Westpac’s landmark ‘wagyu and shiraz’ court victory could trigger a flood of unaffordable loans
A federal court handed a sensational victory to Westpac in a landmark decision — but it was these two words from the judge that sparked fury.
A bank executive in Australia could potentially “shoot someone in the middle of the street” and get away with it, according to a leading economist.
LF Economics founder Lindsay David made the comment after the federal court sensationally tossed out a landmark lending case brought by the financial regulator against Westpac, potentially opening the door to a new flood of unaffordable loans being issued by the big banks.
The Australian Securities and Investments Commission’s test case alleged that Westpac handed out hundreds of thousands of mortgages to people who couldn’t afford them by leaning on the controversial “HEM” benchmark to underestimate borrowers’ household expenses.
The case was dismissed last Tuesday, with Justice Nye Perram rejecting allegations Westpac breached its responsible lending obligations in the way it assessed more than 260,000 home loans.
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Handing down his decision, Justice Perram controversially advised Australians struggling with mortgage repayments to cut “wagyu steaks” and “the finest shiraz” from their diets.
“A credit provider may do what it wants in the assessment process, so far as I can see — what it cannot do is make unsuitable loans,” 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.”
ASIC had alleged Westpac failed to consider any of the living expenses declared by customers between December 2011 and March 2015 and instead relied solely on a widely used spending benchmark — known as a Household Expenditure Measure.
Westpac had already agreed to pay a record $35 million fine to settle the case last year, but Justice Perram rejected the settlement for being too ambiguous, as there was no agreement between the parties on how many loans were actually in breach.
Significantly, in Tuesday’s decision he also rejected ASIC’s interpretation of the law. The judge didn’t accept lenders must use consumers’ declared living expenses to answer key questions about whether someone can meet their repayments or whether they would face substantial hardship.
“Knowing the amount I actually expend on food tells one nothing about what the conceptual minimum is. But it is this conceptual minimum which drives the question of whether I can afford to make the payments on the loan,” he said.
“Without additional information, I do not consider that it is possible to accept that the consumer’s declared living expenses tell one anything about their capacity to meet the repayments under the loan.”
The HEM was widely criticised during the banking royal commission last year as the scale of banks’ reliance on the tool came to light. Mr David cited mortgage book sample data used by HEM which was examined by consultancy firm PwC.
The figures say someone who earns $70,000 a year would have monthly expenses of about $1200, which Mr David says is “complete bulls**t”.
“A lot of people will be thinking that the banks will just be able to go back and use this type of calculation method to assess loan serviceability,” he said.
“It just shows that in Australia we have an incredibly weak stomach to tackling bad bank behaviour. You wonder if a bank executive could shoot someone on the street and get away with it.”
Gerard Brody, chief executive of the Consumer Action Law Centre, said the ruling would result in “more individuals and families given loans they can’t afford”. “Most Australians have expenses that are higher than the HEM benchmark,” he said.
“If loan assessments are based on benchmarks like HEM, even if people cut their expenses, they may well be unable to afford repayments. Many people have no room to cut their expenses, they just have higher expenses due medical conditions or have kids with a disability.”
Mr Brody said without a requirement to examine the position of each individual applicant, lenders would “revert to automated credit tools which, as shown during the royal commission, simply don’t work”.
Financial Rights Legal Centre chief executive Karen Cox said the ruling was “incredibly disappointing” and “suggests that banks do not have to have regard to people’s actual expenses when they lend”.
That in turn will “allow lenders to continue to extend unsustainable loans which set people up to fail”, Ms Cox said in a statement. “To suggest that borrowers ditch wagyu steaks and shiraz for cheaper food really is out of touch with the realities faced by most Australians.”
Ms Cox said people who work long hours “may eat out (or) have high child care costs as a necessary corollary of being able to keep the job they need to be able to afford their mortgage in the first place”.
“If lenders were to be responsible, they would want applicants to demonstrate that they have reduced their expenditure — at least for a period — before applying a loan,” she said. “We can’t assume that people will be able to tighten their belts — that’s simply not the reality of most people.”
CoreLogic senior research analyst Cameron Kusher said the decision “potentially opens a can of worms for both the regulators and lenders”.
“We have already over recent months seen two cuts to official interest rates and APRA relaxing serviceability limits on mortgages which, along with a post-election boost to confidence, has led to an improvement in housing market conditions,” he said in a blog post.
“This judgment may result in some further loosening of borrower serviceability assessments as lenders become less conservative around examining the ‘pre-loan’ spending habits of prospective borrowers, and focus more on non-discretionary expense commitments.”
ASIC commissioner Sean Hughes said the regulator was reviewing the federal court 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’,” he said in a statement.
“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.”
Westpac consumer division chief executive David Lindberg in a statement that 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,” Mr Lindberg said.
Tuesday’s decision does not bode well for a class action filed by law firm Maurice Blackburn earlier this year, which alleged Westpac breached responsible lending laws by providing unaffordable loans, leading to “substantial losses” for many customers.
Lead plaintiff Michelle Tate said in February that she and her husband Ian were ruined after the bank lent them more than $1.8 million across five properties, despite the family having just one income.
Ms Tate said Westpac trusted a loan broker who provided information about her family’s financial position, and did not independently verify the situation. She said her family would now lose all of their properties save for a block of land.
“Dealing with Westpac has devastated us,” Ms Tate said.
Westpac was due to file its defence in the case last Thursday but did not do so. It is understood the bank was asked to hold off — and avoid running up further legal costs — by Maurice Blackburn while it reviews Tuesday’s decision.
“We have taken steps to ensure the defendants don’t incur unnecessary costs as a result of our need to assess if the ASIC decision will have any impact on how our case goes forward,” a spokesman for the law firm said.
WHAT IS THE HEM?
The Household Expenditure Measure is a tool used by lenders to decide whether customers can afford to pay off a loan.
It is calculated based on an applicant’s family size, location and regular lifestyle — including the median spend on basics like food, transport and utilities as well as “discretionary” items like alcohol and takeaway — and is the same method used by the Australian Bureau of Statistics.
WHY IS IT CONTROVERSIAL?
It has been criticised for seriously underestimating people’s living expenses, which can potentially leave borrowers struggling to meet their repayments.
That’s especially serious given just how widespread the benchmark is — in 2017, investment banking giant UBS estimated up to 80 per cent of all Australian home loans were approved using the HEM.
It has been under the spotlight for years, with ASIC and prudential first questioning banks’ reliance on HEM in 2016.
In November 2017, APRA chairman Wayne Byres also publicly questioned its accuracy.
“We would like to see the industry devote more effort to the collection of realistic living expense estimates from borrowers,” he said at the time.
— with AAP
Originally published as Westpac’s landmark ‘wagyu and shiraz’ court victory could trigger a flood of unaffordable loans
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