Responsible lending… or is it?

18 October 2019

In August the Federal Court dismissed ASIC’s prosecution of Westpac for allegedly failing to meet responsible lending standards under the National Consumer Credit Protection Act 2009 (Cth).

This was a test case for ASIC seeking judicial clarification about a ‘cornerstone’ of the obligations that apply to lenders. After the decision, Westpac acknowledged the importance of this as a test case for the industry and welcomed “clarity…for the interpretation of responsible lending obligations.

Among other claims, ASIC took the view that Westpac should have used customers’ declared living expenses to assess serviceability instead of relying solely on the Household Expenditure Measure (HEM).

The HEM uses indicators like a customer’s family and dependants, location, income and lifestyle (student, basic, moderate or lavish) to calculate an estimate of expenses.

During the Banking Royal Commission, criticism was levelled at banks for the use of the HEM to assess serviceability because it fails to take into account the customer’s declared expenditure. In theory then, the HEM could underestimate a customer’s ability to meet repayments resulting in the customer being granted a loan that then puts them a position of substantial hardship.

Equally though, the HEM does not tell a bank about the customer’s “conceptual minimum”. This concept was referred to throughout the Court’s decision and is premised on the idea that past expenditure is not always a complete answer to the question of serviceability. Instead, it may be permissible to take into account essential expenditure and accept that past discretionary spending can be curtailed in order to meet loan repayments.

Justice Perram described how the conceptual minimum might be achieved as follows:
“I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.”

While his Honour did not endorse or legitimise the HEM benchmark, the decision had the potential to bring some comfort to lenders in the wake of the Banking Royal Commission.

However the comfort provided by the decision might be short-lived.

Justice Perram stated that a credit provider may “do what it wants in the assessment process [of a loan application]” but what credit providers cannot do “is make unsuitable loans”.

ASIC is of the view that this “creates uncertainty as to what is required for a lender to comply with its assessment obligation”. Further ASIC does not consider the decision as a whole to be “consistent with the legislative intention of the responsible lending regime.” For these reasons ASIC has recently announced that it will appeal the decision.

The clarification that the appeal will provide is urgently needed for the benefit of lenders and customers alike.

This article was written by Jonathan Kramersh, Partner in our Melbourne office.

Publication Editor: Grant Whatley

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