Westpac receives $35M fine from ASIC over home loan breaches

Westpac hit with record $35m penalty over home loan breaches

Here's the bit I find very interesting:

There's plenty of anecdotal evidence that banks approve loans that don't meet their lending criteria. Every broker has many cases where they've indicated to a client that they wouldn't qualify for a loan for various reasons, only for the bank to approve it in record time through direct channels. Either the borrower uses the broker conversation to figure out what not to tell the bank, or the bank ignores key pieces of evidence in the interests of making a profit.

It's also disappointing in some ways. ASIC has indicated that Westpac didn't adequately investigate living expenses prior to 2015 (which these loans were originated). Prior to 2015 there was responsible lending laws, but little in the way of guidelines on how living expenses should be determined. The figures used were considered appropriate by pretty much everyone at that time. ASIC appears to have judged Westpac's behaviour prior to 2015 by today's standards. Also interesting is that Westpac indicated that these loans aren't actually problem loans. This could be interpreted as punishment based on perception, not results.

I don't like that lenders are lazy in their assessment procedures and ignore their own rules, but I also don't like being judged retrospectively by today's standards which didn't apply previously.

 

Poor Westpac, im sure that .14% increase will cover it several times over.
I for one would have little difficulty living under the HEM if i had to, say if i had to pay my loans.
Does the $35m go to the Borrowers who where treated so harshly by being given loans? If so jackpot for them

 

No doubt it'll go to the Government coffers

 

I would almost say it is predatory behaviour by ASIC.

Lets create responsible lending laws, one of which is to make reasonable enquiries into a customers expenses.

Lets not define reasonable, so that way we can challenge industry in court to argue out what is reasonable.

Lets challenge one of the big four coz they will be able to cough up plenty of $$$$'s if we can argue their measures weren't reasonable.

 

My last loan involved 100 pages of documentation. The way this is all going, next application will be 200 pages of documentation. Better start downloading those credit card and bank statements into a spreadsheet. Categorise all my spending into mandatory, somewhat mandatory, partially mandatory, discretionary, partly discretionary, somewhat discretionary, fully discretionary. Maybe get back to day to day budgeting to make sure I can prove I am below the HEM. Might start the money jar for the weekly grocery bill. Wait until I tell the dog, no more fancy MyDog, you are back on the PAL my friend. Buying MyDog risks putting me over the HEM limit.

 

You're not entirely kidding @Harry30. The CBA's living expense breakdown includes a category for 'pets'.

 

You'd be surprised how much they cost per year. (I allow for 3000 a year for a cat and dog - anf thats not including food)

 

My dog is gonna hate it. Anyway, I really think we have somewhat lost the plot when a small number of bad loans is driving this level of compliance and form filling. And since when is approving a loan that does not meet the bank’s strict lending criteria, in and of itself, wrong? Are we saying there is now absolutely zero discretion in the credit process and we are just applying rules?

 

$3,000. Really! Oh boy, I am really in trouble then with APRA’s HEM police. Is my beloved dogs Buffet and Gates really costing me that much! I suppose it is a bit like those RACV surveys, where they say a car costs $200 a week. And you say, a car does not cost that much! And then you sit down and do the numbers, and you find, oh, it does cost that much! Better fire up that spreadsheet quick smart.

 

The lenders are applying discretion in trying to define/comply/understand what the law makers/ASIC define as reasonable enquiries in to a customers expenses and verification actually means.

These laws were bought in circa 2010/11.

ASIC didn't come out and say exactly what they expect the lenders to do to meet this requirement.

The lenders assumed the position that using HEM was a reasonable way to estimate a customers living expenses until around 2015 like @Peter_Tersteeg mentioned, ASIC reviewed some files at Westpac and came out and said using HEM was not acceptable.

Since then lenders have been asking for expenses to be categorised into 5-15 different categories. The more media/asic attention comes out, the more categories they put in.

Again the lenders are just guessing at what is "reasonable" and will continue to do so...its a bit of a game of cat and mouse until eventually it may go to court and it will be spelt out as to what exactly constitutes reasonable.

 

This hard line from ASIC to make reasonable enquiries into a customers living expenses and then take reasonable steps to verify them just show how out of touch the regulators are.

I mean honestly, what does it come down to.

The lender looks at your transaction/credit card statement over what 1,3,6,12 months, what is a reasonable period to go back?

Then take the total and convert it to a monthly figure.

Hmmm it seems that if you continue spending this much you won't qualify for a loan of x amount. Borrower goes away and lives on bare minimum for next 1,3,6,12 months, comes back to the lender and qualifies for x amount. Got the loan, now they can go back to spending what they like. What good do that do Mr Regulator....didly squat.

