Westpac, ASIC court battle over responsible lending heats up

Westpac’s dispute with the markets regulator over lending practices has brought into focus the limitations of indexes for assessing mortgage applications.

The Australian Securities and Investments Commission had launched civil proceedings earlier this year against the second largest mortgage lender alleging that between December 2011 and March 2015 Westpac failed to properly assess whether borrowers could meet their repayment obligations before entering into home loan contracts.

The bank has denied the claims.

ASIC alleges that Westpac relied on an index, University of Melbourne's Household Expenditure Measure (HEM), to help determine how much to lend to would-be borrowers.

In court filings, ASIC said the HEM benchmark was based on "conservative" estimates of household expenditure”, according to The Australian Financial Review.

The benchmark "represents only an estimate of what Australian families consume" and "was not compiled by reference to expenditure data collected during the relevant period", it said. 

Westpac relied on HEM benchmarks based on data from 2009-10 to assess borrowers for loans that were issued between December 2011 and March 2015, it said adding that the bank only "scaled" the benchmark to account for the location of applicants, number of dependents and marital status. It should have taken into account the total household income, net wealth decile, savings pattern and number of credit cards per household, according to the ASIC.

The National Credit Act provides consumer protections to ensure that credit providers make reasonable inquiries about a borrower's financial situation and assess whether a loan contract will be unsuitable for the borrowers.

Westpac said the court action did not concern any current lending policies or practices.

The bank has defended the HEM benchmark as an "objective measure that does not depend on the quality of a consumer's estimation of their expenses ... [and] excludes discretionary non-basic expenses that a consumer could reduce to meet their commitments without substantial hardship".

Westpac head of consumer banking, George Frazis, has said earlier its assessment processes are comprehensive and take into account a customer’s specific circumstances, including income and expenditure, previous repayments' history and the overall customer relationship.

The bank did not rely solely on the HEM benchmark, Frazis said in a statement in March after the case went to court in March.

"In our experience this survey is a useful input into our loan assessment process, in combination with our understanding of customers' circumstances."

ASIC's statement of claim describes the circumstances of seven loans.

Westpac has previously said all borrowers are up to date with their repayments.

Regulators, include APRA, have been clamping down on banks’ lending practices in recent months to cool the property markets on the East Coast.

Of the major banks, Westpac has the largest proportion of loans made on interest-only terms, reflecting a book weighted towards property investors.

It also asked mortgage brokers to grill clients on why they want an interest-only loan.

Bright Corporate Law principal David Jacobson told the AFR benchmarks like HEM were widely used.

"But they have moved in the last few years to be a cross-check against declared individual expenses rather than a standard default amount to be used as a substitute for getting that information," he said. "In other words, if the information obtained shows declared expenses are lower than the benchmark then the lender needs to get more information.

"But if the declared expenses are higher than the benchmark, lenders calculate affordability on the declared expenses, subject to any other queries or inconsistencies."