A JUDGE has thrown out the financial regulator’s landmark lending case, while arguing borrowers can forgo Wagyu beef and the finest shiraz for more modest fare to meet loan repayments.
In a decision affecting the way all lenders assess loan applications, the Federal Court on Tuesday dismissed the Australian Securities and Investments Commission’s test case against Westpac.
Justice Nye Perram rejected ASIC’s allegations that Westpac breached its responsible lending obligations in the way it assessed 261,987 home loans using an automated decision system between December 2011 and March 2015.
ASIC alleged Westpac failed to have regard to any of the living expenses customers declared on their loan application forms, instead relying solely on a widely used expenditure benchmark.
Justice Perram – who rejected an agreed record $35 million fine to settle the case last year – found Westpac did consider customers’ declared expenses.
Significantly, he also rejected ASIC’s interpretation of the law.
The judge did not accept lenders must use consumers’ declared living expenses to answer key questions about whether someone can meet their repayments or whether they would face substantial hardship.
“A credit provider may do what it wants in the assessment process, so far as I can see; what it cannot do is make unsuitable loans,” he said.
Justice Perram declared living expenses do not demonstrate a consumer’s capacity to meet their repayments, without additional information.
Consumers may choose to forgo some of the living expenses – be it a gym membership or spending $500 a month on wine – in order to meet the repayments.
Using the example of food, Justice Perram said everyone has to eat but the minimum that could conceivably be spent was entirely different to what the consumer actually spent.
“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.
The fact a consumer takes an annual first class holiday to the US is not relevant to assessing whether the repayments will put them into circumstances of substantial hardship, Justice Perram said.
“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.”
Disappointed consumer groups want the government to amend responsible lending laws to ensure lenders make reasonable inquiries and verify borrowers’ actual financial situation.
“To suggest that borrowers ditch Wagyu steaks and shiraz for cheaper food really is out of touch with the realities faced by most Australians,” Financial Rights Legal Centre CEO Karen Cox said.
“We can’t assume that people will be able to tighten their belts; that’s simply not the reality of most people.”
ASIC did not allege the loans made by Westpac were unsuitable, prompting Justice Perram to note it was a case about the operation of responsible lending laws without any allegation of irresponsible lending.
ASIC Commissioner Sean Hughes said the regulator took on the test case because of the need for judicial clarification of a cornerstone legal obligation on lenders.
“The obligation to assess applications builds on the obligation on banks to make inquiries about a borrower’s financial circumstances and capacity to service a loan and to verify the information that borrowers give banks,” he said.
Westpac consumer division chief executive David Lindberg said the bank welcomed the clarity the decision provided for the interpretation of responsible lending obligations.
ASIC is updating its responsible lending guidance to clarify what it expects of lenders.