Even after winning the case filed by the Australian Securities and Investments Commission, Westpac has vowed to revamp its loan policies to ensure a more rigorous assessment of home-loan applications.
The bank announced that it will be overhauling its Household Expenditure Measure (HEM), expanding the expenses categories from 13 to 18 and changing the treatment of other living costs.
Starting today to early September, the bank will gradually roll out consumer credit policy changes across its retail branch and broker networks, according to a report in The Australian Financial Review.
These updates will also apply to its subsidiary banks, including BankSA, St George Bank, and Bank of Melbourne.
"To ensure that expenses can be captured more accurately, we are updating and adding new expense categories to reflect industry guidelines on the HEM values we use as our customer expense benchmarks," the bank said in a note to mortgage brokers.
Some of the changes involve the treatment of investment property rental income and the definition of a dependent — those who are over 18 years old and are still financially reliant on the home-loan applicant will now be considered a dependent.
A new debt-to-income ratio will also be used under the new guidelines. It will be applied using the total gross annual income and most liabilities. This particular change is a good move for Westpac, said Martin North, principal at Digital Finance Analytics principal.
"Debt to income is a good proxy for risk. This is aggressive," he told AFR.
Westpac's court-battle win
Westpac's move came after Federal Court dismissed ASIC's allegations that the bank breached responsible lending standards in approving around 260,000 home loans between December 2011 and March 2015.
The regulator filed the case in March last year to test the responsible lending provisions of the National Consumer Credit Protection Act 2009.
The legislation requires lenders to assess whether loans will be unsuitable for consumers. In the case, ASIC said Westpac's automated assessment system used a benchmark for consumer expenses and did not have regard to the actual costs provided by the consumer and was therefore in breach of its obligations.
"ASIC took on the case against Westpac because of the need for judicial clarification of a cornerstone legal obligation on lenders, this is why ASIC refers to this case as a 'test case'," ASIC Commissioner Sean Hughes said in a statement.