The Federal Court has dismissed ASIC’s responsible lending case against Westpac and ordered the regulator to pay the bank’s costs. Via ABC.
I will make a separate post on the implications of this finding, in the light of ASIC stated intent to change the responsible lending laws, and the current hearings underway.
ASIC had alleged that Westpac breached responsible lending laws on up to 262,000 home loan approvals made using an automated process that relied on the Household Expenditure Measure benchmark, rather than using each applicant’s individually assessed living costs.
In September last year, Westpac agreed to pay a $35 million settlement to ASIC and admit that it breached responsible lending laws.
However, in November Justice Nye Perram sensationally rejected the settlement, finding that it was ambiguous and that the parties did not actually agree on what the responsible lending laws required and, therefore, how many loans were in breach and what the penalty should be.
Today, Justice Perram dismissed ASIC’s case against the bank, awarding costs against the regulator and leaving it negotiating with Westpac over the legal bill in reaching the failed settlement.
In the rejected settlement, Westpac had admitted its automated loan approval system used the Household Expenditure Measure (HEM) — a relatively low estimate of basic living expenses — to calculate potential borrowers’ living costs.
The bank used the HEM instead of actually evaluating the customers’ declared living expenses, and admitted this practice breached the National Consumer Credit Protection Act in certain circumstances.
However, there was an irreconcilable difference of opinion between ASIC and Westpac over when use of the HEM breached the law.
Out of 261,987 loans approved using the HEM benchmark, 211,937 involved customers declaring expenses that were lower than the HEM — that is, below the typical household’s spending on basic goods and services, and in the bottom 25 per cent of household spending on less essential items.
In these cases, use of the HEM actually reduced the amount of money the customer could borrow compared to what they declared.
In the roughly 50,000 cases where declared living expenses were higher than the HEM, use of the benchmark increased the loan amount the customer could receive.
However, in about 45,000 of these cases, both ASIC and Westpac agreed the use of the customers’ actual expenses rather than the HEM would have had no impact on whether they were deemed suitable for the loan.
That left 5,041 loans approved using the HEM that may not have been if actual declared expenses were used — they would have been referred to manual credit assessment instead.
This meant some of those customers might have been approved for home loans they potentially could not afford to repay without financial hardship.
In rejecting the settlement, Justice Perram said neither party could explain what would have happened after that manual loan assessment process, whether any of these 5,041 loans were actually unsuitable and whether any significant harm had been done to any or all of those customers
