The more things change and all of that. Via Banking Day:
Consumer groups and community legal centres have called for responsible lending law reform in the wake of ASIC’s decision not to take its case over Westpac’s alleged breaches of responsible lending any further.
Late last month, the Full Federal Court rejected ASIC’s appeal against a 2019 ruling that Westpac had not breached its responsible lending obligations.
Then last week, the regulator announced that it will not seek special leave to appeal to the High Court over the matter.
Financial Rights Legal Centre, Consumer Action Law Centre, CHOICE and Financial Counselling Australia said in a statement: “The Full Federal Court decision suggests that banks do not have to have regard to people’s actual expenses when they lend. Worse, the court found that the law as it stands leaves its open for the lender to decide what inquiries it will make.”
The group said its view, which it argues is supported by the Hayne royal commission report, is that the current law requires lenders to not only make reasonable inquiries and verify a borrower’s actual financial situation, but also take that information into account in their lending decisions.
The royal commission referred to the Westpac case, saying: “If the court processes were to reveal some deficiency in the law’s requirements to make reasonable inquiries about, and verify, the consumer’s financial situation, amending legislation to fill in that gap should be enacted as soon as reasonably practicable.”
Hayne cautioned against going to a “pre-GFC lending standards”.
ASIC has conceded that there is uncertainty about its regulatory guidance on responsible lending, saying it will review its guidance on responsible lending to take account of any implications of the court ruling.
The guidance was updated last December, with the regulator emphasising the need for credit providers and brokers obtaining reliable and up-to-date information about consumers’ financial situations in meeting their responsible lending obligations.
The guidance includes examples of the range of inquiries and verification steps that would be appropriate for different credit types and consumer circumstances.
ASIC’s case against Westpac goes back to 2017, when it commenced proceedings alleging that between 2011 and 2015 Westpac failed to properly assess whether borrowers could meet their repayment obligations before entering into home loan contracts.
The case revolved around the way Westpac used a benchmark, the Household Expenditure Measure, to assess loan applicants’ capacity to meet their repayment obligations and whether the bank made sufficient inquiries about the applicants’ particular circumstances.
ASIC argued that the bank was overly reliant on the benchmark and did not make adequate inquiries about the applicants’ circumstances. It claimed that in so doing, the bank breached the responsible lending provisions of the National Consumer Credit Protection Act.
In the first case, the court ruled that a lender “may do what it wants in the assessment process.”
It found that a bank could not necessarily make an assessment of a borrower’s capacity to pay based on looking at current expenses because borrowers might stop eating “wagyu beef” after they got their home loan.
When it announced that it would appeal the ruling, ASIC said: “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.”
On appeal, the Full Federal Court said: “There is no textual requirement specifying how the assessment is to be undertaken, and indeed ASIC accepted that ‘it remains open to the licensee to choose how it conducts the assessment required’.”
It went on to say: “Simply labelling an expenditure as a declared living expense and the fact that the consumer incurs that expense on their current lifestyle, does not necessarily change its nature from being discretionary. It is plain that a consumer may choose to, and can be expected to, forego particular living expenses in order to meet their financial obligations under a credit contract.”