The corporate regulator is appealing a landmark Federal Court ruling in favour of Westpac that validated the bank’s automated home loan approval process for hundreds of thousands of mortgages.
Last month, Justice Nye Perram of the Federal Court found in the bank’s favour in a case brought by the Australian Securities and Investments Commission (ASIC) as a test of the responsible lending laws.
ASIC had alleged that Westpac breached the laws by failing to properly take account of customers’ individual declared expenses when they were applying for home loans, instead relying on a benchmark ‘Household Expenditure Measure’ (HEM), which was widely criticised at the banking royal commission for being set too low for many customers.
By using the benchmark, thousands of customers were given loans larger than they would have been granted had the bank assessed them on their actual living costs.
However, many more customers were granted loans smaller than they would have been eligible for had the bank used their declared expenses which, in a large number of applications, were lower than the HEM.
The National Consumer Credit Protection Act requires lenders to make reasonable enquires about the financial circumstances of prospective borrowers and not to grant them a loan if they could not afford to repay it, or could only afford the repayments by being pushed into “substantial hardship”.
In the most famous line of his judgment, Justice Perram found that knowing a customer’s current living expenses was immaterial to deciding whether they could afford repayments on a loan.
“Knowing the amount I actually expend on food tells one nothing about what that conceptual minimum [of how much one can spend without going into “substantial hardship”] is. But it is that conceptual minimum which drives the question of whether I can afford to make the repayments on the loan.”
Justice Perram’s judgment, should it stand, effectively validates the bank’s use of the HEM benchmark in assessing loan applications — a benchmark used in some way by most home lending institutions.
ASIC commissioner Sean Hughes said the regulator felt compelled to appeal after Justice Perram ruled that a lender “may do what it wants in the assessment process”.
“The Credit Act imposes a number of legal obligations on credit providers, including the need to make reasonable inquiries about a borrower’s financial circumstances, verifying information obtained from borrowers and making an assessment of whether a loan is unsuitable for the borrower,” he said in a statement.
“ASIC considers that the Federal Court’s decision creates uncertainty as to what is required for a lender to comply with its assessment obligation, nor does ASIC regard the decision as consistent with the legislative intention of the responsible lending regime.
“For those reasons, ASIC will appeal to the Full Court of the Federal Court.”
Sounds a bit like the “vibe of the thing”. Let’s hope ASIC prevails.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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