ASIC’s had taken Westpac to court over allegations it breached lending laws between 2011 and 2015 by using the household expenditure measure to estimate potential borrowers’ living expenses.
The regulator said the benchmark was frugal and argued that by using HEM the bank had approved loans when the customers’ actual expenses were higher than the benchmark.
Justice Nye Perram of the Federal Court found that the law as it was written did not operate in the same manner that ASIC believed it did.
“The act does not operate as ASIC alleges….the act requires a credit provider to ask itself only whether ‘the consumer will be unable to comply with the consumer’s financial obligations under the contract’ or, alternatively, whether the consumer ‘could only comply with substantial hardship,” said Justice Perram.
Justice Perram accepted that the act required a credit provider to ask the consumer about their financial situation but did not accept that the credit provider must use the consumer’s declared living expenses.
“Division 3 of the act contains neither an express statement that a credit provider must use the consumer’s declared living expenses in doing so nor, in my opinion, can such a requirement be discerned from its terms as a matter of necessary intendment,” he found.
Justice Perram said that for Westpac to use a customer’s declared living expenses it would be relevant to identify the living expenses that cannot be foregone or reduced.
Everyone had to spend money on food so there was a minimum which can be spent said Justice Perram but that minimum was entirely different concept to the declared expense of a consumer.
“Knowing how much the consumer actually spends on food does not tell one anything about that conceptual minimum. 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,” he said.
As such Justice Perram did not consider that it was possible to accept declared living expenses to inform the ability of someone to meet the repayments.
As a result Justice Perram said that the allegations by ASIC that Westpac had breached the act in this way was of no merit.
“This case fails both on the facts and as a matter of statutory construction,” said Justice Perram.
ASIC had also alleged a second set of contraventions to the act in the case of loans having an initial interest only period before payment of principal was required.
ASIC alleged that Westpac treated the loans as if there was no initial interest only period and amortised the principal across the loan, with the commissioner arguing Westpac failed to have regard to the terms of the loan being extended.
Justice Perram rejected ASICs arguments that Westpac should have calculated the serviceability of the loan using higher repayments and that it failed to have regard to the correct interest amount.
“In any event, I reject both arguments. Westpac’s legal obligation was to ask and answer the s 131(2)(a)Questions. The fact that it did so as if the loan did not involve an initial interest only period does not mean that it did not ask and answer those questions,” he said.
Westpac’s chief executive consumer division David Lindberg said that the bank always sought to lend responsibly and took its obligations seriously.
“This is an important test case for the industry, and we welcome the clarity that today’s decision provides for the interpretation of responsible lending obligations,” he said.
ASIC commissioner Sean Hughes said they would review the judgement carefully given it could set a precedent for serviceability assessment practices.
“ASIC took on the case against Westpac because of the need for judicial clarification of a cornerstone legal obligation on lenders, this is why ASIC refers to this case as a ‘test case’,” said Mr Hughes.
“As a regulator, it is our role to test the law.”
