The Australian Securities and Investments Commission (ASIC) has released a consultation paper around proposed changes it plans to make to its responsible lending guidelines in the wake of the banking royal commission.
While the regulator acknowledged that lending practices have improved in recent years, it said it was timely to conduct a review and update its responsible lending guidance, which has been in place since 2010.
ASIC’s paper has highlighted shortcomings of the Household Expenditure Measure (HEM) – a standard benchmark of people’s annual living expenses used in assessing people’s borrowing capacity.
It noted that some lenders used a single HEM benchmark that varied depending on family size and location, but failed to factor in a person’s income.
The regulator said there was an income adjusted HEM which it believed provided a more realistic prediction of consumer spending patterns because it acknowledged “that higher-income consumers generally have higher living expenses.”
Its consultation paper includes adding the following steps it believes lenders should take to reduce the risk of understating a consumer’s actual expenses:
- Ensure the benchmark figure being used is realistic – that it is adjusted for different income ranges and is not merely reflective of “low budget” spending
- If the benchmark figure used is more reflective of low budget spending (such as HEM), apply a reasonable buffer amount that reflects the likelihood that many consumers would have a higher level of expenses
- Conduct a ‘health check’ on the effectiveness of their inquiries and the estimates obtained by periodically reviewing the expense figures being relied upon across the licensee’s portfolio
Canstar Group Executive of Financial Services Steve Mickenbecker said many lenders have already reformed their lending criteria and do not rely solely on HEM, but also examine an applicant’s expenses.
He said he did not expect ASIC’s proposals would massively change current lending standards and the availability of credit.
“Assessing an applicant’s spending behaviour has become the new lending standard,” Mr Mickenbecker said.
“For some applicants, this could mean they may need to adjust their spending behaviour well in advance of applying for a home loan to improve their chances.”