ASIC whacks Westpac with $35m penalty over lax lending standards

ASIC boss James Shipton says Westpac’s pending $35m penalty sends a “strong message” to the rest of the industry.

07/05/2018: Westpac CEO Brian Hartzer speaking at the bank's half-year results in Sydney on Monday. Hollie Adams/The Australian

The corporate watchdog has scored a potential record $35 million penalty against Westpac for breaches of the Credit Act after the nation’s second biggest bank admitted to failing to properly assess the ability of borrowers to repay loans.

The Australian Securities & Investments Commission today agreed with Westpac for a $35m civil penalty, derailing a scheduled three-week Federal Court trial that was due to start yesterday.

Westpac (WBC) has admitted it contravened the National Credit Act by failing to assess borrowers living expenses and instead relying on the controversial Household Expenditure Measure. Westpac also underestimated the ability of higher-risk interest-only borrowers to repay their loans by failing to take into account how the length of interest-only period of the loan would affect the size of repayments when repayments of the loan’s principal amount were required.

The findings that Westpac wildly undershot the capacity for interest-only borrowers to repay loans could further undermine investor confidence in the quality of the bank’s $400 billion mortgage book. Westpac was the lender most heavily focused on investor borrowers and interest-only borrowers, with just recently having 50 per cent of its loan book being sold on an interest-only basis, which required no repayment of the principal amount for a period of five years. Westpac also sold a record amount of 15-year interest-only loans, far in excess of any other mainstream lender.

If the court approved the $35m settlement, it will set a new record for breaches of the Credit Act, after payday lender the Cash Store was hit with a $19m penalty in 2015.

The corporate regulator has also pledged to take action against banks if they are caught relying on the Melbourne Institute’s Household Expenditure Measure to assess borrower’s ability to repay loans.

ASIC boss James Shipton said the decision “sends a strong regulatory message to the industry that noncompliance with the responsible lending obligations will not be tolerated”.

“This outcome is a warning to all lenders that they must comply with the responsible lending obligations. If they do not, ASIC will take action to enforce the law,” Mr Shipton said.

The court case focused on the period between 2011 and early 2015 during which Westpac’s automatic approval process granted a quarter of a million loans to borrowers. For about 50,000 of these home loans, Westpac ignored information provided to it by customers and instead opted for the HEM index. ASIC contends that Westpac should not have automatically approved more than 10,000 of these home loans.

Westpac will also pay ASIC’s litigation and investigation costs.

“Responsible lending in the home lending market is absolutely vital to consumers, banks and our economy,” Mr Shipton said.

“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 said.

Westpac said about 5,400 of the more than 10,000 loans are still active and represent 0.4 per cent of the mortgage portfolio.

Westpac consumer bank boss George Frazis, who last week decided to break ranks with the other major banks and hit customers with the first mortgage rate hike made out of tandem with the Reserve Bank in three years, said the “action does not relate to our current lending practices”.

“We upgraded our credit assessment in 2015 and continue to thoroughly assess home loan applications,” Mr Frazis said.

“From a credit quality perspective, loans approved under these circumstances have continued to perform similar to, or better, than the rest of the Group’s home loan portfolio. Nevertheless, Westpac has committed to proactively monitor the active loans and to provide tailored hardship assistance if necessary,” he said.

Westpac has been dogged by questions about the quality of its mortgage book since the royal commission revealed the prudential regulation was concerned that its quality controls left it a “significant outlier” among the major banks

Westpac shares recently suffered their single biggest one-day loss since the Brexit market rout two years ago, as an influential market analyst raised doubts about the quality of the banking giant’s home lending book following a review of a cache of documents submitted to the financial services royal commission.

UBS analyst Jonathan Mott had warned that lending standards might be falling short after an analysis released by the royal commission of 420 Westpac loans showed almost a third were not checked for proof of borrower income and the majority were assessed against a much-criticised benchmark. This could lead to more focus by banks on following responsible lending rules, which in turn could make loans harder to get for some.

After the reviews, APRA chairman Wayne Byres said Westpac was a “significant outlier”, with the independent expert PricewaterhouseCoopers finding eight of the bank’s mortgage “control objectives” were ineffective.