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ASIC's responsible lending battle with Westpac heats up
Australian Financial Review Sep 4 2017 5:54 PM
Joanna Mather
The shortcomings of indexes for assessing mortgage applications have been highlighted by the Australian Securities and Investments Commission (ASIC) as it pursues Westpac over alleged breaches of responsible lending laws.
ASIC has launched civil proceedings against Westpac for allegedly failing to properly assess whether borrowers could repay their home loans – a claim the bank strongly denies.
Key to ASIC's case is its allegation 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.
The regulator alleges Westpac approved loans in circumstances where a "proper assessment" of a borrower's ability to repay, based on actual spending, would have shown a monthly shortfall.
In court filings obtained by The Australian Financial Review, ASIC said the HEM benchmark was based on "conservative" estimates of household expenditure.
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. That is, 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.
And Westpac only "scaled" the HEM benchmark to account for the location of applicants, number of dependents and marital status, when it could also have incorporated factors such as total household income, net wealth decile, savings pattern and number of credit cards per household.
Under the National Consumer Credit Protection Act, lenders must make an allowance for living costs when making an assessment about how much customers can afford to borrow.
Westpac said the court action did not concern any current lending policies or practices.
In its defence filing, the bank 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 previously defended the bank's assessment processes as comprehensive.
He said they comprised a consideration of customers' specific circumstances, including income and expenditure, previous repayments' history and the overall customer relationship.
Westpac did not rely solely on the HEM benchmark, Mr Frazis said in a statement in March when the case was filed in 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 details the circumstances of seven loans.
Westpac has previously said all borrowers are up to date with their repayments.
The court case comes as regulators clamp down on risky lending. In August, Westpac announced it would more closely scrutinise borrowers' income by requiring details about of bonuses, casual income, superannuation payments, savings and any tax benefits that might be used to qualify for a loan.
Bright Corporate Law principal David Jacobson said 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."