How ‘liar loans’ undermine sound lending practices

From The Conversation.

How truthful are we when it comes to negotiating loans in Australia?

With increasing pressure on the housing market, some of us might be tempted to stretch the truth to secure a mortgage on our dream property – but research shows that this practice can have serious repercussions.

Recent news reports have alerted borrowers to the dangers of “liar loans”, based on the findings of a new UBS research study. A liar loan is a no-documentation loan that is approved on the basis of unverified and possibly false information about income, assets or capacity to repay.

In the United States, where many loan applications have been approved without any information on the borrower’s income and assets – these liar loans have been implicated as one of the reasons for the global financial crisis.

Should we be worried in Australia?

The UBS study found that a third of Australian mortgage borrowers reported being “not factual or accurate” in their mortgage applications. Being “not accurate” is not the same thing as being a “liar”. However, we need to be aware and pro-active to avoid poor standards and practices.

They further estimate that there is roughly US$500 billion (A$657.95 billion) worth of factually inaccurate mortgages on banks’ books in Australia. This is worrying, because it could mean that borrowers are taking on bigger debts than they can actually afford, falling into financial stress or even losing their homes.

The Australian situation

In Australia, when borrowers apply for a mortgage they need to provide documentation that verifies their employment history, creditworthiness, and overall financial situation. Borrowers are required to provide a payslip or most recent tax returns, and show that they have been employed in the same job for at least 12 months.

Other documentation may include: credit card and bank statements; sales contract; confirmation of rental income if purchasing an investment property; and more. The mortgage originator may perform credit checks and bankruptcy or default searches.

Some mortgage borrowers may not be required to provide much documentation if they are existing clients of the bank and already have a strong credit history.

In my research I found that 88.8% of mortgage applicants were existing customers of the bank where they apply for a mortgage, and had been so for 9.3 years on average. But low documentation loans exist for self-employed borrowers.

Where accuracy of mortgage applications becomes difficult to determine is when estimating the expenses of the household. Mortgage applicants are asked about their monthly expenses to assess whether they can service the debt without major stress. Here, applicants may be “mostly factual and accurate” or even “partially accurate” when trying to calculate their monthly expenses. After all, how many people actually keep accurate and up-to-date spreadsheets of all their expenses?

Debts outstanding with other financial institutions or family and friends may also be misreported. In addition, mortgage lenders who receive commissions linked to loan size have incentives to overestimate borrower’s incomes and underestimate expenses.

Australian version of liar loans?

These arguments do not suggest that there is no “lying” or “truth hiding” in mortgage applications in Australia, but that it may not be comparable to the trend of “liar loans” seen in the US.

More importantly, banks do not rely only on their clients’ word. Banks estimate monthly expenses and uncommitted income for their clients based on borrower characteristics and solid financial records.

Data from previous research reveals that banks estimate on average A$1,637 more on monthly expenses than applicants report. Based on the bank’s calculations, housing investors underestimate their monthly expenses by A$1,932 on average, while owner-occupiers underestimate by A$1,560 on average.

Similarly, mortgage applicants report their monthly uncommitted income to be on average A$702.5 more than what the bank estimates it to be. Housing investors only overestimate their monthly uncommitted income by A$174 on average, while owner-occupiers overestimate by A$840 on average.

Due diligence required from both banks and borrowers

Research finds that mortgage features (for example fixed or adjustable rates, maturity, loan-to-value ratio, and so on) help borrowers select mortgage products that are affordable and safer for them, with the guidance of mortgage lenders and brokers.

The research further finds that lenders should make sure that borrowers have the financial capacity to repay their loans out of income or by selling assets under plausible conditions, and not by relying on the value of the collateral.

Mortgage delinquency and default may rise due to excessive risk taking in mortgage lending combined with deteriorating economic conditions; or due to falling income and rising unemployment during a housing downturn. This later case is more likely the potential threat in the Australian current environment.

