Westpac last year agreed to pay ASIC a $35 million settlement, but this was rejected by the court. (ABC News: Alistair Kroie)
The Federal Court has dismissed Australian Securities and Investments Commission’s responsible lending case against Westpac and ordered the regulator to pay the bank’s costs.
- Westpac is found not to have breached responsible lending laws in almost 262,000 home loans approved using an automated system
- Justice Perram found that the bank had adequately considered borrowers’ declared living expenses
- The judge said that knowing a potential borrowers’ declared living expenses “tells one nothing” about their minimum spending
ASIC had alleged that Westpac breached responsible lending laws on up to 262,000 home loan approvals made using an automated process that relied on the Household Expenditure Measure benchmark, rather than using each applicant’s individually assessed living costs.
In September last year, Westpac agreed to pay a $35 million settlement to ASIC and admitted it breached aspects of the National Consumer Credit Protection Act.
However, in November Justice Nye Perram sensationally rejected the settlement, finding that it was ambiguous and that the parties did not actually agree on what the responsible lending laws required and, therefore, how many loans were in breach and what the penalty should be.
Today, Justice Perram dismissed ASIC’s case against the bank, awarding costs against the regulator and leaving it negotiating with Westpac over the legal bill in reaching the failed settlement.
In the rejected settlement, Westpac admitted its automated loan approval system used the Household Expenditure Measure (HEM) — a relatively low estimate of basic living expenses — to calculate potential borrowers’ living costs.
The bank used the HEM instead of actually evaluating the customers’ declared living expenses, and admitted this practice breached the National Consumer Credit Protection Act in certain circumstances.
However, in his judgment, while purporting not to evaluate the legitimacy of the HEM, Justice Perram effectively endorsed the use of a minimum living expenses benchmark in loan assessments as being compliant with the law.
“Knowing how much the consumer actually spends on food does not tell one anything about that conceptual minimum,” he said.
“I may eat Wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.
“Knowing the amount I actually expend on food tells one nothing about what that conceptual minimum is. But it is that conceptual minimum which drives the question of whether I can afford to make the repayments on the loan.”
This appears to be a very different interpretation of the responsible lending laws from that adopted by former High Court justice Kenneth Hayne in the banking royal commission, where banks were criticised for ignoring customers’ actual spending and assuming that they would cut back expenses to benchmark levels.
The judgment implicitly defines the “substantial hardship” that a borrower must not be forced into by the granting of a loan as being at poverty level, rather than seeing a dramatic reduction in their current living standards.
“The fact that the consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship,” Justice Perram concluded.
“With knowledge of the consumer’s declared living expenses, one may well be able to discern that a consumer will have to trim their sails if the loan proceeds.
“But there is arguably a conceptual gulf between a trimming of sails and poverty.”
ASIC ‘reviewing the judgment carefully’
For its part, the regulator said it mainly took on the case to resolve an important question around the responsible lending laws, and it has not ruled out an appeal.
“ASIC took on the case against Westpac because of the need for judicial clarification of a cornerstone legal obligation on lenders, this is why ASIC refers to this case as a ‘test case’. As a regulator, it is our role to test the law,” ASIC commissioner Sean Hughes said in a statement.
“The obligation to assess applications builds on the obligation on banks to make inquiries about a borrower’s financial circumstances and capacity to service a loan and to verify the information that borrowers give banks.
“ASIC is reviewing the judgment carefully.”
The head of Westpac’s consumer banking division, David Lindberg, said the bank has always sought to lend responsibly to customers.
“This is an important test case for the industry, and we welcome the clarity that today’s decision provides for the interpretation of responsible lending obligations,” he said in a statement.
ASIC, Westpac dispute when use of HEM breached the law
Throughout the case, there was an irreconcilable difference of opinion between ASIC and Westpac over when use of the HEM breached the law, which is why Justice Perram rejected the settlement.
Out of 261,987 loans approved using the HEM benchmark, 211,937 involved customers declaring expenses that were lower than the HEM — that is, below the typical household’s spending on basic goods and services, and in the bottom 25 per cent of household spending on less essential items.
In these cases, use of the HEM actually reduced the amount of money the customer could borrow compared to what they declared.
In the roughly 50,000 cases where declared living expenses were higher than the HEM, use of the benchmark increased the loan amount the customer could receive.
However, in about 45,000 of these cases, both ASIC and Westpac agreed the use of the customers’ actual expenses rather than the HEM would have had no impact on whether they were deemed suitable for the loan.
That left 5,041 loans approved using the HEM that may not have been if actual declared expenses were used — they would have been referred to manual credit assessment instead.
This meant some of those customers might have been approved for home loans they potentially could not afford to repay without financial hardship.
In rejecting the settlement, Justice Perram said neither party could explain what would have happened after that manual loan assessment process, whether any of these 5,041 loans were actually unsuitable and whether any significant harm had been done to any or all of those customers.