Fed Court rejects $35m settlement for Westpac credit "breaches"

ASIC has been forced back to the drawing board in its pursuit of Westpac for thousands of alleged breaches of responsible lending laws after the Federal Court rejected its record A$35 million settlement agreement with the bank.

Justice Nye Perram yesterday ruled that he could not ratify the settlement because the parties were still in dispute over the extent of Westpac's contraventions of national consumer credit laws.

In his judgment, Justice Perram said the parties' lawyers had applied "admirable ingenuity" to drafting consent orders that "gloss over" differences that exist between them over the number of breaches committed by the bank.

Westpac concedes that it committed 5,041 breaches of responsible lending laws but ASIC claims that the number is almost 262,000.

Westpac's admissions relate to section 128 of the National Consumer Credit Protection Act, which prohibits the making of loan contracts where assessments are not carried out.

Despite the admissions, Justice Perram said the parties had not explained how Westpac breached the law.

"However, because the parties do not actually agree on what s128 requires they are unable to agree on how many of the respondent's loans were made in contravention of it," Justice Perram said in the judgment.

"This also makes it very difficult to judge the appropriateness of the proposed penalty of $35 million."

Justice Perram's decision is a serious knock for ASIC's enforcement program on responsible lending because it raises the prospect that the bank may escape incurring any penalty.

All of Westpac's admitted breaches concern its reliance on an automated living expenses formula, known as the HEM benchmark, to assess the ability of loan applicants to service future mortgage debts.

ASIC had sought the court's approval to declare that Westpac breached s128 by relying on the benchmark rather than the actual living expenses of loan applicants.

However, Justice Perram's judgment raises the possibility that use of the benchmark might not be a breach of consumer credit laws.

"To labour the point, using the HEM Benchmark does not conceivably contravene s128," he states in the judgement.

Towards the end of the judgment he states:

"I do not propose to make the declaration sought.  I simply do not accept that the conduct specified in the declaration is conduct which could possibly be a contravention of s128.  I will not declare conduct which is not unlawful to be unlawful.  The contraventions of s128, that is the entry into credit contracts, must be specified.  The declaration tells one next to nothing.  

Justice Perram indicated that the consent orders sought by ASIC could have described a bank that "made two loans, 50,000 loans or, significantly no loans at all".

ASIC and Westpac yesterday declined to comment on the judgment's implications for an amended settlement agreement.

The court has set a directions hearing on November 27.