ASIC to appeal Westpac HEM ruling

Via ABC:

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.

David Llewellyn-Smith
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  1. After the RC criticisms and the “why not litigate” mantra, ASIC have no choice but to appeal even if it is going to cost millions and there is a big risk of losing and setting a precedent it hates.

  2. Going off the RC interim report, one wonders if a different judgement would have been handed down had Justice Hayne been acting in place of Justice Perram.

    That alone gives merit to an appeal.

  3. Even StevenMEMBER

    Don’t be too ready to dismiss the determination that was made by the court.

    I do not agree that a borrower’s actual expenses are irrelevant. It is a factor. It should be used to determine what is discretionary vs non-discretionary. The judge is right that the correct approach is to ask ‘what can an individual (reasonably) reduce their expenses to?’ The HEM may be appropriate for some, but not for others where they have a higher level of reasonable expenses (e.g. dependents, medical costs, stage of life).

  4. Justice Perram ruled that a lender “may do what it wants in the assessment process”.
    This effectively sets the law aside. A deeply questionable decision that raises some deep questions about the judge who made it. ASIC is right to appeal.

    • That line could be taken to mean that the method is not prescriptive but the outcome should satisfy the intent of the law. ie that the loan is not unsuitable. Simply put a loan that cannot be repaid without significant adjustment, or outside the wherewithal of the borrowers capacity would be unsuitable ‘the reasonable person’.

  5. ASIC will not and cannot prevail. This is just lawyers at ASIC creating work for themselves and their outside lawyer-mates (whom ASIC might give consulting gigs) to.

    ASIC in the first round did not, i repeat, did not present as witness any “customer that was a victim of such irresponsible lending”. They had list of customers that were thoroughly wronged but they chose to “not present them to court”.

    Second time around, I dont even have a sand-grain sized of optimism that they will present any witness.

  6. Jumping jack flash

    The Judge is on the right track. Borrowers can and will eat dry bread and drink tap water (If that’s not too expensive, Maybe supping from puddles after a good rain?) to service their gargantuan debt.

    Getting onto the property ladder/pyramid and unlocking access to infinite debt… err… capital gains, is THE most important action one can do in Australia.

    Because a foundation of good solid debt is what’s good for an economy.