Westpac and Asic had agreed to fine after bank conceded it wrongly assessed ability to repay mortgages. A federal court judge has balked at Westpac’s offer to pay a record $35m fine over its irresponsible lending practices for home loans.
The country’s oldest bank and the corporate regulator had agreed to the record fine after Westpac conceded it wrongly assessed people’s ability to repay mortgages between December 2011 and March 2015.
The case centred on Westpac using a statistics-based household expenditure measure (HEM) to automatically calculate a customer’s ability to repay a loan – regardless of whether that HEM figure was lower than what the customer had declared as their monthly expenses.
Four per cent of the 262,000 home loans automatically approved under the HEM method should have been referred to a credit officer for assessment but were not.
While the two parties were in lockstep on Monday, federal court judge Jye Perram took issue with how they had arrived at the penalty, which is nearly double that of the largest fine awarded under the National Credit Act.
He said he had to play “devil’s advocate” given Westpac and the Australian Securities and Investments Commission had agreed on the facts – including that the bank’s conduct was an innocent mistake.
“I am a little bit troubled by the rationale of using the HEM,” Perram said. “I understand it was done in good faith but why it was used is necessary [to assess wrongdoing].”
Perram referenced fines handed out this year for irresponsible lending, including ANZ’s $5m penalty over car loans and the owners of Radio Rentals copping $2m over the issuing of 270,000 leases.
Jeremy Kirk, Westpac’s barrister, argued the court was not required to decide whether it was the appropriate penalty but only had to be assured it was an appropriate penalty.
Asic argued the penalty was appropriate given a number of factors, including the relative size of home loans to other consumer loans, the sector’s importance to Westpac’s bottom line and the overall size of Westpac and its main competitors.
The court was told the parties agreed no customers suffered specific loss or damage under Westpac’s previous automated system, and the bank had not admitted any loans were unsuitable for the borrowers.
HEM is widely used by banks when borrowers’ estimates of living expenses appear low.
The prudential regulator has told the banking royal commission HEM is based on a relatively low estimate of living expenses.
Kirk told the court the bank now only automatically approved loans when both the HEM and the consumer’s own list of expenses were low enough to service the loan.
“Westpac acted in good faith and there were good reasons for using the HEM to some extent,” he said. “But it accepts it didn’t get it right in a significant extent [of loan assessments].”
Perram reserved his decision until a later date.This article was first published by https://www.theguardian.com/