Westpac's settlement with ASIC is a big deal
Westpac’s settlement with the corporate regulator for breaching the responsible lending provisions of the consumer credit protection law is a big deal, according to Citi.
According to the broker, Westpac should be concerned about the customers who may have received loans which could be classed as “unsuitable” if they go sour as this would make customer redress a real possibility.
Westpac has admitted it breached its responsible lending obligations relating to around 10,500 home loans between December 2011 and March 2015. It agreed to pay a $35 million fine.
But the bank has not made any admissions that any of the affected loans were ‘unsuitable’ at the time of their origination,Citi’s Brendon Sproules pointed out in a client note.
“However, with 50 per cent of these loans still current, they still may be considered ‘unsuitable’ under the National Consumer Credit Protection Act, if the borrower is unable to meet repayments or faces substantial hardship in the future," he said.
Sproules further noted that the onus appears to be on the lender, not the borrower to show that the loan was not ‘unsuitable.’
“The key issue for lenders with this settlement is that any future impairments or hardship for affected borrowers in these circumstances are likely to lead to customer redress,” he said.
“This could include repayment of interest and fees, pay amounts for economic loss, amending the loan contract, or even declaring the loan contract void.”
More potential penalties
Westpac admitted it did not meet the requirements of the NCCP Act in two ways.
Firstly, it incorrectly used the HEM benchmark for household expenses instead of the borrowers declared living expenses.
Second, the lender incorrectly calculated loan repayments for interest-only loans based on the full 30-year loan term rather than on the 25-year period after the interest-only period had concluded.
These breaches ceased in 2015 when Westpac made changes to its systems.
However, Spoules believes these practices were widely used across the industry during this time.
"There is a risk that these breaches may apply to other lenders suggesting more potential penalties."
According to Pat McConnell, commentator and visiting fellow at Macquarie University’s Applied Finance Centre, the modus operandi for the banks is to pay a fine but not admit wrongdoing in a bid to head off class actions.
“But the vultures are circling,” he said.