But we did create these laws with many ways in which they could be interpretated, that way we could go after these big bad lenders, take some money off them and create jobs for ourselves. Call me suspicious, but are they really protecting the public or looking after themselves.

 

It is ASIC that is driving it, the lenders are just responding to them and trying to stay on the right side of what they think will constitute reasonable enquiries in to living expenses.

And what is likely to be coming down the track...What constitutes reasonable verification of these expenses.

Yes...I definitely think ASIC/law makers have lost the plot with the reasonable enquiry and verification of living expenses.

 

You usefully clarified some points and deepened my understanding. Many thanks. I must say, it surprises me a bank would accept a $35m fine if the case came down to ASIC’s interpretation of what ‘reasonable inquiries’ meant. Reasonable would involve some weighing up of the administrative burden of lifting the lid on the HEM, against the benefit achieved by ‘auditing’ these expenses, noting that unlike things like salary, rental, mortgage payments, etc, the customer has considerable discretion to adjust up and down these expenses over time in order to meet repayments, as Peter has rightly said.

 

I thought westpac got in trouble approving loans that failed their calculator, and some were for existing customers whose spending was clear in their transaction account, yet Hem was used in the calculator.

 

This very issue was discussed in detail in a Royal Commission Hearing. The Lead of the Home Owner Team for ANZ, Will Rankin was quizzed about it by the Commissioner and Senior Counsel.

The guy from ANZ's position was that taking the Customers stated living expenses and verifying them against an independently verified statistic such as the HEM was reasonable verification in ANZ's opinion.

He said even if the Customer had a transaction account with ANZ and the spending on the transaction account was higher than the customer stated expenses, they would be ignored for the reason you mention, in that it would be a very lengthy process to go back through 12 months of transactions with a customer identifying every transaction, whether it was a one-off/discretionary/likely to continue in the future/etc, etc and that they would like come back to a figure close to what was stated anyway.

The Commissioner pipes in at some stage with the line, is it a case of administrative convenience over obeying the law, to which the ANZ guy responds that they take their legal obligations very seriously and I guess it is a question of what is considered reasonable.

In the past, ANZ would just ask for 1 line total of customer stated expenses, a review of over 400 files show 73% of files used the HEM figure. After implementing a more detailed categorisation of expenses to 15 through the proprietary channel, the % coming up to HEM remained relatively the same.

It makes for some interesting viewing if you are interested FSRC Day 6, 19/3/2018 about 51.55 mark.

 

Thanks for that, most interesting. I should watch it. I have been watching a lot of the testimony, and have written a detailed post with some observations on related topics. See ‘Banking Royal Commission....’

 

Hmm, the main reason why Westpac were hit is because they chose to ignore customer declarations, not because they took HEM at face value (like ANZ did at the RC). Westpac literally ignored information provided to them through the loan process. Its not dissimilar to inflating income, etc. In truth, there's 100s of things you could ping banks for over the years, this one didn't make it very hard for the regulator.

The other case, built around not uplifting assessment rates on IO loans though...literally every single lender i can think of didn't do this in 2015. This one is IMO regulatory overreach. If you do this, may aswell go after OFI actuals. Although, if this was the case alone, i think it wouldn't have gone anywhere and there'd be no fine.

The discussion at taking HEM at face value is one for APRA to consider. They're best placed to consider the whole framework and see how the expense side of the equation should fit into it. IMO the RC is as qualified as @Harry30 dog to make assessments on whether its OK or not. They were just picking something that was in the media and trying to get a headline here. Realistically you don't need to look at expenses that closely in loan assessments if you don't want to. Having system generated living expenses isn't necessarily a bad thing, it certainly has upsides too. There's a tradeoff benefit; marginally worse loan quality (barely noticeable in australia) for the benefit of efficiency and growth (quicker assessments, etc). APRA knew how living expenses were treated, didn't care or weren't really too fussed. Thats why there wasn't too much change in the 'process' for living expenses when they first intervened on serviceability frameworks 2015. HEM measures are neat, as it allows quicker assessments of something that is difficult to accurately define.

At the end of the day, 'living expenses' is about its about making prudent lending decisions around 'serviceability'. Haircutting income, using standard DSR ratios, potential loan to income ratios, etc are all ways to do this that don't necessarily require living expense verification. You can come up with different ways to do this, many that don't involve a thorough examination of individualised households expense arrangements. The RC and other media commentators haven't really consider the context of the decision making process, APRA are best placed to do this (and its really their mandated job).

 

it might soon become reality. the amount of initial supporting documents and subsequent supporting documents ( required by some major banks) are mind blowing. it is not 200 pages, it will be 200 documents at some stage

 

A comedian right here.....fine to oil the machinery that squeaks a lot

 

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