Westpac judgment opens door for questionable loans, says CALC

Action group warns ASIC’s Federal Court loss to Westpac opens the way for unscrupulous lenders to exploit the vulnerable.

Gerard Brody is CEO of the Consumer Action Law Centre. Picture: Stuart McEvoy

The scandal-ridden payday lending sector could be given the green light to ignore the poor creditworthiness of vulnerable consumers and ply them with heavy debts following a Federal Court demolition job on responsible lending laws, warns the Consumer Action Law Centre.

CALC chief executive Gerard Brody said Federal Court Justice Nye Perram’s “disappointing decision” to dismiss a claim by the Australian Securities and Investments Commission that Westpac breached responsible lending practices when assessing customer applications meant that lenders could be free to ignore customers expenses and simply apply a benchmark to consumers when assessing their ability to repay a loan.

Mr Brody said the Federal Court’s judgment that all consumers could adjust their spending habits if they were to take out a loan seemed “out of step with reality”.

Justice Perram dismissed ASIC’s interpretation of the responsible lending provisions — which require lenders to only sell loans to customers who can afford to repay them — was incorrect, as requiring banks to comb over expenses left out the fact that it was “always possible that some of the living expenses might be foregone by the consumer in order to meet the repayments.

“I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare,” he said.

Mr Brody said the judgement overlooked those whom the laws were designed to benefit.

“It’s for those people who are likely to be given too much credit and who are over-indebted,” Mr Brody told The Australian.

To suggest that people are likely to change their declared expenses to be irrelevant and to change their situation, it just defies reality. Most people who apply for credit don’t have the capacity to change their spending,” he said.

CALC was one of the main consumer advocacy groups that helped gather witnesses to tell their stories of hardship at Kenneth Hayne’s banking royal commission.

Commissioner Hayne, a former High Court Justice, refrained from commenting on ASIC’s Westpac case as it was before the courts at the time of his inquiry. But he said the law should be reformed to bring further clarity to the assessment process if it was found to be deficient.

“If court processes reveal some deficiency in the law’s requirements to make reasonable inquiries about, and verify, the consumer’s financial situation, amending legislation to fill in that gap should be enacted as soon as reasonably practicable,” Commissioner Hayne said.

Mr Brody said ASIC should appeal the case. “There should be law reform to specifically require lenders to look at someone’s income and expenditure,” he said.

Payday lenders, which offer short-term loan contracts often sold at sky-high interest rates, are subject to responsible lending laws, including a special requirement that credit providers must examine 90 days’ worth of bank statements before signing over a loan to a consumer.

Mr Brody said the Federal Court decision meant that payday lenders may legally be allowed to ignore these expense statements.

ASIC recently launched a consultation process in preparation for a potential move to ban the controversial business model, under which short-term credit providers charge mammoth fees, as soon as August in order to protect against “significant consumer detriment”.

The regulator called out two companies using the model — payday lenders Cigno and its associate Gold-Silver Standard Finance — but said the proposed product intervention order would apply to any firm using the high charging model.

Government legislation to clamp down on the payday lending sector has been put on the backburner, with almost 1000 days passing since it announced it would reform the sector.