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Westpac hits back at ASIC responsible lending claim
By Clancy Yeates
Westpac has rejected the corporate watchdog's claim it broke responsible lending laws in the mortgage market, saying the regulator has failed to prove that a group of loans it made were unsuitable for consumers.
In a landmark action, the Australian Securities and Investments Commission in March alleged the bank acted irresponsibly because it did not adequately test whether borrowers could afford their loans.
Westpac says ASIC has not established that its sample of seven loans were unsuitable.Credit: Louise Kennerley
The claim, the first of its kind, cites a sample of seven customers who were given loans between 2011 and 2015, most of them interest-only mortgages.
It alleges the bank used a statistical benchmark to assess the borrowers' living expenses, instead of the actual expenses nominated by customers, which were significantly higher.
But the bank's defence, filed this month, highlights a complex range of checks on bank loans, and says the law did not require it to use declared expenses instead of the benchmark across all of its loan approval processes.
As well as defending its internal systems for assessing loans, Westpac stands by the lending decisions to the seven customers, referred to as loans A to G.
"ASIC has not established that any of the home loans A to G were unsuitable for customers A to G when those home loans were entered into," the defence says.
It is understood all of these customers are ahead or meeting their repayments.
The case is set to put the spotlight on the complex processes banks use to assess borrowers, at a time when regulators are alert to the higher risks in the housing market, after previously warning bank lending standards were too lax.
Five of the seven loans highlighted by ASIC were interest-only loans, an area where regulators have particular concerns about some consumers being given risky credit.
A key point in ASIC's case is that Westpac used an index, the household expenditure measure (HEM) benchmark, when assessing whether customers could afford to repay the bank.
ASIC has previously aired concerns about banks' use of benchmarks such as these, and it says that a "proper" assessment would have shown the loans were in a monthly deficit.
Westpac's defence confirms the bank used the index, but defends the quality of the index, which it presents as just one part of a complex assessment process.
It says the index is an "objective measure that does not depend on the quality of a consumer's estimation of their expenses" and the measure excludes "discretionary non-basic expenses that a consumer could reduce to meet their commitments without substantial hardship".
The case also involves the inner workings of the banks' automated decision system – a program that applied more than 200 "rules" to assess a customer's ability to repay a loan. Westpac says this was part of the wider loan approval process.
Against ASIC's claim it relied overly on the benchmark index, Westpac says some of the "rules" within its automated system took into account the expenses nominated by the customer.
For instance, the system included a rule that consumers' declared expenses could not be more than 70 per cent of monthly income. Applications with a percentage above 70 per cent were assessed manually by a bank officer.
Responding to claims on how it used the benchmark, the bank also says "no provision in the Act required it to use a consumer's declared living expense as a proxy for monthly living expenses" when it was figuring out customers' monthly surplus income.
Contrary to ASIC's claim, it also contends that its loan approval processes assessed all interest-only loans as if they were principal and interest loans.
At a hearing in March, Justice Nye Perram said it was clear "this is going to be a fairly complicated piece of litigation".