“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”.
Here! Here! Justice Perram.
The Federal Court judge handed down his judgment in Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] this week.
The regulator took on one of the “Big 4” on the back of the findings of the Banking Royal Commission and came up short. It alleged that Westpac contravened the National Consumer Credit Protection Act 2009 (Cth) (Act) by using an automated system for home loan approvals, amongst other things.
The first allegation against Westpac was that the bank failed to have regard to the living expenses declared by consumers on their loan application forms.
The second set of allegations against Westpac was that it underestimated the total amount of interest payable over the life of a loan in circumstances where there was an initial interest only period before payment of principal was required. ASIC’s second allegation against the bank was dispatched quickly because where loans with a variable rate are concerned, the total interest payable over the life of the loan is indeterminate. Therefore, the bank had elected to amortise the interest over the life of the loan. The judge decided that “there is nothing” in ASIC’s argument that the bank contravened the Act.
The Court was very critical of the regulator and dismissed the case against it with a costs order to pay Westpac’s costs.
In relation to the first allegation, the Act requires the bank only to assess whether a consumer is unsuitable for a loan. To do this, it must make reasonable inquiries about the consumer’s financial situation and take reasonable steps to verify the consumer’s financial standing, amongst other things, under section 130 of the Act. After making reasonable inquiries, it must determine whether the consumer will be unable to comply with the consumer’s financial obligations under the contract or alternatively, whether the consumer could only comply under substantial hardship.
The Court held that the bank had made reasonable inquiries and taken reasonable steps to verify the consumer’s financial situation, but it was not required to go one step further – that is, to apply the consumer’s declared living expenses to make this assessment. The bank admitted to using the Household Expenditure Measure (HEM) benchmark published by the Melbourne Institute of Applied Economic and Social Research every quarter to assess a consumer’s financial situation. Evidence suggested that this HEM benchmark is the benchmark used by the Australian banking industry to assess household expenses in serviceability calculations. Rent or board and child maintenance/alimony and obligations under other credit contracts were referred to as liabilities and the remaining monthly expenses were encompassed within the concept of “declared living expenses”. The bank did not contravene the Act by relying on the HEM benchmark.
The much-publicised reference to Wagyu beef and the finest shiraz illustrates the Court’s point that a consumer may declare quite extravagant living expenses but that does not mean that the consumer can’t service the loan. That same consumer may very well have to cut back on the niceties in life, be that fine dining or gym memberships or other subscriptions, to meet the loan repayments.
