Market watchers and economists continued to criticize Westpac’s dismissal by the Federal Court for its alleged breach of responsible lending use. They said it would make things worse.
In 2017, the Australian Securities and Investments Commission took the case. The case was brought by the Australian Securities and Investments Commission in 2017. During investigations by the royal commission, there was a lot of doubt about HEM’s use to evaluate borrowers’ ability for home loan service.
Lindsay David, founder and CEO of LF Economics said that “a lot people will believe that banks can just be able back to use this type method to assess loan servicingability.”
What made the case even more controversial was Justice Nye Perram’s interpretation of lending rules, saying: “I may eat wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.”
“Westpac would have been shut down in any country and its loan license taken away. This is a clear indication that Australia doesn’t have the stomach to deal with poor bank behavior. David asked: “Do bank executives have right to shoot people in the street and get away with it?”
Unaffordable loans are often more common
Experts predict that banks will continue using HEM benchmarks after the court’s ruling. This could result in more homebuyers getting loans they cannot afford.
Karen Cox, Chief Executive of Financial Rights Legal Centre stated that the court’s decision meant that banks no longer have to take into account people’s actual expenses when they lend money.
This will give lenders the flexibility to extend unsustainable loans that could cause people to default. She said that the idea that borrowers should forgo wagyu steaks and shiraz in order to get cheaper food is not consistent with reality.
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What’s the deal with HEM, you ask?
Lenders use HEM to evaluate the ability of borrowers with respect to making mortgage payments. Lenders and banks have their HEM benchmarks. When evaluating borrowers they take into account many factors, such as family size and location.
UBS estimates that almost 4/5 home loans were approved using the HEM benchmark in 2017.
“If loan assessment are made on the basis HEM benchmarks, even if people cut their expenses, they may not be able afford repayments. Consumer Action Law Centre’s chief executive is Gerard Brody. He said that not everyone has the means to cut their expenses.
In 2016, ASIC challenged the benchmark’s use. In 2016, the ASIC Commission challenged the use of the benchmark. The next year, Westpac was sued by the commission. Even the Australian Prudential Regulation Authority (APRA) questioned the HEM Benchmark’s use.
Wayne Byres was the chairperson of APRA in 2017. He stated that he would like to see more industry effort toward collecting realistic living expense estimates from borrowers.
Promise of Westpac
Following the court’s decision, Westpac promised to revise their loan policies in order to provide a better assessment of home-loan applications.
The bank will increase HEM benchmarks by adding expense categories and changing the way other living costs are handled.
In a statement, the bank stated that they were doing so to “ensure expenses can be captured more accurately”.
Future home lending
Cameron Kusher (CoreLogic analyst) stated that the ASIC/Westpac case would have serious repercussions. This is especially true when you consider the effects on the back to back rate reductions as well as the relaxation of serviceability guidelines.
He stated that the judgment could lead to a loosening in loaner serviceability assessments because lenders are less attentive about pre-loan borrowing habits and more focused on non-discretionary obligations.
ASIC indicated that it is updating its responsible lending guidance.
“ASIC was required clarifying a key legal obligation to lenders and took on Westpac’s matter. ASIC refers to this case as a ‘testcase. He stated that regulators had the responsibility of testing the law’s scope and validity.