Westpac agreed that it breached its responsible lending obligations and to pay a $35 million civil penalty, rather than face the three-week trial due to commence on 10 September. Westpac also agreed to pay ASIC’s litigation and investigation costs.
ASIC and Westpac submitted a Statement of Agreed Facts to the Federal Court, and sought orders that Westpac breached the responsible lending obligations and should be awarded a $35 million civil penalty. The Court is yet to make the orders.
Last year, ASIC commenced legal action against Westpac for an alleged breach of Westpac’s responsible lending obligations. Specifically, because of Westpac’s reliance on its automated decision system in assessing loan applications, ASIC alleged that Westpac did not make reasonable inquiries, verify information obtained or assess whether the home loans it granted were unsuitable for borrowers.
When assessing home loan applications, Westpac used an automated system to assess a consumer’s capacity to repay loans and ultimately decide whether or not to grant a loan. This practice was common in the mortgage industry.
ASIC alleged, and Westpac has now agreed, that during the period December 2011 and March 2015, its automated decision system:
- Used the Household Expenditure Measure as a benchmark to assess whether a consumer could repay their mortgage, rather than using the consumer’s declared living expenses that were collected by Westpac in the application process;
- For consumers with an interest-only period in their loan, did not assess the consumer’s capacity to repay the loan when the interest-only period ended, and repayments increased;
Based on the above, Westpac’s home loan assessment process did not meet the responsible lending standards required by the National Consumer Credit Protection Act 2009.
If the Federal Court accepts the orders proposed by the parties and awards the suggested $35 million penalty, it will be the largest civil penalty made under the Act.
ASIC has advised that it will be updating its Regulatory Guide 209 Credit licensing: Responsible lending conduct this year, and that it will be engaging in public consultation as part of the process.
Message 1: Ensure that your responsible lending process requires the collection of adequate information to properly assess a consumer’s financial situation, and verification and application of that information, so that you can properly assess whether the loan being sought is unsuitable. Ensure you are recording the actual living expenses and do not rely on standard lender servicing calculators.
Message 2: When assessing the “unsuitability” of a loan, consider the risk of an adverse outcome for the consumer over the course of the loan, rather than only the initial period of the loan, if the loan is approved.