Westpac has emerged victorious after a bombshell court decision today that vindicates automated assessments of loan applicant's living expenses using a formula called the Household Expenses Measure.
Westpac had agreed to pay a $35 million fine to the corporate watchdog, the Australian Securities and Investments Commission, for using the formula instead of the actual stated expenses of loan applicants more than 260,000 times between 2011 and 2015.
Now ASIC will have to pay Westpac's legal costs because a surprise ruling by Justice Nye Perram today in the Federal Court rejected the settlement. In November, Justice Perram said the proposed settlement did not spell out how Westpac had breached responsible lending laws.
"How can the court be expected to assess the reasonableness of the proposed penalty if it be left in the dark about what the actual problem is?"
The HEM has four tiers or levels of expenses that households fund from their income. They are:
Westpac and other lenders often use the Basic level of expenses to assess loan applications, even where this level is less than the borrower's stated living expenses. ASIC had alleged the formula produced a 'frugal' level of living expenses. Westpac used the HEM to approve almost 262,000 loan applications even when the applicant had stated their expenses were higher than the HEM.
Westpac had argued that borrowers adopt "a modest lifestyle for a period of time in order to acquire real property"
The big bank made a submission to ASIC asking the regulator to accept that borrowers make "reasonable lifestyle adjustments ('belt-tightening')," to afford their home loan.
The judge has apparently largely agreed to that proposition.
"I may eat wagyu beef everyday washed down with the finest shiraz," said Justice Nye Perram.
"But, if I really want my new home, I can make do on much more modest fare.
Justice Perram said a borrower's stated living expenses were only relevant if they can't be reduced (or foregone) to a 'conceptual minimum.'
"Knowing the amount I actually expend on food tells one nothing about what the conceptual minimum is.
"But it is this conceptual minimum which drives the question of whether I can afford to make the payments on the loan."
"I do not consider that it is possible to accept that the consumer's declared living expenses tell one anything about their capacity to meet the repayments under the loan."
ASIC commissioner Sean Hughes said he is reviewing the judgment.
"As a regulator, it is our role to test the law," said Mr Hughes.
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