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You cannot always bank on a sure thing!
A funny thing, but for borrowers a very good thing, happened last week in the Federal Court of all places. Westpac and the ACCC trouped in to finalise an agreed fine of $35 million for Westpac not examining in detail the spending habits of it’s borrowers.
The ASIC interpretation of the rules on how banks assess whether borrowers can repay a loan is known to cause banks to scrutinise the spending habits of prospective borrowers more closely which analysts say has contributed to sharp fall in lending..
The Federal Court dismissed ASICs case alleging Westpac breached Responsible Lending Rules pretty much giving all banks a green light to make their own judgement calls about whether a borrower can repay a loan.
The judge said Westpac should be free to use spending benchmarks and not automatically be required to consider declared living expenses.
The problem for ASICs argument is that the mere fact that there are living expenses is not necessarily relevant to whether a consumer will be unable to comply with their loan obligations because it is always possible that some of the living expenses might be forgone by the consumer in order to meet the repayments, Justice Perram said.
“I may eat Wagyu beef every day washed down with a fine Shiraz but if I really want my new home, I can make do on much more modest fare”, the judge said.
It was the third straight court defeat for ASIC in cases against Westpac in the past two years and a second strike by Judge Perram who sparked the case when he refused to endorse the record $35 million fine agreed between the two litigants in a settlement last year.
At the trial to ratify the agreed fine which began in May ASIC alleged Westpac breached responsible lending laws when assessing 261,987 Westpac loans – every mortgage the bank approved between December 2011 and March 2015.
The loans were assessed through Westpac's automated decision system which used the household expenditure measure, HEM, rather than customers declared living expenses. In dismissing the settlement Justice Perram said it was impossible to endorse a penalty based on the information provided to him.
Banks will still have to make reasonable inquiries into a consumer's financial circumstances, verify the information they obtained and avoid entering into unsuitable loan contracts. The judge however ruled that it was up to the banks to determine what use to make the expense data that they collected.
Westpac customers who were filling in five expense boxes were suddenly confronted with 13 the upshot is that industry practice largely confirms ASIC interpretations of the law in 2017. This mitigates against the likelihood of an appeal. ASIC has 28 days to decide whether to appeal.
The ruling is expected to have repercussions for all lenders because it will help define how they meet responsible lending obligations and whether they can continue to use benchmarks such as the HEM to decide whether an applicant can afford to repay a loan.
If you are buying a home it can only be a benefit to you. One more stepping stone in the recovery of the housing market.
by David Hamilton
You cannot always bank on a sure thing
palmbeachfn.com.au August 2019
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