This article is from the Australian Property Journal archive
WESTPAC has agreed to pay a $35 million civil penalty after admitting to breaching its responsible lending obligations when it automatically approved approximately 10,500 home loans.
The admission is a backdown from the bank who vowed in March last year to fight ASIC’s legal action. A three-week trial for this matter was due to commence in the Federal Court this week.
Westpac has admitted that it breached the Act and agreed to also pay ASIC’s litigation and investigation costs. If approved by the Court, this will represent the largest civil penalty awarded under the National Credit Act.
When the case was brought against Westpac last year, it brought attention to “liar loans” which UBS estimated was worth as much as $500 billion.
UBS warned that Australian banks were underestimating the probability of defaults and losses in the event of a housing downturn. UBS said the most common lie was overstating income and assets, whilst at the same time understating living expenses, other loans and liabilities. The report found on average applications understated their expenses and liabilities by 10-12%, although some were as high as 30%.
The corporate regulator alleged that Westpac failed to properly assess whether borrowers could meet their repayment obligations under the National Credit Act.
ASIC said Westpac did not have regard to consumers’ declared living expenses when assessing their capacity to repay home loans, and instead used a benchmark (the Household Expenditure Measure).
For home loans to owner occupiers with an interest-only period, ASIC said the bank failed to use the higher repayments at the end of the interest-only period when assessing a consumer’s capacity to repay the loan.
For example, for a loan of $500,000 at 5.24% with a term of 30 years and a 10-year interest-only period, the assumed repayment using the incorrect method is $2,758 per month, whereas the actual repayment after the expiry of the interest-only period using the correct method is $3,366 per month.
The litigation related to Westpac’s home loan assessment process during the period December 2011 and March 2015, during which approximately 260,000 home loans were approved by Westpac’s automated decision system.
For approximately 50,000 home loans, Westpac received, and did not use, consumers’ actual expense information that was higher than the Household Expenditure Measure. For approximately 50,000 home loans, Westpac used the incorrect method when assessing a consumer’s capacity to repay a home loan at the end of the interest-only period.
Of these approximately 100,000 loans, Westpac admitted approximately 10,500 loans breached its responsible lending obligations.
ASIC Chair James Shipton said this is a very positive outcome and sends a strong regulatory message to industry that non-compliance with the responsible lending obligations will not be tolerated.
“This outcome, and ASIC’s actions in relation to responsible lending, reinforce that all lenders must obtain information from individual borrowers about their financial situation to ensure that they can properly assess the ability of the customer to repay the loan. Lenders must then verify the information to ensure that it is true, and then assess whether the loan is unsuitable for the borrower. Taken together, these responsible lending obligations are a cornerstone protection for both borrowers and lenders,” he added.
Australian Property Journal
