Borrowers will be able to use ‘rough expenses’

The Federal Court this week dismissed allegations made by the corporate regulator that Westpac allegedly breached responsible lending obligations in its issuance of home loans more than a quarter of a million times through the use of the Household Expenditure Measure (HEM) benchmark. 

According to the judge presiding, Justice Perram, 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 as a measure of suitability.

For example, he said that borrowers could ditch luxury food items like wagyu steak and shiraz for more humble fare when looking to repay their mortgage.

Speaking of the judgement, associate professor Mark Humphery-Jenner from UNSW Business School said ASIC should be cautious about being too litigious.

“This is a landmark case for responsible lending, and no doubt many prospective borrowers will be raising a glass of Shiraz to the judgement,” Mr Humphery-Jenner said.

“Many people spend more than they need to because they can. When they have to budget, they can reduce expenditure. In short, the decision was eminently sensible, but the case didn’t turn entirely on the judge’s remarks about affordability.”

The judge found a bank could never fully assess a borrower’s expenses because a borrower had the power to change some of their expenses after taking on a loan so that they could make payments.

“The case mainly turned on the fact that the parties couldn’t agree on how many people were affected by the supposed breach. This evidentiary issue created major problems for ASIC’s case,” Mr Humphery-Jenner said.

The crux of the issue is that Westpac used an automated way to assess expenditure, rather than relying on actual expenditure, in around 260,000 cases.

“But only in 50,000 did customers declare expenses below that automated calculation. Even then, only 5,000 loans were approved when they might not otherwise have been had actual expenses been used,” the associate professor explained.

“That is, fewer than 2.5 per cent of all the loans that ASIC alleged breached proper procedure were given to people who potentially could not afford them. And, even then, evidence on that was lacking.”

Mr Humphery-Jenner said it is quite reasonable to use a simple formula benchmark known as the HEM, instead of having to trawl through a borrower’s bank statements and calculate exactly what they spend before applying for a loan.

“Borrowers who recently have found every expense scrutinised will now be able to go back to putting down their rough expenses on an application, which should make the process of applying for a mortgage far easier.

“It is also more in line with the real world, where borrowers prioritise when faced with new budget constraints.”

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.  

It is expected that the ramifications of the court case decision and lenders’ reliance on the HEM will be discussed at ASIC’s public hearings on responsible lending next week.

In February, the Australian Securities and Investments Commission (ASIC) launched a review to update its responsible lending guidance (RG 209), which has been in place since 2010.

ASIC opened consultation by inviting submissions from stakeholders within the financial services sector and has since commenced a second round of consultation in the form of public hearings, in which stakeholders that provided submissions have been called to provide further guidance.  

The next round of hearings will be held in Melbourne on Monday, 19 August.

 [Related: ASIC to ‘review’ Federal Court’s HEM verdict]