The Australian Prudential Regulatory Authority (APRA) and the Reserve Bank of Australia (RBA) perform stress tests to check the financial system’s resilience. Along with APRA’s macro- and micro-prudential regulations, some lenders are introducing higher requirements and credit restrictions on potential borrowers.

These include obtaining more information on the clients, which helps assess credit and default risks and helps design and target financial products to specific type of borrowers. There is however risk of mortgage discrimination.

More careful monitoring needed

Mortgage risks often relate to mismatches between the products used by households and their financial capabilities and ability to bear risks. For that reason, mortgage product characteristics should be monitored carefully both by banks and borrowers.

The Organisation for Economic Co-operation and Development (OECD) suggests that financial authorities should make sure lending standards are sound, both in the banking and non-banking sectors. It is important that banks do not face incentives encouraging excessive risk taking.

Requiring more transparency, reinforcing consumer protection and financial education encourages sound lending and borrowing practices.

Author: Maria Yanotti, Lecturer of Economics and Finance Tasmanian School of Business & Economics, University of Tasmania

Westpac tightens up on responsible lending

From Australian Broker.

Westpac has brought in a number of responsible lending changes affecting how brokers enter in requirements and objectives (R&O) questions for clients.

“As a bank, Westpac is committed to responsible lending and meeting our conduct obligations under the National Consumer Credit Protection Act. Requirements and Objectives are a part of our responsible lending obligations,” the bank wrote in a note to brokers on Monday (30 October).

Effective from 14 November, brokers will be required to complete additional R&O questions and declarations for clients taking out certain loan types including but not limited to:

  • Fixed interest loans
  • Loans requiring lenders’ mortgage insurance
  • Loans with interest only repayments
  • Line of credit loans
  • Loans for refinancing or debt consolidation

The questions are designed to help brokers understand their client motivations, align the products to their needs, and prompt brokers to explain consequences around each choice of product to the client.

Additional R&O questions will also apply for each applicant of the loan, including for clients with foreseeable changes, special circumstances, current financial hardship, or those approaching retirement age.

“Westpac Group takes its responsible lending obligations seriously and is committed to ensuring good outcomes for our customers across first and third party lending,” Tony MacRae, general manager of third party distribution at Westpac, told Australian Broker.

“We’ll be working closely with all brokers over the coming months to support them with this new way of working – many had already adopted this approach and have been working this way for some time.”

From 8 January 2018, changes to submitted loan applications will no longer be accepted by email and will instead have to be completed through ApplyOnline.

“This will ensure that the correct R&O are captured accurately for all applications submitted and resubmitted and there is a central location that incorporates all the R&O information that has been discussed between yourself and the client with documented evidence of any loan changes,” the bank said.

MP grills CBA on brokers, offsets and big mortgages

From The Adviser.

NSW MP Kevin Hogan said that mortgage brokers have told him that it is in their best interest to get clients to borrow as much as they can.

Mr Hogan was on the parliamentary committee that questioned CBA chief executive Ian Narev in Canberra on Friday (20 October), where he was eager to find out from the CEO how brokers were behaving.

“You have one of the most extensive broker networks in the country,” Mr Hogan said, addressing Mr Narev.

“Brokers, as well as customers, tell me it’s obviously in the broker’s interest to get the customer to borrow the maximum amount of money they can get them to borrow — they get remunerated that way — even though they might not need that much money. And then they open an offset account and put the money they don’t need in that account, but they have drawn down the maximum amount of money they can borrow.”

The MP then asked Mr Narev if he has noticed “a big difference” in the number of customers who open an offset account, with money put in it straightaway, between the broker network and their branch network.

The CBA boss took the question on notice, but provided his thoughts on debt levels and the financial wellbeing of customers.

Mr Narev said: “You are raising a different and very valid point, which is: how much should people borrow? In the context of the broader regulation on general advice versus specific advice, we have a lot of discussion about that at the bank, and it is a very live discussion both through our own channels and through proprietary channels.”

