In a major victory for Westpac, and indeed all lenders and mortgage brokers, the Federal Court has held that ASIC had no legal foundation for prosecuting Westpac for failure to assess a borrower’s expenses when assessing a loan application.
In a forceful judgment, Justice Perram concluded that in none of the 261,897 loan applications considered by Westpac from 12 December 2011 to March 2015, did it fail to ask itself whether:
the consumer will be unable to comply with the consumer’s obligations under the contract or
alternatively, whether the consumer ‘could only comply with substantial hardship’
being two particular circumstances in which a credit contract will be unsuitable described in s 131(2)(a)&(b) of the National Consumer Credit Protection Act 2009 (Cth).
The decision is Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial)  FCA 1244 (13 August 2019).
ASIC’s position – Regulatory Guide 209 Credit Licensing: Responsible Lending Conduct
Regulatory Guide 209 gives ASIC’s guidance on how ASIC interprets the law. It contains specific guidance to lenders on assessing living expenses, including:
RG 209.30 The obligation to make reasonable inquiries upon the consumer’s financial situation requires you to find out about the consumer’s current situation. This involves obtaining information about the consumer’s actual income, expenses and other circumstances that are likely to affect their ability to meet the financial obligations of the proposed credit contract or consumer lease.
RG 209.105 Use of benchmarks is not a replacement for making inquiries about a particular consumer’s current income and expenses, nor a replacement for an assessment based on that consumer’s verified income and expenses.
ASIC argued that Westpac, in using its computer operated loan approval system, which Westpac calls its automated decision system (ADS), it failed:
- To have regard to any of the living expenses declared by consumers on their loan application forms (instead, it relied solely upon the HEM benchmark); and
- In assessing loans having an interest only period before payment of principal was required, by treating these loans as if there was no interest only period and by amortising the principal across the life of the loan, Westpac failed to have regard to the terms of the actual loan being extended to the consumer.
Westpac’s position – the loan expenses form and the ADS Rules
Consumers applying for a loan were required to complete a form with a section headed ‘MY MONTHLY EXPENSES’ which was:
The completed Application form was then assessed by the ADS which comprised over 200 rules. There were three possible outcomes: ‘conditional approval’, ‘referral for manual assessment or ‘decline’. Rules which related to living expenses (loan unsuitability) included:Note: the items italicised are ‘living expenses’, the others are ‘liabilities’
- The 70% Ratio Rule: If a consumer’s declared living expenses exceeded 70% of their verified monthly income, the application was referred for manual processing by a credit officer. The fact the application was referred and the purpose of the rule being to gauge the risk of default meant that Westpac complied with s 131(2)(a) of the Act.
- The Serviceability Rule: If there was a shortfall between discounted monthly income and assessed monthly repayments plus outgoings plus HEM Benchmark (i.e. living expenses) plus ‘buffer’ or if mortgage insurance was required, the application was referred for manual assessment. This complied with s 131(2)(b) of the Act.
The HEM Benchmark was used by Westpac because it serves as ‘a proxy for substantial hardship’ The HEM (Household Expenditure Measure) benchmark is based on average expenditure on over 600 goods and services by households in Australia. It generates data based on households in major capital cities and regional Australia. For example, it contains information such as ‘in Sydney, 25% of households spend less than an average of $466 per month on discretionary expenses’.
In dismissing ASIC’s application, with costs, the Court made these findings and observations:
- “the mere fact that there are living expenses is not necessarily relevant to whether a consumer will be unable to comply with their loan obligations because it is always possible that some of the living expenses might be foregone by the consumer in order to meet the repayments”.
“I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.”
- “whether the consumer, whilst able to afford the repayments, will not be able to do so without being placed in circumstances of substantial hardship … cannot …. be discerned from the declared living expenses by themselves.”
“The fact that the consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship. Nor for that matter does knowing that the consumer spends $500 per week on basic food items.”
- the assessment of whether or not a loan was unsuitable was the same for loans with an initial interest only period as for loans which were principal and interest for the whole term. Westpac had complied with this requirement by assessing the monthly repayments on the basis that there was no interest only period and amortised the principal across the life of the loan.
Provided a lender / mortgage broker makes proper enquiries as to living expenses, they can rely on the HEM Benchmark when assessing whether a loan to a consumer will be suitable.
ASIC will need to revise RG 209 where it deals with living expenses in line with this decision.