Questions mount following Federal Court’s HEM decision

Earlier this month, Federal Court Justice Nye Perram dismissed the Australian Securities and Investments Commission’s case against Westpac regarding alleged breaches of responsible lending obligations in its issuance of home loans through the use of the Household Expenditure Measure (HEM) benchmark. 

In September 2018, 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.

However, the Federal Court was tentative in its approach to the matter.

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”).

Following his review of the case, Justice Perram judged that a lender “may do what it wants in the assessment process”, noting that other provisions of the NCCP impose penalties if lenders make unsuitable loans as a result of that process.

Industry stakeholders have claimed that the Federal Court’s decision has called into question the current regulatory approach to mortgage lending, opening a “can of worms” for both the regulators and lenders

CEO of the Consumer Action Law Centre Gerard Brody also echoed such concerns in his appearance before ASIC during its second round of public hearings regarding a proposed update to its responsible lending guidance (RG 209).

Mr Brody said he is concerned that the Federal Court’s verdict would remove lenders’ obligation to assess an individual borrower’s suitability for a loan.  

The chief executive called for ASIC’s new regulatory guidance to be based on “what the law actually says”, adding that it should “help clarify aspects of what it means to lend responsibly”. 

“[As] noted by commissioner Hayne in his interim report in the royal commission, responsible lending isn’t about loan serviceability and the lender’s credit risk appetite,” he said.

“These assume a proportion of borrowers will default. 

“[Responsible lending] is about compliance with the legal requirements to ensure a credit contract is ‘not unsuitable’ for the individual consumer and it’s affordable for the consumer without putting them into substantial hardship, and it meets their requirements and objectives.”

He added: “That’s our primary concern with the decision of the Federal Court.

“It seems to suggest that the law doesn’t require lenders to look at the position of the individual applicant in front of them, to look at that applicant’s requirements and objectives, and whether the repayments would cause hardships for that particular applicant.”

ASIC’s second round of public hearings have now concluded, with the corporate regulator expected to publish its new guidance before the end of the calendar year.

[Related: HEM decision to ‘open can of worms’ in mortgage space]