ASIC/Westpac fallout spurs rethink on HEM...

  • By Christine St Anne

The decision by the Federal Court to dismiss ASIC’s case against Westpac will spur a rethink on responsible lending laws including the use of the HEM benchmark. 

On Tuesday, the corporate regulator lost its case against Westpac over the alleged breaches of responsible lending laws impacting more than 260,000 home loan applications. 

The case began back in March 2017, where the corporate regulator sought to test the responsible lending provisions of the National Consumer Credit Protection Act 2009. 

The Act requires lenders to assess whether loans will be unsuitable for consumers

ASIC had argued that the bank had relied on the HEM benchmark rather than individual expense verification to assess a borrower’ ability to service their loan and was therefore in breach of its obligations. 

In assessing home loans with an interest-only period, ASIC alleged that Westpac was required to have regard to the higher repayments at the end of the interest-only period and did not do so.

In handing down his decision, Justice Perram said that the problem in ASIC’s argument is that borrowers would alter their spending behaviour in order to meet their mortgage repayments.

That is, “it is always possible that some of the living expenses might be foregone by the consumer in order to meet the repayments”. 

“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,” Justice Perram said in his judgement.  

For CoreLogic senior research analyst Cameron Kusher, the case will spur a rethink on responsible lending laws. 

“What Justice Perram said is true. The approach to mortgage lending used to be simply about looking at a borrower’s finances and assessing whether they had the capacity to pay back the mortgage,” Kusher said. 

“In the past few years its shifted to an approach where borrowers now have to show that they have the capacity to restrain their expenditure even before they get the mortgage.” 

As a result of the more stringent approaches to assessing the viability of borrowers through their expenses, Kusher said there has been a lot few mortgages been written with a lot of households finding it difficult to get a mortgage. 

“I think the industry was expecting ASIC to win this case but in the light of the judgement, a rethink will be needed on responsible lending including the use of HEM.”

The judgement comes at a time as ASIC kicked off the first of its public hearings into responsible lending

These public hearings were part of the corporate regulator’s approach to revise its responsible lending laws in light of the Royal Commission which could mean a more stringent approach and possibly abandoning the use of the HEM measure. 

Indeed, the viability of the measure was questioned during the Royal Commission, however, it was not included in the public inquiry’s final recommendations. 

“I certainly think there needs to be a rethink about what is appropriate and what is not appropriate when asking people about their expenses when applying for their loan. 

“Realistically what really causes people to default on their loans is losing their job. Whether you believe that HEM is a good measure or not, it has served lenders well for a very long period of time. During that period mortgage arrears have generally been very low. 

“It comes back to the old rule, if it ain’t broke don’t fix it.” 

However, Kusher is not advocating abandoning other forms of expense verification all together and does not expect lenders to also abandon the changes they have made to their respective approaches. 

“The pendulum has just gone too far on the conservative side at the moment. The questions don’t have to delve too deeply. 

“You read stories now about borrowers are being asked whether they have a child or whether they have a cat. Why they went out and why they spent this money. I don’t think you need to be ridiculous about it. 

“I think a balance can be struck. There are possibly ways to find out a little bit more information to ensure a good decision. But you don’t want to make it too restrictive that it gets just too difficult to get a mortgage.”