This article is from the Australian Property Journal archive
THE Federal Court has dismissed ASIC’s landmark responsible lending case against Westpac.
The corporate regulator sued the lender in March 2017 alleging the bank breached its responsible mortgage lending laws when it automatically approved approximately 262,000 home loans using its automated assessment system, the Household Expenditure Measure or HEM for consumer expenses.
ASIC said HEM did not have regard to the actual expenses provided by the consumer and was therefore in breach of its obligations. Further, in assessing home loans with an interest-only period, ASIC alleged that Westpac was required to have regard to the higher repayments at the end of the interest-only period and did not do so.
In September last year, Westpac reached a settlement and agreed to pay a $35 million penalty, but in November the Court dismissed the settlement, finding that the parties did not actually define what responsible lending was and how many loans were in breach. Initially, the figure was 10,500 home loans but later it was upgraded to 262,000.
In his judgment Justice Nye Perram found that a lender “may do what it wants in the assessment process” and that other provisions of the National Consumer Credit Protection Act 2009 impose penalties if lenders make unsuitable loans as a result of that process.
Justice Perram also found that Westpac did take account of consumers’ declared living expenses because another rule in Westpac’s system compared declared living expenses to income (but leaving out other expenses including the repayments under proposed loan) was a measure of suitability.
Justice Perram said “The problem for ASIC’s argument is that the mere fact that there are living expenses is not necessarily relevant to whether a consumer will be unable to comply with their loan obligations because it is always possible that some of the living expenses might be foregone by the consumer in order to meet the repayments.
“A worked example illustrates the problem. Let it be assumed artificially that a consumer with a monthly after-tax income of $4000 has three declared living expenses of food ($1200 per month), utilities and internet ($200 per month) and gym memberships ($200 per month). The declared living expenses are therefore $1600 per month and the consumer will have a surplus of $2400 per month. If the consumer proposes to take out a home loan which will require monthly repayments of $2500 the outgoings will then be $4100 per month as opposed to the after-tax income of $4000 per month. The consumer will therefore have a shortfall of $100 per month.
“But this does not tell one that the consumer cannot afford to meet the repayments. One reason this is so is because the consumer may choose to discontinue their gym memberships and meet the repayments in that way.
Justice Perram said the only way that one or more declared living expenses can be shown to be necessarily relevant to the issue of whether the consumer can afford to make the repayments is by identifying some living expenses which simply cannot be foregone or reduced beyond a certain point.
“For example, everyone has to eat so there must be an amount for food which is the minimum which can conceivably be spent. But that minimum is an entirely different concept to the declared living expense of what the consumer actually spends on food.
“Indeed, knowing how much the consumer actually spends on food does not tell one anything about that conceptual minimum. I may eat Wagyu beef everyday 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,”
Westpac has welcomed the decision. Consumer division chief executive David Lindberg said the bank “has always sought to lend responsibly to customers and takes its lending obligations very seriously.”
“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.”
Meanwhile ASIC commissioner Sean Hughes said the regulator is reviewing the judgment carefully.
“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 and its ambit. The obligation to assess loan applications builds on the requirement for 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.” Hughes said.
The Court also ordered ASIC to pay the bank’s costs.
