Today (13 November), Justice Nye Perram handed down his judgement relating to Federal Court proceedings under the National Consumer Credit Protection Act 2009, in which he dismissed the Australian Securities and Investments Commission (ASIC) and Westpac’s joint application for approval of a $35 million civil penalty.
The matter related to supposed breaches of responsible lending obligations in its issuance of home loans.
In September, Westpac admitted to breaches of responsible lending obligations when issuing home loans to customers, and agreed to pay a $35 million civil penalty to resolve Federal Court proceedings under the National Credit Act.
ASIC and Westpac jointly approached the Federal Court seeking orders that the bank contravened the responsible lending provisions of the National Credit Act because its automated decision system:
- did not have regard to consumers’ declared living expenses when assessing their capacity to repay home loans, and instead used a benchmark (the Household Expenditure Measure); and
- failed to use the higher repayments at the end of the interest-only period when assessing a consumer’s capacity to repay the loan, for home loans to owner-occupiers with an interest-only period. For example, for a loan of $500,000 at 5.24 per cent with a term of 30 years and a 10-year interest-only period, the assumed repayment using the incorrect method is $2,758 per month, whereas the actual repayment after the expiry of the interest-only period using the correct method is $3,366 per month.
ASIC reported that the litigation related to Westpac’s home loan assessment process during the period December 2011 and March 2015, during which approximately 260,000 home loans were approved by Westpac’s automated decision system.
Further, for approximately 50,000 home loans, ASIC noted that Westpac received, and did not use, consumers’ actual expense information that was higher than the Household Expenditure Measure (HEM).
Additionally, ASIC reported that for approximately 50,000 home loans, Westpac used the incorrect method when assessing a consumer’s capacity to repay a home loan at the end of the interest-only period.
ASIC contended that of the 100,000 loans, Westpac should not have automatically approved approximately 10,500 loans.
Had the civil penalty been approved by the Federal Court, it would have been the largest civil penalty awarded under the National Credit Act.
However, the Federal Court has been tentative in its approach to the matter.
While ASIC’s Regulatory Guide 209 (which is soon to be updated) outlines that “benchmarks can be useful tools in the process of determining whether a particular consumer will experience substantial hardship as a result of meeting the obligations of a credit contract”, it adds that “automated systems and tools are not a substitute for making inquiries about the consumer’s current financial situation”.
Indeed, the statement of agreed facts between Westpac and ASIC outlines that Westpac accepts that, for the loans in question under the ASIC case, it should have had regard to the declared living expenses in its serviceability calculation in the automated decision system.
But — as previously reviewed in Mortgage Business — the statement of agreed facts also shows that the loans conditionally approved under the automated system actually had a “lower rate of hardship applications than manually approved home loans” originated during the same period.
Justice Nye Perram had sought a friend of the court to consider whether the Westpac case even constituted a breach of the NCCP (reportedly stating that “there is no fact before [him] that any unsuitable loans were made”).
It is believed that should the bank be found to have breached the NCCP, the $35 million would be deemed too small. However, there are still questions relating to whether the law has been breached, as it does not specifically state that banks should use the customer data they collect over the use of the HEM.
Justice Perram’s judgement reads: “Whether the use of such benchmarks as an input into the serviceability calculation is a good or bad idea is not a question this court is called upon to address. What is required, however, is satisfaction that the use of the HEM benchmark as disclosed by the statement of agreed facts is a contravention of [the NCCP]...
“What [section 128] prohibits is the making of a credit contract where an assessment has not been carried out. Section 128 says nothing about the nature of an assessment other than it must be done in accordance with s 129. The prohibited acts in s 128 are therefore specified above the cincture to the provision, not below it. To labour the point, using the HEM benchmark does not conceivably contravene s 128; it is making a credit contract without first making an assessment in accordance with s 129 which is the relevant act of contravention.”
Justice Perram continued: “I simply do not accept that the conduct specified in the declaration is conduct which could possibly be a contravention of s 128. I will not declare conduct which is not unlawful to be unlawful. The contraventions of s 128, that is the entry into credit contracts, must be specified. The declaration tells one next to nothing.”
He later said: “[T]he declaration does not provide any information about when the use of the HEM benchmark instead of the customers’ declared living expenses is permitted and when it is not.”
The judge added that not knowing the reasoning behind why the bank chose to use the HEM benchmark in preference to customers’ declared living expenses also “makes it very difficult to assess how serious its conduct is and hence how appropriate a civil penalty of $35 million might be”.
“For example, did the Respondent use the HEM benchmark because it thought it more reliable than customers’ self-reported living expenses? Or did the Respondent use it because it did not wish to suffer the administrative burden of analysing an individual customer’s living expenses? Or was it because it wished to make as many unsuitable loans as it could? There are many other possibilities. Each discloses conduct of a differing level of seriousness.
“Yet the court is asked to say that the proposed penalty is appropriate even though it knows nothing of the Respondent’s motives beyond a bland agreed fact that it acted in good faith. In the information vacuum in which the parties have left the court, this is not possible.”
He concluded: “It is unworkable to assess the reasonableness of the penalty if it is not known what is to be penalised.”
A case management hearing has now been set down for 27 November 2018.
An ASIC spokesperson said: “ASIC is reviewing the judgement and will make no further comment at this stage.”
Mortgage Business has reached out to Westpac for a comment but has not yet received one.
However, the major bank recently backed the use of the Household Expenditure Measure as a benchmark for validating a borrower’s living expenses in a recently released submission responding to the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
In a separate matter, the big four bank was fined $3.3 million last week, escaping a $58 million penalty proposed by the corporate regulator, for contravening section 12CC of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) through its involvement in setting BBSW in 2010.
More to come.
[Related: To HEM or not to HEM? Is that the question?]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.