The Federal Court has thrown out ASIC’s case against Westpac over alleged responsible lending contraventions – for the second time. In 2019, the court ruled that Westpac had not breached its responsible lending obligations and on Friday the full court confirmed that ruling on appeal.
The case goes back to 2017, when ASIC 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.
Lenders’ over-reliance on HEM and other benchmarks has received plenty of critical attention during the Hayne royal commission hearings and the court’s judgment came as a surprise.
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.”
The appeal 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.”
The appeal court ruling may have limited impact on the way lenders meet their responsible lending obligations because ASIC updated its responsible lending guidance last December, putting much more emphasis on the need for credit providers and brokers to obtain “reliable and up-to-date information about consumers’ financial situations.”
The new guidance also made it clear the lenders and brokers had to understand more about a borrower’s requirements and objectives.
It has more detailed guidance about how spending reductions may be considered as part of the consumer’s financial situation. And it provides more detailed guidance on the use of expenses benchmarks.