ASIC opens way for banking standards re-collapse

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.”

David Llewellyn-Smith
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Comments

  1. Lol.
    Noone would want to win this case now. And that’s not just to do with ongoing lending taps being open. As the house prices go down, noone wants the specufestors to have any grounds to be able to blame banks for what’s coming.
    Not winning this case makes it clear to all speculators that you are on your own when the titanic goes down.

    • Its actually the best of both worlds as much as I hate to say it.

      Borrowers are now on their own with no recourse against banks for dodgey lending standards – thats it, borrower beware.

      But banks wont be handing money out anyway – because – the borrowers have no money anyway, and the houses are collapsing in value.

      Win win.

      Only down side I can see is taxpayers picking up the tab for banks poor lending standards.

      • House prices aren’t collapsing. Records are still being set.

        House prices won’t collapse. The government will pay everyone’s mortgage and rent income before that happens. It’s already clearly indicated this.

        • Err yeah. Like the govt told the landlords that they have to take some pain in providing rent free accomodation while raking up debt with banks.. no this sets them up for exactly the opposite of what yoy are claiming.
          If they wanted to, they could make banks culpable and then bail out the banks.. actually more politically viable that way.
          And there is good narrative too “the ones going bust are those that have their 5th or 6th property. Now one can only imagine the kind of risk that was and it isnt the banks responsibility to verify such speculators expenses.. they need to be responsible and where they have taken on too much risk, we see that they have failed”..
          The gas lighting will reach epic proportions. LNP do not want banks blamed for this. What with the number of times they rejected the royal commission in the first place. And now there are some big losses attached to this blame game.

      • Not exactly.
        ASIC has been told quietly that by winning this case, they will make the bail out bill larger than it needs to be and to stop chasing.. Because they will end up with govt having to bail out mums and dads as well as banks!
        This makes it clear than tax payer money can go to into bailing out banks but not speculators. Speculators cant add their tab on to the bank’s books as “you lent me too much”. If mum abd dad investor class fail, they will be allowed to. But banks will be protected.. that’s what this sets up the scene for.
        Always bet on the horse called self interest.. it’s the only one trying (or in this case, been instructed very sternly not to try).

      • “It went from zero to hero,” RBA Property director Phil Lowe said. “It was like a tsunami and I’m not even joking. I’d be on the phone and four other calls were coming in.”
        Unable to keep up with demand, Mr Lowe was selling multi-million-dollar mansions to people who had never stepped through the front door. After less than a week on market, two homes sold separately for $3.6 million each. In both cases, the buyers – from Melbourne and New Zealand respectively – had only taken a video tour.

  2. Jumping jack flash

    There are 2 standards: HEM and LVR.

    That is all.
    They like to keep it simple for debt maximisation and care minimisation. Mortgage brokers aren’t the sharpest tools in the shed but they know how to do HEM and LVR.

    • nil_allMEMBER

      And the assessment rate of interest which is / was the most effective tool at preventing excessive lending but quietly abandoned by apra while everyone focused on the hem sideshow.

  3. If the banks want to be guaranteed as they say, they would be locked to a lending sector split, at equal interest rates.
    The issue we have is dknose buying a 2 bedder at Chatswood, pays half the interest rate than does the guy trying to grow his business and employ people.

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