Via the ABC:
Westpac could be sued by its customers, funders and investors after admitting it breached responsible lending laws and a separate finding that it lacked appropriate lending controls.
The bank recently reached a $35 million settlementwith the corporate watchdog ASIC after admitting an “automated decision-making system” for home loans breached responsible lending laws, issuing more than 10,000 mortgages that should not have been approved.
“These admissions expose Westpac to civil action by individuals who were provided with too much credit — and inappropriately so — during their application for a loan,” Josh Mennen, a principal at the plaintiff law firm Maurice Blackburn, told the ABC.
“In circumstances where people find themselves in default on their mortgages they will be able to bring an action against Westpac, potentially, for breaches of responsible lending laws.
“It is early days in relation to any class action, but I don’t think anyone who has been following this could seriously rule out the possibility of a class action being brought.”
International investors in the wholesale money markets who funded Westpac mortgages or invested in residential mortgage-backed securities underpinned by its loans could also have a case to sue in the future if default rates rise.
“There is an argument that the international wholesale lending community who gave these banks a lot more money than they probably would have had they known that the banks did not have these controls in place would have grounds for legal action,” Lindsay David of LF Economics said.
Last year, in response to allegations of mortgage fraud and manipulation by major Australian banks, the Australian Prudential Regulation Authority (APRA) commissioned a series of confidential “targeted reviews” of major banks.
The reviews probed the data and systems Westpac uses to assess applicants’ ability to service housing loans.
The findings on Westpac were damning.
Eight out of 10 of its core lending controls were found to be “ineffective in their operation”. Most were also poorly designed.
The consequence was Westpac lacked effective measures to accurately assess the existing debts and expenses of home loan customers or properly assess their ability to service loans.
“There were limited controls in place to ensure that borrower declared living expenses were complete and accurate,” audit firm PWC, which conducted the review for APRA, concluded.
With interest rates at historic lows, arrears and default rates on Westpac’s mortgage book are low despite the adverse findings; Westpac maintains the loans which were the subject of its $35 million settlement with ASIC are performing well.
The question is whether this will continue when interest rates rise, and borrowers face the potential “double whammy” of rising rates and falling property values.
APRA findings ‘never meant to see the light of day’
The findings of the targeted review and the admissions of irresponsible lending expose Westpac to “very large litigation actions against them down the line should investors find themselves running at a loss or running at some sort of deficit due the fact that they invested into some sort of financial product that — let’s call it what it is — [involved] fraud,” Mr David said./
APRA kept the targeted reviews secret — the findings only became public when the documents surfaced earlier this year at the banking royal commission.
“These findings were never meant to see the light of day,” Mr David said.
The banking regulator did not provide the results of the targeted reviews to the Treasurer, the Minister for Financial Services or the Finance Minister, the prudential regulator told Mr David in response to a request for documents under Freedom of Information laws.
The ABC contacted APRA and asked why it had not formally communicated the results of the targeted reviews to relevant ministers, and why it had allegedly failed to inform the banking royal commission of the existence of the targeted reviews until after the commission was “tipped off” to their existence.
APRA, in response, did not answer the questions, but it told the ABC:
“APRA can and does instigate targeted reviews across all industries it regulates as part of the normal supervision process.
“APRA does not comment on its supervision of specific entities. However, as has been noted in public statements regarding the outcomes of the program of targeted reviews on mortgage lending, a range of issues was identified across all institutions reviewed. Institutions were required to provide APRA with rectification plans to deal with the issues identified.”
Westpac declined a request for an interview.
A spokesman said it was not able to comment because its settlement with ASIC was yet to be ratified by the Federal Court.