The controversy surrounding the landmark case between ASIC & Westpac has reignited debate about how lenders should assess potential borrowers’ ability to service home loans. The bank’s win will likely make things more complicated, said an expert. The question is — where will mortgage lending rules go from here?

The Federal Court dismissed claims by the Australian Securities and Investments Commission that Westpac had violated responsible lending standards when it approved around 260,000 home loan loans between December 2011 and March 2015. Westpac used the Household Expiture Metric (HEM) to approve the loans.

Cameron Kusher, CoreLogic analyst and thought leader, stated that the dismissal of the case by the court “potentially opens up a can full of problems for regulators as well as lenders,” in a thinkpiece.

According to him, “Lending policies have become tighter over recent years as ASIC/APRA requested that lenders focus more on individual borrower spend behaviour and less on using household expenditure averages such as HEM.”

Kusher said the borrowers’ spending habits prior to having the loan could radically be different from how they spend once they get the green light.

Nye Perram was actually the judge who heard the case and stated that the minimum living expense benchmark in loan assessment seems to be in compliance with the law.

“Knowing the actual food expenditures of a consumer does not reveal anything about their conceptual minimum. “I may eat Wagyu beef with the finest Shiraz every day, but if this is what I want, I can eat much better food.” he stated.

Changes in the landscape of home-lending

Kusher stated that there has been a significant shift in mortgage lending in recent years.

He said, “The way I describe it is that in past times borrowers had to prove they could repay a loan; today borrowers have to show a track record for ‘post-loan spending’ before being granted a mortgage.”

He said that the impact of the landmark case, which saw back-to-back rate reductions and an increase in serviceability guidelines, would be substantial.

He stated that this judgment could lead to a further loosening in borrower serviceability assessments, as lenders become less cautious around examining the “pre-loan” spending habits of potential borrowers and instead focus on non-discretionary expenses.

Are you worthy to get a mortgage?

Kusher believes that spending habits don’t necessarily indicate a borrower’s “worthiness” to obtain a mortgage. He said factors like employment situation, health, number of dependants, and income paint a clearer picture of the borrowers’ ability to repay debt.

The truth is that someone could be deemed worthy of a mortgage on one day, and completely unworthy of it the next. He said that while we don’t know when someone will lose their job or fall ill, these factors have a greater impact on someone being able to repay their mortgage than if they have a few drinks before taking out a mortgage.

Westpac has pledged to overhaul its loan policies in response to the case to ensure that home-loan applicants are assessed more accurately.

ASIC stated that it is currently updating its responsible-lending guidance.

“ASIC decided to take on Westpac’s case because it needed to clarify a fundamental legal obligation on lenders. This is why ASIC refers this case as a “test case”. ASIC Commissioner Sean Hughes stated in a statement that it was their responsibility to test the law and its scope.