The use of HEM may well be back in play, following the latest from the Westpac ASIC case. Given that at some banks HEM is still being used for around half of applications, and the Royal Commission commented specifically in the use of HEM, perhaps the law needs to be changed.
The core of the argument is whether the loans were unsuitable, and that it seems would depend of the ultimate progress of the loan subsequently. In other words, it cannot be proved to be unsuitable until it falls over. ASIC would need to prove the loan was unsuitable!
Actually we think the law says lenders have to verify expenses, and in other cases, for example in pay day lending specific inquiries are required as part of the assessment.
But its a clear as mud at the moment! When is unsuitable lending to be demonstrated. This will have a significant impact on any potential class actions. Expect bank share prices to rise!
A federal court has rejected a $35million fine for Westpac after it admitted breaking responsible lending laws, via MPA.
Last year the Australian Securities and Investments Commission (ASIC) began proceedings against Westpac in relation to its use of the Household Expenditure Measure (HEM) when assessing home loans.
ASIC argued the bank failed to conduct proper assessments to ascertain whether borrowers could afford to repay their loans.
The $35m penalty was a negotiated settlement between the two parties after it admitted to using the HEM to assess borrowers’ living costs.
ASIC alleged the bank approved around 50,000 home loans based on a HEM benchmark, even though expenses were presumably higher.
Among the explanations of the reasons behind the decision to refuse the penalty, Justice Nye Perram said the court had been asked to determine whether Westpac was in contravention of Section 128 of the National Consumer Credit Protection Act 2009.
Justice Perram said this section merely prohibits the making of a credit contract where an assessment has not been carried out. Regardless of the bank using the HEM benchmark, an assessment was in fact carried out.
Justice Perram also said that although both parties had agreed on the sum, “the theoretical maximum penalty is therefore either $1.1 million or $1.7 million per contravention” depending on the dates of contravention.
Justice Perram said because the parties could not agree on what contravened the section, it was difficult to “judge the appropriateness” of the $35m figure.
So the best idea is to copy Singapore and where your home loan is your super with payments fixed at 25% of your income at all times, good or bad, then we’re all set.
The ALP & major donors the “industry super funds” will be furious.