Mr Narev noted that, historically, there has generally been a view that “whatever the bank will lend me, I should borrow”.

While he stressed that CBA lends responsibly for what people can service, Mr Narev said that the question of what level of debt somebody is comfortable with is “very personal”.

“The whole industry — and we are certainly doing it, including through behavioural economics in conjunction with academics from Harvard University — is working through how, within the constraints of the law on advice, we can have richer discussions with people to go down exactly the distinction you’ve drawn.”

Mr Hogan restated his belief that brokers get incentive to put customers in larger loans, saying: “It is obviously in the broker’s interest to get that person to borrow as much money as they can possibly get them to do — which might not necessarily be in the best interest of the customer — and you have an extensive network.”

Outgoing ASIC chairman Greg Medcraft also believes that brokers encourage customers to borrow more. In fact, he even admitted that he would do it himself if he was a mortgage broker.

Speaking at a Reuters Newsmaker event on 12 September, Mr Medcraft touched on a recent report from investment bank UBS, which suggested that around $500 billion of mortgages could be based on inaccurate information.

Mr Medcraft said: “The mortgage commission is based on [the fact that] the larger their loans, the more you get. So, logically, what would you do?

“It’s human behaviour. I’d do it.”

More Evidence Of The Risks Of Interest Only Loans

Citi has published a 54 page report on the highly topical subject of interest only (IO) loans, and we provided data from our Core Market Model to assist their research.

Even after recent regulatory tightening, they highlight that underwriting standards in Australia are still more generous than some other countries.

They conclude that there are vulnerabilities in the IO sector, both from property investors and owner occupied IO loan holders.

They say that tighter lending criteria and rising house prices has meant investors increasingly face net negative cash flows and investors face a growing household cashflow gap and reducing capital gains expectations.

The large levels of debt outstanding by borrowers aged in their 50’s and 60’s means many investors will need to sell property to discharge their debts.

Owner Occupied IO borrowers are more susceptible to interest rate rises given higher average borrowing levels and higher average loan to
value ratios. Our mapping of OO IO borrowers between 2011 and 2017 highlights the spread of these loans.

They conclude that:

all major lenders face a responsible lending risk – Westpac and CBA have more customers who will need to adjust to the new realities of investing in the residential property market in Australia. Given the widespread use of IO finance and the reduced prospects of discharging debt via means other than liquidation of portfolio holdings, banks must face an increased risk of mis-selling claims in future years. Mining towns serve as a microcosm of this threat.

The Hundred-million Dollar Home Loan Fraud Conspiracy

ASIC says false documents were used for more than 500 loan applications valued at approximately $170 million submitted between about March 2008 and August 2010 to numerous banks and financial institutions.

These included the Commonwealth Bank of Australia, Westpac Banking Corporation, St George Bank, Bankwest, Adelaide Bank, Bank of Queensland, Choice Home Loans, Citibank, National Australia Bank, Pepper Homeloans and Suncorp Bank.

The false documents included bank statements, payslips, citizenship certificates and statutory declarations. These were predominantly used in support of applications for home loans for house and land packages as well as for the purchase or refinance of existing homes.

The sentencing follows an ASIC investigation into Footscray-based finance broking company Myra Home Loans Pty Ltd, which traded as Myra Financial Services (Myra).

Mr Najam Shah, 58, of Victoria, has been sentenced to 5 years jail after pleading guilty to one charge of conspiring to defraud financial institutions. Mr Shah must serve 3 years and 3 months before being eligible for parole.

The charge relates to Mr Shah’s role at Myra and the creation and use of false documents to support loan applications valued at a total of approximately $170 million.

On 13 February 2017, Mr Shah entered the guilty plea during an appearance at the County Court of Victoria. Mr Shah’s plea followed his arrest and charge in January 2015. By pleading guilty, Mr Shah admitted to conspiring to defraud financial institutions.

