The former head of the Mortgage and Finance Association of Australia (MFAA) has thrown his support behind better assessment of living expenses.
Tim Brown, who is now head of financial markets at Lakeba, has commended the “wait and see” approach from treasurer Josh Frydenberg, who said he would not be in a hurry to make changes to the current banking and insurance legislation.
After revelations from the Royal Commission hearings there is pressure to make changes to the way banks and other finance groups operate.
But many in the industry are warning that unintended consequences need to be thought through before decisions are made.
Pointing to a recent UBS study, Brown said consumers also needed to be held accountable for their decisions. The study showed that as many as one in three lied on their loan applications.
With this and the overuse of the HEM benchmark to assess living expenses, it is clear to see more needs to be done to verify borrowers’ financial situations.
Brown said, “I am entirely supportive of lenders doing more analysis around verifying a client's income and expenditure.
“I have been personally involved in building new regulatory tech software that can collect documentation and analyse a client’s banking transactional data to understand their income and expenditure.
“However, what this analysis shows is that there are very different levels of expenditure between geographical and demographic segments, and like Household Expenditure Measurement (HEM), there is no single benchmark for all borrowers.
“For example, a young couple's discretionary expenditure will reduce by up to 30% when they buy their first home.
“Now, if we were to try and use a benchmark such as HEM for the whole industry the majority of first home buyers would not qualify, based on their current expenditure.
“If I relate this back to myself when I bought my first home, this sounds about right. I remember curbing many of my outgoings and became much more frugal when spending money.”
But Brown also said the relationships between the lender and the customer could help the client’s financial health.
“Consequently, there must be some leniency given to lenders to sit down with a client and negotiate a budget they both commit to, moving forward,” he said.
“A client’s financial health can be monitored by using existing budgeting tools that are readily available in the market, and when the client moves outside the agreed budget limits, they return for credit counselling.”