Westpac ‘outlier’ on loan approvals, ASIC case told

The Australian May 9, 2019

Joyce Moullakis

Westpac has conceded it was an outlier among its rivals in the way it assessed a borrowers’ ability to repay interest-only loans before changing its policy in mid-2015.

On the third day of a Federal Court battle against the Australian Securities & Investments Commission, the regulator’s lawyers peppered Westpac managers with questions seeking to establish that the bank didn’t adhere to responsible lending obligations.

Jeremy Clarke SC, for ASIC, argued that from 2011 to 2015 Westpac didn’t make an adequate assessment of customers’ ability to repay mortgages when they changed from interest-only to principal and interest.

Westpac’s Robert Love, head of credit risk optimisation, admitted the bank had been an outlier in how it assessed those loans but noted the process had changed following an internal review.

“We saw this change as an enhancement to our underwriting practice,” Mr Love said.

Mr Clarke asserted that many bank customers used interest- only loans to accommodate other cash flows, such as buying furniture, and were extending the interest-only period because they couldn’t otherwise afford the loan repayments.

“It is a possibility, yes,” Mr Love said in response.

He added that almost a third of interest-only borrowers were less than one payment ahead on their mortgage, but that given interest rates were at historic lows, delinquencies weren’t dissimilar to those seen on principal and interest loans.

Westpac has the highest exposure among its peers to interest-only loans, which are deemed riskier by regulators. The bank has, however, reduced the proportion of interest-only loans to 31 per cent of its domestic mortgage book as at March 31, down from 40 per cent a year earlier.

The entire banking industry is closely watching the court case after intense debate over responsible lending rules and their interpretation during last year’s Hayne royal commission. Commissioner Kenneth Hayne noted a concerted shift by banks away from using benchmarks such as the Household Expenditure Method (HEM) to assess loan serviceability, but said he would leave the interpretation of responsible lending to the court.

ASIC last revised its guidance on responsible lending in 2014 and is consulting on a further update.

The Westpac-ASIC matter is before judge Nye Perram and comes after an earlier $35 million settlement of the case was knocked back by the court.

Earlier this week, ASIC said Westpac relied too heavily on the HEM and failed to properly verify the actual financial position of borrowers 261,987 times. In 154,351 of those cases, the regulator claims the bank failed to use correct figures when assessing borrowers taking out interest-only loans.

Also in the witness box yesterday was Westpac’s general manager of credit David Malcolm and Heather Green, a senior risk manager in the mortgage division.

Mr Malcolm told the court Westpac’s processes, in the period in question, allowed it to “alert and escalate” any borrower applications that had high expenses relative to income.

Westpac argues it met its responsible lending obligations and that the corporate regulator has altered its position.

Both parties are putting forward expert witnesses on loan serviceability and HEM.

The hearing continues.