In sentencing Mr Shah, Judge Gucciardo noted that mortgage fraud of this nature damages the integrity of the lending system and that Mr Shah’s well organised deception enabled such corruption. He further noted that Mr Shah was motivated by greed.

ASIC Deputy Chair Peter Kell said, “ASIC will continue to ensure that mortgage brokers who provide false documentation are held to account. Today’s sentencing reflects both the severity of Mr Shah’s actions and the consequences facing those who do not abide by the law.”

The matter was prosecuted by the Commonwealth Director of Public Prosecutions.

ASIC’s investigation is continuing.

Are IO Households Aware They Have IO Loans?

DFA analysis shows that over the next few years a considerable number of interest only loans (IO) which come up for review, will fail current underwriting standards.  So households will be forced to switch to more expensive P&I loans, assuming they find a lender, or even sell. The same drama played out in the UK a couple of years ago when they brought in tighter restrictions on IO loans.  The value of loans is significant. And may be understated, according to new research.

A few observations. ASIC in 2015, released a report that found lenders providing interest-only mortgages needed to lift their standards to meet important consumer protection laws. They identified a number of issues relating to bank underwriting practices. We would also make the point that despite the low losses on interest-only loans to date in Australia, in a downturn they are more vulnerable to credit loss.

In April this year we addressed the problem of IO loans.

Lenders need to throttle back new interest only loans. But this raises an important question. What happens when existing IO loans are refinanced?

Less than half of current borrowers have complete plans as to how to repay the principle amount.

Interest-only loans may seem like a convenient way to reduce monthly repayments, (and keep the interest charges as high as possible as a tax hedge), but at some time the chickens have to come home to roost, and the capital amount will need to be repaid.

Many loans are set on an interest-only basis for a set 5 year term, at which point the lender is required to reassess the loan and to determine whether it should be rolled on the same basis. Indeed the recent APRA guidelines contained some explicit guidance:

For interest-only loans, APRA expects ADIs to assess the ability of the borrower to meet future repayments on a principal and interest basis for the specific term over which the principal and interest repayments apply, excluding the interest-only period

We concluded:

This is important because the number of interest-only loans is rising again. Here is APRA data showing that about one quarter of all loans on the books of the banks are interest-only, and that recently, after a fall, the number of new interest-only loans is on the rise – around 35% – from a peak of 40% in mid 2015. There is a strong correlation between interest-only and investment mortgages, so they tend to grow together. Worth reading the recent ASIC commentary on broker originated interest-only loans.

But if households are not aware they have IO loans in the first place, then this raises the systemic risks to a whole new level. The findings from the follow-up study by UBS, after their “Liar-Loans” report (using their online survey of 907 Australians who recently took out a mortgage – they claim a sampling error of just +/-3.18% at a 95% confidence level) are significant.

They say their survey showed that only 23.9% of respondents (by value) took out an interest only loan in the last twelve months. This compares to APRA statistics which showed that 35.3% of loan approvals in the year to June were interest only.

They believe the most likely explanation for the lack of respondents
indicating they have IO mortgages is that many customers may be
unaware that they have taken out an interest only mortgage. In fact, around 1/3 of interest only borrowers do not know that they have this style of mortgage.

Source: UBS

They also says 71% of respondents who took out an interest only mortgage during the last 12 months indicated they are already under moderate to high levels of financial stress.

Source: UBS

Finally, they found that Interest Only borrowers via the broker channel are more likely to be under high financial stress from recent rate rises.




ANZ tightens up on apartment lending

From The Advisor

ANZ has announced that it will be implementing new restrictions on some loans for residential apartments, units and flats in Brisbane and Perth.

Effective Monday, 2 October, there will be a maximum 80 per cent loan-to-value ratio (LVR) for owner-occupier and investment loans for all apartments in the following inner-city Brisbane postcodes:
– 4000
– 4006
– 4010
– 4011
– 4014
– 4102
– 4171

There will likewise be a new restriction on investment lending for apartments in some areas of inner-city Perth.

