Lending curbs hit home

Borrowers beware. The banks’ mortgage clampdown may have gone too far, but any easing will be marginal.

Borrowers beware. The banks’ mortgage clampdown — an often intrusive procedure designed to make sure you can repay — may have gone too far, but any easing will be marginal.

There are plenty of anecdotes about prospective home buyers being asked all sorts of wacky questions, like why you spent $4000 on a suit or chose to dine out at a restaurant once a fortnight.

Another obscure story had a bank asking a couple, married for 20 years, how they would service a home loan if they divorced. Those tales are at the extreme end of the spectrum but hopefully when the Hayne royal commission dust settles, the industry and frustrated borrowers will find an equilibrium.

Mortgage brokers say changes to banks’ serviceability measures are now “coming in constantly”, whereas two to three years ago they were altered just a few times annually.

Somewhere in the middle is where this verification of expenses and granular approach needs to end up. Sensible checking of spending to make sure borrowers are providing accurate information and limited use of crude formulas such as the Household Expenditure Measure are the key elements.

Banks have hired teams of additional people to conduct more spot checks of expenses and override approvals if deemed necessary. The scrutiny has, it seems, gone to a new level.

Anecdotal evidence also suggests a jump in the number of people missing their property settlement date due to the extra hoops required to get loan applications across the line.

The responsible lending issue was again in the spotlight yesterday as Westpac became the first of the big four to be hit by a royal commission-related class action.

The action relates to loans provided after January 2011, which are being characterised as unsuitable for the borrower.

Westpac responded by saying it was aware of the class action brought by Maurice Blackburn, and would defend itself against the claims as it took its responsible lending obligations “very seriously”. Caps on interest-only loans and investor loans, which have now been removed, changed the lending landscape and spurred a lot of caution at the banks which was exacerbated by the royal commission.

ANZ chief Shayne Elliott this week conceded the lender went too far to curb home lending by taking an “overly conservative” approach.

Others are still tinkering. A memo sent by Commonwealth Bank to mortgage brokers, obtained by this column, shows additional revisions to policy that come into play over the weekend.

They cover brokers and branch staff starting to include expenses in a loan application for a borrower if the applicant has a dependent over the age of 18 — think young adults at university living at home.

There is more scrutiny around a person’s time-frame for retirement at CBA and ensuring “repayment requirements are met based on current and projected retirement income”.

CBA is also changing its so-called servicing calculator to cut the amount of income used for government pensions and payments, superannuation and child support. Instead of counting all of that income, from the weekend it will count 90 per cent.

Mortgage Choice chief Susan Mitchell believes banks are “starting to adapt” to the new environment and bring on more resources to get on top of a home loan backlog. But she estimates while borrowers that have almost perfect loan applications can expect to wait two weeks for approval, that can easily drag out to three weeks or a month.

The change that’s occurred already in the mortgage sector saw limited recommendations by commissioner Kenneth Hayne on responsible lending in his landmark report this month.

He wants industry to adhere to the National Consumer Credit Protection Act and for obligations to be better enforced.

“I think Hayne wants banks to develop a social conscience about their lending practices, similar to the corporate and social responsibility trend about 10 years ago, but applied throughout the business through their lending activities as opposed to merely supporting local sports teams or funding the Westpac helicopter service,” says Hillary Ray, a partner at law firm Cowell Clarke.

Hayne’s final report said Westpac had expanded the number of expense categories in its home loan application process to 13 from six and made some categories mandatory. CBA has a mandatory expense breakdown and updated its calculators and systems to identify commitments at other banks. ANZ has a detailed breakdown of living expenses and is moving to digital tools to “capture and categorise” spending data.

National Australia Bank introduced a more detailed expense validation in 2016, and is now said to be asking for more detail around future expenditure.

The ensuing months will be key to see where the industry lands. Those monitoring developments will put May 6 in the diary, as that’s when the corporate regulator and Westpac face off again in the Federal Court over responsible lending breaches.