HEM date with destiny set

Via the AFR:

The Federal Court has set a date for the appeal against the “Wagyu and shiraz” judgment, however the regulator will be meeting a different adversary than the one it faced off against in the first half of 2019.

The Australian Securities and Investments Commission will front up to a full bench of Federal Court judges – including Justice Middleton, Justice Gleeson and Justice Lee – for the appeal, scheduled to begin in Sydney on February 25.

What is at stake? Previously from the 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.”

At this rate, ASIC will be booted from the Council of Financial Regulators, which is thrilled with the new bubble:

  • Financing conditions and the housing market. Council members discussed trends in credit and recent developments in the housing market. Growth in housing credit remains subdued overall, with credit to investors particularly weak. Owner-occupier loan commitments and housing turnover in Sydney and Melbourne have picked up, suggesting that a strengthening in credit growth is likely. Mortgage lending standards have been broadly unchanged recently. Overall, near-term risks related to the housing market have lessened as housing market conditions nationally have improved. Members discussed the potential for the current weakness in apartment construction to place upward pressure on prices in some cities over time unless construction picks up. They also discussed the tight credit conditions for small businesses and the reduced risk appetite by many lenders for lending to small business.
  • Responsible lending. Members discussed ASIC’s plans to release updated guidance on responsible lending provisions in the coming weeks. The guidance will maintain the current principles-based approach that recognises lenders’ flexibility to determine what is reasonable in individual circumstances. It will also assist lenders to better understand their obligations and reduce the risk of non-compliance. The guidance will also address the confusion around the requirements that apply to small business. It will confirm that responsible lending requirements do not apply to loans made predominantly for business purposes, regardless of the type of security offered for the loan. Council members stressed that the flow of credit is fundamentally important to the functioning of the Australian economy and discussed the concern that lenders’ risk appetite for some types of lending may have swung too far towards caution.

What a pest is the law.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

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.

Latest posts by David Llewellyn-Smith (see all)

Comments are hidden for Membership Subscribers only.