Westpac wins responsible lending appeal

Via Westpac:

Westpac Banking Corp has won a significant victory in the Federal Court, where two judges to one have found in favour of the bank on its interpretation of responsible lending duties, dealing another blow to the corporate regulator in the prolonged dispute.

The Australian Securities and Investments Commission had appealed the original ‘shiraz and wagyu’ decision, which found the regulator did not properly understand how the credit laws operate. While one of the appeal court judges sided with ASIC, the other two on Friday ordered its appeal be dismissed and called on the regulator pay the bank’s legal costs.

Given the split decision, ASIC may decide to seek leave to appeal the case to the High Court. The case is being watched by all banks because it is examining Westpac’s automated loan assessment system; big lenders all use computer algorithms to assess suitability for loans, so they can create ‘scaled’ processes to serve millions of customers.

Split decision not terribly convincing. Hopefully, ASIC will appeal.

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.

If Westpac loses these cases, then the banks will be forced to abandon the HEM altogether and rigorously scrutinise a borrowers’ capacity, that is do banking, with the end result being tighter credit availability.

David Llewellyn-Smith
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    • It’s good to see the banks using cost-saving measures, and only buying 2 of the 3 judges!

      After the Dyson Heydon revelations it is time for a Royal Commission into Judicial Corruption.

    • Well that’s not right. The RC was never about determining the law, just about shining a light on poor conduct. Hayne himself might be embarrassed by the fact that the Courts are disagreeing with his views on responsible lending but so what, that was never his call to make.

      That all said, the world has moved on from the rampant use of HEM and banks are being more judicious with it these days.

  1. COVID has ruined any chances of this being successfully litigated. Absolutely all landlords will be rescued by printing more. No child will live in poverty. What a lucky country Straya is! A great land mass where the music never stops.

  2. So we now have;
    – Governments telling the banks to lend with their ears pinned back
    – RBA making billions available to banks for lending
    – APRA telling banks to use their strong capital ratios to lend more
    – And now a court ruling that says if a customer can fog a mirror, your good to go for a mega mortgage
    Its clear that they want to push more air into this bubble, because any level of bubble deflation is catastrophic for the economy.
    Yet credit growth is the lowest its been for 20 years.
    So is credit growth about Aussies “ability” or “willingness” to take on more debt?
    Perhaps a bit of both?

    • Spot on. Pushing Upon A String 101.

      Banks are pulling back because their over-indebted serfs are drowning and can no longer take succor from rate cut relief. Significant chunks of their book are already zombified and in a state of permanent deferral. How are they going to go back to the glorious negligence of 2012-2017, when their books are turning toxic?

      • I find this really interesting. Can they do it again?
        Well, there is fresh credit available and they are priming the credit pump. Can they get the credit to flow given the current state of the economy? Hmmmmm…..my personal guess is – not enough, soon enough.

    • Jumping jack flash

      “So is credit growth about Aussies “ability” or “willingness” to take on more debt?”


      But don’t forget that debt is absolutely essential. Just try saving up for a median Sydney house on one, or even a couple of median incomes. It’d take about 50 years, or probably more I’m guessing.
      It’s hard enough to save up for just the deposit to get the amount of debt that is required!

      Decisions like this one are essential.

      The next problem they need to solve is making more people eligible for larger piles of debt given the same or lower economic circumstances. They’re working on it, you can be sure. The problem isn’t the availability of the debt, there’s never been more debt available for the banks to lend out, and debt has never been cheaper. The problem is debt eligibility.

  3. Kinda doesnt really matter. Once open banking is in full flight with a click of button your new lender will have access to your bank transactions. Simple calc and loan approved. So banks won’t have any use for the HEM. surely?? 🙂

    • Jumping jack flash

      The HEM is absolutely essential.

      The HEM represents the level of abject poverty that a household can experience after signing up for the biggest and baddest mortgage they could get their hands on – which was absolutely essential to acquire.

      Without the HEM, the banks would actually need to perform all the calculations manually for each person to arrive at pretty much the same result, and that takes up far too much valuable time.

      I think of HEM as the “great leveler”. It doesn’t matter what your income was before taking on the debt, 100K or 500K, after you’re “living on the HEM”, you’re eating beans on toast for dinner a couple of nights a week, and 2-minute noodles for the remainder, there are no “nights out”, and no discretionary spending of any kind.

  4. “then the banks will be forced to abandon the HEM altogether and rigorously scrutinise a borrowers’ capacity, that is do banking, with the end result being tighter credit availability.”

    Chances of this happening? given the govt’s past track record? given the recent introduction of housing stimulus?


  5. The thing that amazes me about this case is that based on AFR reports it seems that everyone claims everyone else doesnt understand the law but they do. But everyone involved in the case is top shelf legal talent incl judges. Amazing.

    • The thing is, it isn’t a black and white concept as to what “responsible means”. It’s the age old problem with principles based law. Everyone knows you have to be responsible but have different views on how to comply with that. And I dare say, ivory tower judges like Hayne might not have the best sense of what responsible means in practice.

  6. GlendaFMEMBER

    Well, bring on the sub-prime mortgages, may save the house prices for a little while, but then low wages, un and under employment, rising cost of living will all start to creep up on the new losers, sorry property purchasers, and watch the unravelling start to happen.
    The govt better get used to buying bad mortgages, coz they’re going to get a truckload of them in the next 6-18 months existing and new borrowers will fall on their swords in droves….

  7. Jumping jack flash

    Go you good thing!

    Right, now that the unpleasantness is behind us and the regulators know where they stand (back in your box, you!), can they start worrying about the debt eligibility problem we have?
    The debt growth is gone. Kaput. The whole place is going to hell in a handbasket as a result.

    We don’t really need more QE or lower interest rates, they would be nice of course, but we don’t really need them. Rather we need to all become eligible for the enormous quantities of debt that are essential to get this place partying like it was 2006 again!

    We need to reach the 7 trillion dollar mark by 2030!
    We need to be up around 3 trillion right now, just to recoup the growth we missed out on over the last 7 years. Surely that’s not too hard. We’re at 2.4 already. 600 billion in the next 12 months should be easy.

    Come on, government, do your thang!

  8. nil_allMEMBER

    MB is usually on the money with lending standards but not now. Poring over every transaction for a loan approval is ineffective and asks the wrong question. As in Westpac case peram makes the eminently reasonable point that borrowers can change their expenses and do. I am all for crimping maximum lend and the APRA minimum 7% floor assessment rate was a very effective way of doing that. To reduce it to 5% or less as they have done and at the same time complain that lenders should be finding expenses greater than HEM or else it’s irresponsible is absurd

  9. I dont know how relevant expense checking is going to be when unemployment is through the roof. lol. I mean, eligibility is being crimped in more ways than expense checking now right. The same things in pre-wuflu world dont exactly matter in the same way anymore.

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