Also from 2 October, there will be a maximum 80 per cent LVR for investment loans for apartments in these Perth postcodes:
– 6000
– 6004
– 6104
– 6151

These policy changes apply to all apartments in affected postcodes, including off-the-plan and non-standard small residential properties (≥40m2 & <50m2) valued at less than $3 million.

Granny flats are not impacted by this change.

ANZ has told brokers that applications submitted prior to 2 October 2017 will be assessed under the previous policy (as will applications that have been granted an extension prior to Monday, 6 November 2017).

A spokesperson for the bank commented: “This update for a handful of Brisbane and Perth locations is part of our ongoing efforts to ensure we are lending responsibly and in consideration of all our regulatory responsibilities.

“We regularly look at a number of factors in relation to residential apartments to make sure we are meeting our responsibilities, including supply and demand, rental yield, vacancy rates and location.”

The moves come amid increasing concern of oversupply in apartment building, with several developers making headlines recently for being left with unsold apartments.

Analysts at BIS Oxford Economics suggested in June that new apartment completions in Australia that have been largely bought off the plan by investors will hit a record this year and “most cities will find that tenant demand will not be sufficient to support rents and consequently values”.

According to the report, the whole of Australia, barring NSW which is “heavily undersupplied”, will be in oversupply over the next three years, with the unit market likely to face more challenges than the house market as a result of APRA constraints on investor lending.

Further tightening could be on the horizon

Speaking to The Adviser, Ranjit Thambyrajah, managing director of Acuity Funding, suggested that there could be further tightening by ANZ in the coming months.

The commercial broker said: “Perth has been slowing down and slow for quite a while now and Brisbane is heading that way quite quickly. ANZ, in particular, pulled out of lending for both those states for development a little while ago, so I think [this recent change] is just following on from that.

“I think it’s probably going to be more than those areas, actually. I think they are going to face difficulty in other areas as well, in terms of oversupply.”

He explained: “We’re in the business of funding the developments and we are experiencing a lot of difficulty in funding things in Queensland, particularly with the ANZ bank, and we have the same situation in WA. So, they perceive the oversupply as going to continue for a while, but currently the areas that they are quoted on are the ones that they are experiencing most oversupply in.”

While Mr Thambyrajah said that other areas experiencing oversupply of apartments, such as Melbourne and some areas of Sydney, will “start feeling more tightening as well”, he said that he is not overly concerned by the changes.

“Just because one bank is not lending does not mean others are not. It really depends on their prudential limits to the area and also the blend of their book in terms of APRA guidelines as well.

“So, I’m not concerned by this at all. I think it just changes from month to month and bank to bank.”

ANZ also tightened their underwriting standards according to MPA by issuing a Customer Interview Guide..

Yesterday ANZ issued a Customer Interview Guide which specific which topics brokers should discuss with home and investment loan borrowers.

“We expect brokers to use a customer interview guide (CIG) to record customer conversations as a minimum moving forward,” noted ANZ “while it is not required to submit the CIG with the application, it should be made available when requested as a part of the qualitative file reviews.”

Brokers and Banks Respond to ‘Liar’ Loan Claims from UBS

From Mortgage Professional Australia.

The MFAA and FBAA have harshly criticised a UBS report which claimed 1/3 of mortgage applications were not entirely accurate (which they term ‘liar loans’).

The report, which also claimed broker channel loans were more likely to contain inaccurate information, was branded ‘reckless’ by the FBAA because it was “based on implied presumptions.”

MFAA CEO Mike Felton questioned the validity of UBS’ results, stating that “we particularly question their comparison of misrepresentation in the ‘Banker vs broker’ channels given that the actual data shows us that default rates experienced on loans originated through the respective channels are quite similar once controlled for demographic differences.”

