Judge rejects Westpac settlement with ASIC on irresponsible lending

A judge has dealt a blow to ASIC, refusing to approve a deal for Westpac to pay $35m for irresponsible lending practices.

Westpac had admitted breaching irresponsible lending laws. Pic: Hollie Adams

The Federal Court has refused to approve a $35 million civil penalty agreed by Westpac after it was taken to court by the corporate regulator for breaches of responsible mortgage lending obligations.

Federal Court Judge Nye Perram rejected the settlement between the Australian Securities and Investments Commission and Westpac in part because they couldn’t agree on the number of breaches.

Westpac and ASIC had reached an agreement in September over the fine, after the bank conceded it wrongly assessed people’s ability to repay mortgages by relying on a benchmark for customer expenses.

If approved by the Federal Court, it would have represented the largest civil penalty awarded under the National Credit Act.

However Federal Court Judge Nye Perram today dismissed the settlement and ordered a directions hearing on November 27.

Explaining his decision, Justice Perram said it was “impossible to address the appropriateness” of the $35m penalty given Westpac and ASIC could not agree on the number of breaches.

“It is unworkable to assess the reasonableness of the penalty if it is not known what is to be penalised,” he said.

Westpac had agreed to the settlement with ASIC for contravening the National Consumer Credit Protection Act after an automated Westpac system approved about 10,500 loans between December 2011 and March 2015 that should not have been allowed, before changing its systems in 2015.

The case centred on Westpac using a household expenditure measure (HEM) to automatically calculate a customer’s ability to repay a loan, instead of actually evaluating their declared living expenses.

This meant customers could be approved for home loans they could not afford to repay without financial hardship.

The ASIC action alleged Westpac did not properly assess whether interest-only borrowers could continue to afford their mortgage repayments when the interest-only period ended and principal and interest payments had to be made.

The switch to principal and interest can add as much as 40 per cent to the monthly repayments on a mortgage.

Announcing the settlement in September, ASIC chair James Shipton said it sent a “strong regulatory message to industry that noncompliance with the responsible lending obligations will not be tolerated”

In his ruling today Justice Perram said that not knowing why Westpac had decided to use the HEM benchmark in preference to customers’ declared living expenses in some cases made it difficult to assess the seriousness of the conduct.

He noted that he had asked Westpac and ASIC to address the issue of that “information vacuum” on the issue.

“I invited the parties to address this issue but the invitation was declined,” he said.

Justice Perram said “admirable ingenuity” was used by both Westpac and ASIC in framing their legal arguments to “gloss over” differences in what was being admitted.

The case also sheds further light on the banks’ use of HEM to determine loan serviceability, a measure that has also come under fire in the Hayne royal commission.

“Whether the use of such benchmarks as an input into the serviceability calculation is a good or bad idea is not a question this court is called upon to address," Justice Perram said.

“What is required, however, is satisfaction that the use of the HEM benchmark as disclosed by the statement of agreed facts is a contravention of s (section) 128 of the National Consumer Credit Protection Act 2009.”

Other banks will be closely watching the outcome of the case, in particular because the reasons rejecting the agreed penalty also suggested the use of the HEM measure may not contravene the relevant section of the Act.

“Section 128 says nothing about the nature of an assessment other than it must be done in accordance with s 129. The prohibited acts in s 128 are therefore specified above the cincture to the provision, not below it,” the ruling said.

“To labour the point, using the HEM benchmark does not conceivably contravene s 128; it is making a credit contract without first making an assessment in accordance with s 129 which is the relevant act of contravention.”

Justice Perram went even further by noting the declaration by ASIC and Westpac said “next to nothing” and didn’t go into enough detail on the bank’s alleged wrongdoing by using one expense measure over another.

ASIC said today it was reviewing the judgment and would make no further comment.

At about 1.10pm (AEDT) Westpac shares, trading ex-dividend, had fallen 5.37 per cent to $26.25.