Last week the Judge delivered his verdict in the ASIC-Westpac HEM case, essentially because of the ~260,000 loans examined in the case less than 5,000 would have potentially had their loans tweaked lower if the HEM was not used, whereas the bulk of the loans would have been bigger if HEM was not utilised in the decisioning.
I have now had the chance to speak to a number of industry players, and most have fallen into expected camps. Lenders in the main welcome the decision, suggesting that common sense has prevailed, and that ASIC was not reasonable in its interpretation of responsible lending guidelines. On the other side, consumer advocates are calling for tighter controls and suggesting that the HEM benchmarks, even in their revised form are too low – meaning that households are committed to servicing loans they cannot afford. And ASIC has commenced a review of responsible lending by years end.
But among my conversations on this topic, I found a sensible and balance view expressed by Fintech CEO Mark Jones from SocietyOne. They of course are on the cutting edge of technological innovation through their lending processes in Australia.
Mark made the point that recently lenders have been raising their standards, but the question becomes whether a lender has to try and uncover untruthful declarations from prospective borrowers. In Australia there is no clear-cut legal obligation of borrowers to be honest and transparent in their declarations, whereas in the USA there is such a legal obligation, and in New Zealand a Code of Conduct.
He cited examples where applicants had clearly lied on loan application forms.
What is the right balance between asking in painful detail for information from applicants, some of which are unsure of their specific spending patterns, and the fact that in any case if they take a loan, they may be capable of “life-style modification”?
So, he sees HEM in the context of the broader loan assessment processes, with data from applications tested again HEM, and additional dialogue around other unusual commitments which might include school fees, alimony, and other elements. This is all around knowing your customer. And there needs to be a focus on both discretionary and non-discretionary categories to give a complete picture.
The systems which Fintech’s like SocietyOne use are more sophisticated and can handle the complex algorithms which reflect real life. Positive credit and now Open Banking, both of which are arriving, are helpful in uncovering critical information. As a result, there are better outcomes for customers. No lenders want to make a loan which is designed to fail! And it opens the door to more sophistication around risk-based pricing
So, in summary, the trick is to get the right balance between getting every scrap of potential data from a customer, thus getting bogged down in the detail but missing the big picture; and applying simplistic ratios which do not provide sufficient precision to spot good and bad business. And it is this balance which needs to be defined in responsible lending, to a level which passes both community expectations and the operational requirements of lenders. To that end, the debate should not really be about HEM at all!
