back to the broker or lender a summary of exactly what, when and where an applicant’s income and expense are positioned.”
However, the Opica Group founder said that while the AI engine “does all the grunt work” to auto categorise and allocate spends to a range of buckets (such as mandatory versus discretionary expenses), the broker is able to review each category of spend and re-allocate expenses to a different category as part of their responsible lending discussions with the customers.
Each change made is then notated by the broker in order to meet their responsible lending requirements.
Revealing that the engine has been 16 months in the making, Mr Spencer said that the group wanted to “create a platform that a broker could use to protect themselves from any unintended breach of their responsible lending requirements”.
He added: “We also wanted to speed up the physically demanding process of paper-based statement reviews so that a broker could reduce the amount of time it takes to process a loan, and in the process providing a far greater service to the customer.”
Opica Group revealed that “early indications” have shown that by performing a RelieCheck on an applicant, a broker or lender could reduce processing times by approximately 90 minutes per application (when compared to manual assessment of the applicant’s banking and credit card transactions).
Mr Spencer concluded: “We want to create a new industry standard.
“Data is a commodity, but what you do with the data is the key ingredient.”
He added that he did not believe anyone else was thinking about “what we do with the data to aid the lending process”.
Opica Group is reportedly working with a number of aggregators and lenders to establish whether the engine could be integrated into their customer relationship management (CRM) systems. The service costs $15 (plus GST) per applicant for a broker account, or $10 (plus GST) per applicant for an aggregator or lender account.
CBA owned mortgage broker Aussie Home Loans does not have the capability to detect fraud committed by its brokers and instead waits until the banks detect scams and alert them as it does not have the resources.
The admissions were made by Aussie Home Loans general manager of people and culture Lynda Harris in a second day of questioning at the banking royal commission from counsel assisting Rowena Orr, QC.
It was revealed the company had recently bolstered the risk and compliance function at the broker to a total of nine employees.
Ms Harris was being questioned about the process behind the termination of an Aussie Home Loans broker Emma Khalil. Ms Khalil submitted multiple loan applications that were based on fake supporting documents including many from the same employer and with the same details.
“We don’t have that, we are reliant on the lenders to provide that expertise because ultimately they are the organisation that is approving the loans,” Lynda Harris said.
The fraud was not picked up until the client applied for a credit card with Westpac using different income details.
After the extent of the fraud committed by Ms Khalil was revealed, multiple internal emails between Aussie management revealed the broker was waiting for confirmation from Westpac before acting.
“If Westpac find that there was fraudulent activity on her part and revoke her accreditation, then that will be in breach of her contract and ultimately result in her termination from Aussie,” one such email read.
Ms Orr asked why Aussie was waiting to hear back from Westpac before terminating the employment of Ms Khalil despite identifying a number of suspect loans supported by similar or identical fake letters of employment.
“So Westpac – and in fact all large banks, have credit specialists and fraud teams that have the expertise to be able to determine fraud. We don’t have that, we are reliant on the lenders to provide that expertise because ultimately they are the organisation that is approving the loans,” Ms Harris said.
“What I want to put to you, Ms Harris, is that it’s not good enough, it’s not good enough that Aussie Home Loans outsources to a third party investigations of a fraudulent conduct made against one of its own employees. What do you say to that?” Ms Orr asked.
Ms Harris replied by saying that Ms Harris was not an employee of Aussie Home Loans and was in fact an independent contractor. She also said that company was not able to justify the expense.
Following an incredulous look from Ms Orr, Commissioner Ken Hayne sought clarification of the point
“It is open to me to conclude from your evidence from the time of the Khalil events and earlier, Aussie was of the view it was the role of the lender to investigate and determine whether there was fraud associated with one or more transactions?”
“Is it open to conclude from what you have told me that it remains Aussie’s view that it is for the lender and not Aussie to investigate and determine whether there was fraud associated with one or more transactions?”
Ms Harris explained the mortgage broker continued to invest in its systems and processes and hoped to develop a fulsome and rigorous process for the detection of anomalies in the loans submitted by its brokers.
She said the mortgage broker was developing a dashboard that would give it better visibility over its network however it was still in pilot phase.
The Banking Royal Commission has already cast a spotlight on so called Introducer Programmes, which allows professionals like lawyers, accountants and even real estate agents to be rewarded for flagging a potential mortgage lead to a bank. They are paid if the lead is converted by the bank.
As they are not providing financial advice, there is no formal regulation, only “professional” standards that they should disclose any financial reward for such activities. But how many do? Would you know?
This is, to put it mildly, a black hole. NAB showed that between 2013 and 2016 its introducer program brought in mortgages worth $24 billion, while paying out around $100 million in commissions to its introducers, or about 0.4%. Given that mortgage brokers get around 0.68% plus a trail, for doing significant work to steer an application through, introducers get money for old rope.
ASIC already highlighted this practice during evidence to the Productivity Commission review into Financial Services. An ASIC representative emphasised that although there is an exemption within the law for referrers, he noted that there is now “a fairly large industry of referrers comprising professionals, lawyers, accountants and advisers who do directly refer consumers to particular lender[s]” and that the commissions paid to these referrers “can be quite significant.
Disclosure needs to be tightened, and I question whether there is a role for such introduces at all.
Separately at the RC, we learnt that the banks are talking about adopting an updated HEM (the Melbourne Institute based benchmark). “The Household Expenditure Measure (HEM) is a measure that reflects a modest level of weekly household expenditure for various types of families. The Melbourne Institute produces the quarterly HEM report which is distributed through RFi Roundtables”.
The HEM is used to benchmark household expenditure as part of a loan application, and it looks like revisions will hit later in the year. But the RC probed whether there was a first mover disadvantage (as the metrics would lead to less ability to lend) and whether this is why there was an industry led coordinated approach.
Does the fact that there is an industry panel trying to deal with this motivate it, in part, by the avoidance of first mover penalty?—No. Well, that certainly wasn’t the motivation to set up the working group. It is something that has been discussed though, is with a number of changes coming this year in terms of uplifting serviceability standards, such as comprehensive credit, changes to HEM and new 25 measures such as debt to income ratios, it has been something discussed around the first mover disadvantage.
I wonder if the ACCC would have a view?
The RC also probed whether the HEM adequately reflected true levels of expenditure, as it was based on a “modest” lifestyle.
