The Federal Court has dismissed the Australian Securities and Investments Commission’s (ASIC) allegations that Westpac breached responsible lending standards in approving around 260,000 home loans between December 2011 and March 2015.
ASIC filed the case in 2017 during efforts to strengthen the lending standards of Australian banks. The regulator alleged that Westpac's automated decision system for mortgage applications was flawed — it said that Westpac relied solely on a household expenses benchmark index that actually underestimated real living expenses.
Nothing wrong with Westpac's standards
Nye Perram, the judge who handled the case, said Westpac had done nothing wrong by using the automated system rather than manually checking the borrowers' living expenses.
He added that laws do not explicitly require banks to check expenses. He said he was "unable to discern why, as a matter of principle, the consumer's declared living expenses must be considered."
"I may eat Wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare," Perram wrote in the judgment.
The ruling came even after Westpac admitted it had inaccurately assessed the living expenses of borrowers. The bank even agreed to pay a $35m fine, a move which was rejected by the court.
Blow to the efforts to toughen lending rules
Some market watchers believe the decision will hamper regulators’ efforts to tighten lending standards.
Early this year, the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry released its final report after a year of investigating banks. Commissioner Kenneth Hayne said laws should be amended if courts showed "deficiency in the law's requirements to make reasonable inquiries about, and verify, the consumer's financial situation."
"I'm not sure the courts are, in this instance, in tune with what public expectations might be. It does show you how slowly legal and regulatory change takes place. The Royal Commission can fire a number of huge incendiaries into existing practices and legal practices, but the courts carry on as if it's business as usual," University of Technology professor Thomas Clarke told Reuters.
Consumer advocates also slammed the court's decision, saying that Perram's statements indicate that there is a need for changes in the law to compel banks to properly consider the financial circumstances of borrowers.
The decision suggests that banks do not have to have consider people's actual expenses when they lend, said Karen Cox, CEO of Financial Rights. She said this would allow lenders to continue to extend unsustainable loans which set people up to fail.
"To suggest that borrowers ditch wagyu steaks and shiraz for cheaper food really is out of touch with the realities faced by most Australians. The rules and procedures applied by Westpac could equally have approved borrowers who have significant medical expenses, or additional education and recreational expenses for a child with a disability," she said.