Felton also pointed to the low numbers of brokers being deregistered by ASIC, the high market share of brokers and ASIC’s Review of Mortgage Remuneration to counter UBS’ claims. He also notes that “whilst the broker is an intermediary in the process with a significant role, final responsibility for approving or declining a loan has to lie with the lender.”

eChoice’s general manager of aggregation Blake Buchanan argued that UBS’ report demonstrated a lack of understanding of the sector: “the level of scrutiny for  broker introduced business is greater than their retail counterparts and with advancements in technology, information sharing and better regulation the event of misrepresentation is more discoverable than ever before.”

Lenders also criticised UBS. Major bank ANZ, which was singled out by UBS for an alleged high proportion of incorrect loans, told MPA: “a survey of 907 people covering all of the major banks is an extremely limited sample given ANZ has more than one million home loans.”

Methodology and sample size

UBS results come from an online survey of 907 individuals who had taken out mortgages in the last 12 months.

Peter White, executive director of the FBAA, has asked to see UBS’ questions (of which there were 70) and asked whether participants were paid to take part, arguing that “UBS must prove there is no steering of answers or influences to produce outcomes which are not factual or fair or commercially sound.”

ANZ and brokers have questioned whether UBS’ sample size could adequately support the bank’s claims. UBS does not disclose what proportion of its respondents used brokers, but assuming 50%, that meant 65 respondents claimed “the broker suggested I misrepresent” on their mortgage application. Just 9 individuals claimed bankers had suggested they misrepresent.

In comparison, ASIC’s Review of Mortgage Broker Remuneration analysed 1.4m home loans worth $5.5bn, collecting 157 data points for each, in addition to surveying 3000 consumers on their opinion of brokers.

The MFAA told MPA it will continue to benchmark against ASIC’s data rather than consumer surveys.

UBS involvement in Australia and fines

FBAA boss White also criticised UBS’ knowledge of mortgage broking: “this is not their data and not data from a bank/lender, so the question must be asked as to the accuracy and integrity of the research, which is fundamentally divorced of market broker and lender marketplace data.”

According to APRA’s monthly banking statistics, UBS have $0 lent out in mortgages in Australia although they are involved in over $2bn of lending to Australian corporations.

UBS themselves disclose they are linked to the major banks through the provision of investment banking services. However, the bank is not a member of the Australian Bankers Association or the Australian Finance Industry Association, and so not involved in the Combined Industry Forum on broker remuneration.

The bank has been fined for misconduct several times in recent years, albeit for services not clearly connected with their recent report, and in many cases outside Australia.

In 2015 UBS was fined US$545m by the UK regulator for rigging inter-bank exchange rates, US$15m in 2016 by the US regulator for failing to properly instruct financial advisors on the products they were selling and 2 million Swiss Franks in 2017 for releasing price-sensitive information too late. UBS’ most recent brush with ASIC was a $280,000 fine in June this year for incorrect disclosures related to trading and an electronic trading system.

What is the industry doing to respond?

With UBS’ report covered extensively by Australia’s financial and mainstream press, the industry has come under pressure to protect broking’s reputation.

The MFAA and FBAA have made public statements against the report, although it is not clear whether they will engage directly with UBS.

ANZ told MPA that: “We have processes in place designed to ensure our home loans continue to be assessed conservatively. This includes applying an interest rate floor of 7.25% and using the higher of either the customer-stated expenses or a benchmark based on independent data provided by the Melbourne Institute.”

ANZ added that UBS’ report “reinforces the need for the introduction of Comprehensive Credit Reporting which ANZ strongly supports.”

Damn Lies and Statistics

We have been watching the continued switching between owner occupied and investor loans – $1.4 billion last month, and more than $56 billion – 10% of the investor loan book over the past few months.

This has, we think been driven by the lower interest rates on offer for owner occupied loans, compared with investor loans. But, we wondered if there was “flexibility with the truth” being exercised to get these cheaper loans.

So we were interested to read the latest from UBS which further underscores the possibility of untruths being told as part of the mortgage underwriting processes – to the extent of $500bn (on a book of $1.6 trillion).

