Westpac in landmark responsible lending win against ASIC

A judge cites spending on Wagyu beef and shiraz as he throws out ASIC’s responsible lending case against Westpac.

Westpac Bank was accused by ASIC of breaching responsible lending laws. Picture: AAP

Westpac Banking Corp has won a landmark case brought by the corporate regulator over its mortgage lending practices, as a judge said borrowers eating Wagyu steak and the finest shiraz could get by on “much more modest fare” to meet loan repayments.

In the Federal Court, Justice Nye Perram dismissed a claim by the Australian Securities and Investments Commission that Westpac breached responsible lending practices when assessing customer applications.

He ordered that the regulator pay costs.

The case, which followed Justice Perram’s rejection of a record $35 million fine agreed between Westpac and ASIC in a settlement last year, is the third time in two years that ASIC has taken Westpac to court over alleged conduct breaches.

At a trial that began in May, ASIC alleged that Westpac breached responsible lending laws when assessing almost 261,987 home loan applications between December 2011 and March 2015.

ASIC had alleged Westpac breached the law by relying on benchmark industry expenditure measures to assess potential mortgage customers rather than using them as a “cross-checking tool”.

Westpac argued that nothing in the governing legislation or regulation dictated that a loan suitability assessment had to be conducted in a prescriptive manner.

The bank’s overall position was that it undertook the relevant assessment required by the law for the home loans during the period in question, having made the inquiries required by the National Consumer Credit Protection Act.

The loans were assessed through Westpac’s automated decision system, which used the household expenditure measure (HEM) rather than customers’ declared living expenses.

But in dismissing the settlement, Justice Perram said it was impossible to endorse the penalty based on the information provided.

In his judgment, Justice Perram said a lender’s assessment of a borrower’s ability repay a loan had to take into account their overall financial situation, rather than just their declared living expenses.

“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,” Justice Perram said.

“In fact, 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 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.

“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.”

The ruling is expected to have repercussions for all lenders because it will help define how they meet responsible lending obligations and whether they can continue to use benchmarks such as the HEM to decide whether an applicant can afford to repay a loan.

In the final report of the royal commission into banking misconduct Justice Kenneth Hayne said that if the Westpac case revealed any deficiency in the law’s requirements that a lender make reasonable inquiries about, and verify, a consumer’s financial situation, there should be legislation to fill in that gap.

The royal commission and the ASIC review of responsible lending rules have already seen banks, including Westpac, move away from measures such as the HEM.

Last year, Westpac introduced more granular assessment measures for home loans, with 13 new expense categories.

ASIC is already seeking industry views on responsible lending rules, with the judgment being handed down on the second day of public hearings into potential changes.

ASIC Commissioner Sean Hughes said the regulator was 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,” Mr Hughes said.

“As a regulator, it is our role to test the law. The obligation to assess applications builds on the obligation on 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.”

It’s the third time in two years that ASIC has taken Westpac to court over alleged conduct breaches.

Last year it secured the first court finding against a bank anywhere in the world over rigging of interest rate benchmarks, when the Federal Court found the bank engaged in unconscionable conduct. But it failed to make the case Westpac had rigged the bank bill swap rate.

ASIC is also appealing a Federal Court ruling in December against its claim that Westpac Securities Administration and BT Funds Management provided personal financial advice during a telephone campaign urging people to switch their super fund into accounts managed by the bank.