Queensland couple Ian and Michelle Tate are the lead litigants in a class action being brought against Westpac by law firm Maurice Blackburn. The class action alleges that Westpac was overly-reliant on benchmarks when assessing mortgage loan applicants. The Tates, who lost over $430,000 on two investment properties, are blaming Westpac, stating that it underestimated their living expenses by $6,570 a month and therefore incorrectly assessed their loan applications. The class action is open to those who have taken out a mortgage with Westpac or one of its subsidiaries since 2011. From The AFR:
The class action lawyers claim Westpac should have verified the family’s actual living expenses and assessed their ability to repay both the principal and interest, not just the interest. They argue the bank should have declined both loan applications because had they done the calculations properly, they would have discovered the family would be short by more than $100,000 a year on making the repayments.
The class action is being heard by Justice Nye Perram, who is also deciding on the outcome of the corporate regulator’s responsible lending case against Westpac.
This case is important as it will help determine lending standards going forward.
That is, the Hayne Royal Commission did not explicitly outlaw the use of Household Expenditure Measure (HEM) in assessing a borrowers’ capacity owing to the pending Westpac vs ASIC case. Therefore, the outcome of Westpac versus ASIC is going to have some bearing on the legality of benchmarks, as will the success of this class action.
Banking Day provided an important update on ASIC’s court case a few weeks back:
ASIC and Westpac have returned to court to try and resolve a responsible lending settlement that was thrown out of court last year. ASIC has amended its claim, and this week told the court the bank improperly relied on the HEM income measure more than 260,000 times.
If Westpac loses these cases, then the banks will be forced to abandon the HEM altogether and rigorously scrutinise a borrowers’ capacity, with the end result being tighter credit availability. As Endeavour Equities has pointed out:
The key revelation that emerged late 2018; all (or almost all) mortgages were based on the HEM as a default from 2012 to 2016, and this has driven a Non-Prime bubble in terms of DSTI ratios.
The key driver of our current property price downgrade is the late 2018 revelation (ASIC vs Westpac) that Westpac and likely other ASX banks did not collect, or certainly did not input, actual borrower expenses into loan serviceability calculators. Instead they applied their own downwardly biased HEM expenses of $32k at all income levels as the default or policy driven input. This upwardly biased Debt Service to Income ratios by 10-15%+. We note ASIC has alleged that this has made all such loans irresponsible lending (all 260,000 mortgages written to 2016 in Westpac’s case)…
The Size of the Credit Crunch is directly proportional to the unreasonableness of the HEM expenses benchmark. Since HEM expense estimates are unreasonably low, the credit crunch will be significant and ongoing as it is increasingly replaced with reasonable expenses that are consistent with Responsible Lending Laws…
The outcome of these cases will largely determine whether the bubble deflates over time or is allowed to return.