This is based on survey results from 907 mortgage applicants over the last year.  There are significant differences across channels and individual lenders.  The net effect is that loan portfolios contain more risks than banks believe – something which our own analysis also demonstrates.

Understating living costs was the most significant misrepresentation, plus overstating income, especially loans via brokers.

In 2017 one-third of mortgage applications were not factual and accurate UBS Evidence Lab found that only 67% of respondents stated their mortgage application was “completely factual and accurate” in 2017 – a statistically significant reduction from the 2016 Vintage (72%). This year 25% of participants said their application was “mostly factual and accurate”, 8% said it was “partially factual and accurate”, while 1% “would rather not say”. By channel the level of “completely factual and accurate” mortgages fell across both brokers to just 61% (from 68%) and via the branches to 75% (from 78%). At a bank level there was a statistically significant fall in factual accuracy at NAB to 62%. While at ANZ the level of factual accuracy fell to 55% in 2017, statistically significantly lower than the Industry (99% confidence level).

Given the rising level of misstatement over multiple years we estimate there are now ~$500bn of factually inaccurate mortgages on the banks’ books (ie ‘Liar Loans’ – a term used in USA during the Financial Crisis for mortgages where documentation was not accurate). While household debt levels, elevated house prices and subdued income growth are well known, these finding suggest mortgagors are more stretched than the banks believe, implying losses in a downturn could be larger than the banks anticipate.

We are underweight Australian banks and are very cautious the medium term outlook.

Expect the normal rebuttals from the lenders, but that has more to do with protecting their positions than wanting to understand the truth – a core cultural problem across the sector.

Westpac facing ASIC loan assessment allegations

From Australian Broker.

Westpac’s usage of expenditure indexes to assess borrower suitability has come under fire by the Australian Securities & Investments Commission (ASIC) in its ongoing legal battle with the major bank.

The civil proceedings allege the bank failed to conduct proper assessments to ascertain whether borrowers could afford to repay their home loans. Westpac has denied this claim.

Court filings obtained by the Australian Financial Review put the spotlight on Westpac’s use of the University of Melbourne’s household expenditure measure (HEM) to determine borrower suitability.

In these documents, ASIC claims that the bank reliance on the HEM to assess borrowers led to approvals where a “proper assessment” based on actual spending would have unveiled a monthly financial shortfall.

ASIC said that the benchmark was based on “conservative” estimates of what a household would spend and “represents only an estimate of what Australian families consume”.

Furthermore, the regulator said that the HEM used “was not compiled by reference to expenditure data collected during the relevant period”. In other words, it claims Westpac used HEM benchmarks based on data from 2009 to 2010 when assessing borrowers for loans issued between December 2011 and March 2015.

Further allegations state Westpac only “scaled” the HEM to account for location, number of dependants and marital status when this could also have been extended to other factors, such as total household income, net wealth, savings patterns, and number of credit cards.

Westpac has said that the court action does not concern current lending policies or practices, reported the AFR.

The bank defended the HEM benchmark in its defence filing, saying it was an “objective measure that does not depend on the quality of a consumer’s estimation of their expenses … [and] excludes discretionary non-basic expenses that a consumer could reduce to meet their commitments without substantial hardship”.

In a statement released in March, Westpac Group chief executive of consumer bank George Frazis said that the bank had confidence in its lending standards and processes.

“It is not in the bank’s or customers’ interests to put people into loans that they cannot afford to repay. It goes hand in hand that we have robust credit approval processes while helping customers purchase their home,” he said.

“Our credit policies are informed by our deep experience and understanding of the mortgage market.”

Frazis said Westpac used “sophisticated systems” including the HEM to develop a broad analysis of customer expenditure.

“In our experience this survey is a useful input into our loan assessment process, in combination with our understanding of customers’ circumstances,” he said.

Westpac has denied claims that it relied solely on the HEM benchmark and that it failed to account for the customer’s declared expenses in its unsuitability assessment.