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Federal Court Justice Nye Perram has dismissed the Australian Securities and Investments Commission’s case against Westpac regarding alleged breaches of responsible lending obligations in its issuance of home loans through the use of the Household Expenditure Measure (HEM) benchmark.
In September 2018, Westpac admitted to breaches of responsible lending obligations when issuing home loans to customers and agreed to pay a $35-million civil penalty to resolve Federal Court proceedings under the National Credit Act.
ASIC and Westpac jointly approached the Federal Court, seeking orders that the bank contravened the responsible lending provisions of the National Credit Act because of its automated decision system.
ASIC reported that the litigation related to Westpac’s home loan assessment process during the period December 2011 and March 2015, during which approximately 260,000 home loans were approved by Westpac’s automated decision system.
Further, for approximately 50,000 home loans, ASIC noted that Westpac received, and did not use, consumers’ actual expense information that was higher than the HEM.
Additionally, ASIC reported that for approximately 50,000 home loans, Westpac used the incorrect method when assessing a consumer’s capacity to repay a home loan at the end of the interest-only period.
The regulator contended that of the 100,000 loans, Westpac should not have automatically approved approximately 10,500 loans.
Had the civil penalty been approved by the Federal Court, it would have been the largest civil penalty awarded under the National Credit Act.
However, the Federal Court was tentative in its approach to the matter.
Justice Nye Perram had sought a friend of the court to consider whether the Westpac case even constituted a breach of the NCCP (reportedly stating that “there is no fact before [him] that any unsuitable loans were made”).
Justice Perram has now judged that a lender “may do what it wants in the assessment process”, noting that other provisions of the NCCP impose penalties if lenders make unsuitable loans as a result of that process.
Justice Perram also found that Westpac did take account of consumers’ declared living expenses, pointing to another rule in Westpac’s system, which compared declared living expenses to income was a measure of suitability.
Westpac has welcomed the Federal Court’s judgement, with the chief executive of the bank’s consumer division, David Lindberg, describing the decision as a “test case” relating to the broader lending industry’s responsible lending practices.
“Westpac has always sought to lend responsibly to customers and takes its lending obligations very seriously,” he said.
“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.”
In response to the verdict, ASIC commissioner Sean Hughes has stated that the regulator would “review the judgement carefully”, given the potential precedent it may set for serviceability assessment practices in the mortgage industry.
“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.
“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.”
[Related: ‘Belt tightening’ provision rejected at ASIC hearing]
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