HEM – It’s a thing of the past

September 10th, 2018

At Connective, we’ve required our authorised Credit Representatives to complete thorough Household Living Expense (HLE) assessments since the NCCP Act with its Responsible Lending requirements was first passed. Yet many of the big banks did not follow and are now facing consequences for continuing to rely solely on the HEM.

Last week, Westpac made a bold move to settle out of court with ASIC on breaches of these Responsible Lending laws. With banks continuing use of the HEM, it’s no surprise that many brokers have found it difficult to know exactly what is expected when it comes to identifying and verifying an applicant’s HLE.

How does this affect brokers?

The long-accepted HEM basis used by lenders with their servicing calculators is way overdue for an overhaul. The HEM is seen by APRA and ASIC as inadequate for use as ‘the’ benchmark living expense measure in determining whether a loan is ‘not unsuitable’ as far as servicing is concerned. We highly recommend that you use the calculators provided in Mercury by the Connective Compliance Team instead of, or in addition to, the lender’s versions.

What’s going to happen next?

The $35M fine handed down by ASIC to Westpac is a further indication that the industry watch-dog is serious about the Responsible Lending requirements of NCCP.

The Royal Commission hearings to date have certainly supported ASIC’s point of view. It’s likely that when the Royal Commission’s Justice Hayne hands down his findings in February next year, that the HEM will be either abandoned completely or at least, its relevance severely challenged.

We’ve already seen many lenders tightening credit policies in respect of living expense assessments. Processes are being introduced requiring brokers to collect details and verify an applicant’s holistic household living expense position. Not only that, they require that we are taking real steps to validate and confirm the information supplied by the applicants.

What does this mean for the industry?

We are in a regulatory and fiscal environment that is under increased scrutiny by industry regulators. This is resulting in a tightening of lender policies across the board. Whether you agree or not, the landscape is changing. The regulators will be looking to position themselves closer to lenders in enforcing compliance with the law. There is also the prospect of ASIC embedding enforcement staff within the executive offices of the major lenders.

What does this mean for you and your customers?

Approximately 54% of loans in Australia currently originate via the broker channel, so it’s clear that consumers trust us as their first port of call when considering their finance options. Any further crackdown on using the HEM represents an opportunity for brokers.

An in-depth understanding of your customer’s spending habits is now more important than ever. The challenge this presents is the increased amount of time and work it takes to properly collect and validate living expense information. Having a defined process for it is vital to your ability to maintain turnaround times and conversion rates.

All brokers understand that time is money and increasingly we’re seeing brokers turn to technology solutions to support these extra regulatory requirements.  For example, websites like bankstatements.com.au can reduce the amount of time it takes to validate an applicant’s living expense attestation.

Use our resources to make it work.

Connective has taken on the changes early, with increased emphasis on living expense data collection in broker on-boarding training, HEM/HLE webinars, e-magazine articles and file reviews. You can also find handy resources on Connective Wiki to help you establish an efficient and thorough assessment process.

Our Smart Broker’s Guide to Household Living Expense Assessments and Best Practice Interview Questions for Good Customer Outcomes will help to ensure you always get an accurate result and stay on top of your compliance and responsible lending obligations.

Connective will continue to be at the forefront as the industry moves into the ‘Post Commission’ environment, representing your interests through industry forums (i.e. The Combined Industry Forum) lobbying lenders and regulators so that mortgage and finance brokers get greater consideration in the changing credit landscape.

If you have any questions, please don’t hesitate to get in touch with your local Compliance Support Manager at compliance@connective.com.au. If you have any questions about the Royal Commission or its findings and how they may affect you, our Group Legal Counsel Daniel Oh will be happy to help, simply email Daniel.Oh@connective.com.au