The Australian Securities and Investments Commission (ASIC) case was dismissed in the decision on the obligations of responsible lending in Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244.

ASIC bought their case alleging that Westpac contravened ss128 - 135 of the National Consumer Credit Protection Act 2009 (Cth) (the NCCP). These provisions refer largely to the ‘responsible lending’ rules that those in the credit industry are familiar with.  

Westpac used an automated system for the conditional approval of home loans (the ADS) and calculated proposed repayments with principal amortised over life of interest only loans.

The alleged breaches fell into two categories; firstly, whether Westpac’s assessment of unsuitability requires direct comparison of declared living expenses against loan repayments, this argument failed both on the facts and the statutory construction and secondly, whether assessment by reference to repayments due after the interest only period ends. ASIC also failed on the second limb of its arguments.

Justice Perram dismissed ASIC’s application with costs.

Perram J concluded that by means of the 70% Ratio Rule Westpac took into account the declared living expenses of the consumer, based on Westpac’s application form. If the 70% ratio was triggered, this by way of exceeding the consumers verified monthly income, then it was referred to a manual processing credit officer.

Regardless of which channel the consumer applied for a loan at some point the consumer was required to provide information on their financial position by way of Westpac’s application form.

ASIC’s case was primarily documentary however calling expert evidence about the nature of the Household Expenditure Measure (HEM) benchmark. In the course of the action ASIC amended their claims focusing on the general obligation to assess unsuitability under the NCCP as opposed to being assessed as unsuitable.

Perram J said:

“…..so far as the consumer’s financial position is concerned, The Act requires a credit provider to ask itself only 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 with substantial hardship’, s131 (2)(a).

Perram J accepted the fact the NCCP required credit providers to enquire about the financial obligations under s130(1)(b), in turn answering s131(2)(a) however he rejected that the credit provider had to use the declared living expenses declared on the application form, noting the fact the NCCP is silent on how credit providers are to answer s131(2)(a). Division 3 neither expresses any statement accordingly.

ASIC implied three arguments, Perram J stated firstly that s129 does not say that a credit provider must take into account financial information obtained by the consumer under s130(1)(b) when performing the assessment under s129.

It states; it must ‘specify’ the period to which it relates and it must ‘assess’ whether the credit contract ‘will be unsuitable for the consumer’. Perram J declared that living expenses are mandatory and agreed with ASIC that this is required by s130 before the assessment is carried out, because the purpose of these inquiries are for the purpose of carrying out the assessment. The consumer’s financial situation must be taken into overall account, so therefore triggering whether that financial issue has been taken into account and then how it has been taken into account, leaving the question of fact and degree.

This leads to the question of how to assess servicing of a loan? Can it be serviced by making of the repayments, putting the consumer into substantial hardship? Perram J accepted that this provides the credit provider the answer making this the mandatory matter. However he did not accept that all the consumer’s financial circumstances would be a mandatory matter. There are elements of the financials that are irrelevant and should not be made mandatory matters.

The first question in s131(2)(a) is that the credit provider has to assess whether the consumer will be unsuitable for the credit contract, this displaying the consumers ability to service the loan not that by so they will be in substantial hardship.

ASIC failed to demonstrate why in answering that question one must know what the declared living expenses are of the consumer. It is a probable fact that a consumer will forgo living expenses in order to service a loan. In saying this it is only relevant to identify the living expenditure that cannot be forgone.

‘The second question in s131(2)(a) whether the consumer cannot service their obligations under the contract without substantial hardship, giving rise to the fact of whether if some or all of the living expenses are forgone, if done without would this give rise then to substantial hardship. This cannot be discerned merely on the declaration of the living expenses”.

Perram J rejected the first argument by way of analysis declaring that living expenses alone do not necessarily have to be relevant to s131(2)(a) and by not being relevant s129 it cannot say that living expenses be taken into account in the performance of unsuitability.

For clarity, Division 3 ensures the credit provider is obliged under s129 to make a correct assessment of suitability or unsuitability and is prohibited under s128 from entering into a contract unless having performed an assessment.

A credit provider may do what is necessary in the assessment of unsuitability under ss131 and 133, what it cannot do is make an unsuitable loan.

Westpac did take into account the living expenses although where not required to by way of the 70% Ratio Rule assessment under the ADS, alongside other named rules.

Perram J stated that under s132 the word ‘assessment resulted from the process of assessment’.

ASIC failed on the third point because Westpac declared living expenses, when it didn’t have to and therefore did not fail the assessment requirement under s129.

ASIC argued that by using the HEM it did not assess the particular consumer individually and therefore did not assess the loans suitability in line with the requirements at s129(b). The HEM benchmark by itself did not satisfy this requirement. Alleging that Westpac only used the HEM and not the declared living expenses.

Perram J upon analysis found:

“Westpac did however use the declared living expenses, however not deciding whether the HEM was a good benchmark to assess substantial hardship. Concluding that Westpac used the HEM benchmark in the ADS, in good faith for the assessment of substantial hardship. He said the use of HEM benchmark was an estimator of the level of household expenditure expected of a consumer to spend as a reasonable standard of living”

In the matter of interest only loans ASIC alleged Westpac contravened the NCCP in respect the initial interest only period loans.

Perram J concluded:

“This part of ASIC’s case may be readily dispatched. What it submits is impossible. [T]he interest is variable it is not possible to know what the repayments will be at the end of an interest only period………ASIC’S contentions about these loans can be rescued from incoherence only by adding assumption that the repayments at the end of the initial period should be estimated at the initial interest rate….I do not see how ASIC’s submission that the repayments due at the end of the initial interest only period is a mandatory matter which must be taken into account in answering s131(2)(a) questions, as the financial position in its entirety of the consumer is not a mandatory consideration for the purpose of s132(2)(a).

What is mandatory is the matters known before the s132(2)(a) questions can be answered, this not being regulated under s131 so making it difficult to identify matters in advance although not impossible. So without knowing the repayments at the end of the initial interest only period these questions cannot be answered…..”.

It was concluded that there was no contravention of s128 about making a right or wrong assessment, an invalid assessment resulted in the credit provider failed to ask itself under s132(2)(a) the questions. Westpac did in fact ask the questions, so how Westpac went about asking those questions was a legitimate matter for it.

ASIC’s position on the primary case was inconsistent with its secondary case about loans with the initial interest only periods.

Conclusion

In conclusion Perram J decided that there is no deficiency in law as to the allegations against Westpac and its assessment process in line with their statutory requirements under the NCCP, ASIC’s interpretation of the law was incorrect. Perram J made clear “the credit providers need to satisfy themselves in their assessments (In which they did, by way of the ADS, HEM and 70% Ratio Rule) meeting the minimum statutory requirements of the ACT”. 

This is an important decision in the current environment. Readers will realise that ASIC is currently conducting public hearings on the scope of responsible lending obligations.

This is the first judicial interpretation of the responsible lending obligations. We can expect ASIC not to leave this as the end of the matter. Further guidance will be required as to how ASIC will deal with responsible lending obligations following the decision. It may be the case that ASIC goes back to the Government for legislative clarity on responsible lending obligations that corresponds with their view.

Special thanks to Kylie Jay from Southern Cross University for assistance in preparation of this Case Note.