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Court weighs in on benchmarks, ‘belt tightening’

Westpac’s use of expense benchmarks for serviceability assessments was “far from intuitively odd”, a Federal Court Justice has said in his reasons for dismissing ASIC’s responsible lending appeal.

Last week, the Full Federal Court dismissed the Australian Securities and Investments Commission’s (ASIC) appeal against Justice Nye Perram’s decision to overturn its responsible lending case against Westpac Group, which has since been dubbed the “wagyu and shiraz” case.

Two out of three judges in the Full Federal Court upheld the court’s initial decision that sided with the major bank.  

The case focused on Westpac’s reliance on expense benchmarks, such as the Household Expenditure Measure (HEM), in serviceability assessments used for home loan applications through an automated decision system (ADS).

ASIC had alleged that by failing to separately assess declared living expenses, Westpac fell short of obligations under the National Consumer Credit Protections Act.

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These obligations (specifically, Section 131 (2) (a)) require lenders to consider the following questions:

  • Is it likely that the consumer will be unable to comply with the consumer’s financial obligations under the contract? 
  • Is it likely that the consumer will only be able to comply with the consumer’s financial obligations under the contract with substantial hardship?

In upholding the court’s original decision to dismiss ASIC’s case last week, Justice Jacqueline Gleeson and Justice Michael Lee found that Westpac’s use of expense benchmarks to grant conditional approvals through its ADS did actually satisfy considerations of a borrower’s suitability for a loan.

Specifically, Justice Gleeson stated that Westpac’s application of a “70 per cent Ratio Rule” – which would be triggered if a consumer’s declared living expenses exceeded 70 per cent of monthly income – satisfied adequate consideration of a borrower’s financial position.   

“[By] applying the 70 per cent Ratio Rule in each case, Westpac did take into account the consumer’s declared living expenses as part of the process comprised by the ADS,” she said.

Justice Lee agreed, adding lenders are not required to take into account “all information collected, regardless of its relevance or materiality to the assessment of unsuitability”.

Echoing remarks made by Justice Nye Perram in his original judgement, Justice Lee acknowledged that lenders may give consideration to a borrower’s commitment to adjust their spending behaviour after taking out a home loan (belt tightening).

“Simply labelling an expenditure as a declared living expense, and the fact that the consumer incurs that expense on their current lifestyle, does not necessarily change its nature from being discretionary,” he said.

“It is plain that a consumer may choose to, and can be expected to, forgo particular living expenses in order to meet their financial obligations under a credit contract.”

Justice Lee concluded that it was not improper for lenders to assess a borrower’s suitability for a loan through the application of an expense benchmark.

“This was an unusual case, being a case alleging a serious want of compliance with responsible lending norms, divorced from consideration of any facts about any specific consumers,” he said.

“It was Westpac’s job to assess suitability and although not determinative, for my part, it is far from intuitively odd that Westpac would focus on independent, objective data as represented by the HEM Benchmark and use the declared living expenses in the way it did – through the use of the ‘70 per cent Ratio Rule’.”

ASIC is currently considering its next steps, with the regulator entitled to pursue the matter in the High Court.

[Related: ASIC mulls further action amid responsible lending loss]

Court weighs in on benchmarks, ‘belt tightening’
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