The Australian Securities and Investments Commission (ASIC) has begun civil proceedings against Sydney-based Westpac Banking Corporation for allegedly breaching responsible lending provisions contained in consumer protection laws.
The bank’s alleged misconduct occurred between December 2011 and March 2015. Schedules to the pleadings filed in the Federal Court of Australia yesterday point to seven loans, though it is understood that these are a sample of a much larger number of loans which ASIC alleges breached Westpac’s responsible lending obligations.
An initial court hearing will take place on 21 March. However, before a judge hears the allegations, ASIC and Westpac may be asked about more details of the case via the political process.
ASIC’s commissioners, including Chairman Greg Medcraft, will appear before a senate estimates hearing in the capital today. Meanwhile, Westpac’s chief executive officer, Brian Hartzer, is scheduled to appear before the House of Economics next Wednesday.
Mortgage brokers, who handle more than 50% of mortgage deals, fear the case will “go off like a bomb” among other lenders already nervous about breaching the Australian Prudential Regulation Authority’s (APRA) 10% speed limit.
Lenders have been curtailing investor growth for the past eight months in response to pressure from the Reserve Bank, ASIC, and APRA. The nation’s regulators want lenders to reduce lending to high-risk investment borrowers, particularly for apartment markets in Sydney and Melbourne, by cutting back on approvals for interest-only loans.
Westpac’s flawed serviceability assessment
According to ASIC, Westpac’s “automated decision system” for mortgage applications for interest-only loans had a serviceability assessment that used a monthly repayment figure that assumed – to the contrary – that repayments of principal would be made over the term of the home loan.
Instead, the repayments were made over the residual term after the expiration of the interest-only period. In other words, the serviceability assessment considered a lower figure for minimum monthly repayments than would actually have to be paid.
ASIC said Westpac relied solely on a household expenses benchmark index that actually underestimated real living expenses. The bank ended up approving loans where a proper assessment of a borrower’s ability to repay would have revealed a monthly deficit.
In an official statement, George Frazis, the head of Westpac’s Consumer Bank, defended the bank’s practices, saying it had “robust credit approval processes while helping customers purchase their home.”“Our credit policies are informed by our deep experience and understanding of the mortgage market,” he said. “They include a consideration of customers’ specific circumstances, including income and expenditure, previous repayments history and the overall customer relationship. We build into our processes a range of conservative inputs, including the addition of buffers to take into account possible future interest rate increases.”