Murky waters: What is “responsible lending”?
On 13 August 2019, Justice Perram dismissed a case that ASIC brought against Westpac in regard to responsible lending laws. Ultimately, Justice Perram decided that Westpac’s use of an automated process for loan approvals was not a breach of responsible lending. The decision leaves us asking: Will banks ever be held accountable?
In September last year, Westpac admitted to using an automated process to determine whether to approve home loan applications. Therefore, Westpac was using the Household Expenditure Measure benchmark, rather than assessing each individual applicant’s living expenses. ASIC alleged that this practise was a breach of section 128 of the National Consumer Credit Protection Act 2009 (“the Act”), which details credit providers’ ‘obligation to assess unsuitability’. Justice Perram did not agree with ASIC, for the reasons explained below.
Obligation on credit providers
ASIC alleged that Westpac did not have any regard for the living expenses that applicants stated on their loan application forms. Justice Perram rejected this argument, but he also said that even if that was true, Westpac’s conduct still would not have amounted to a breach of section 128.
He said ASIC had misinterpreted what the Act means. He explained that “the Act requires a credit provider to ask itself only whether the consumer will be unable to comply with their financial obligations under the contract” or “whether the consumer could only comply with substantial hardship”.
What Justice Perram is saying is that credit providers, (in this case Westpac,) do not need to consider an applicant’s living expenses as alleged by ASIC. Rather, they just need to consider whether the applicant will be able to comply with the terms of the loan. In Justice Perram’s opinion, this consideration can be done without regard for the applicant’s living expenses.
Justice Perram further explained that credit providers must consider whether an applicant would only be able to pay the loan off if they suffered substantial hardship to do so. For example, if an applicant had to go without food to be able to fulfil their loan obligations, this would be very likely to constitute substantial hardship and therefore the credit provider would not be able to approve the applicant’s loan.
According to section 131 of the Act, credit providers need to assess an applicant’s financial situation to determine whether they will be able to pay off the loan. However, Justice Perram said that section 131 does not expressly say that credit providers need to assess living expenses. He said “I do not accept ASIC’s contention that all of the financial circumstances of the consumer can be a mandatory matter”.
Essentially, Justice Perram is saying that although credit providers need to assess the financial situation of loan applicants, they only need to assess the financial circumstances that are relevant to whether they will be able to pay off the loan, (and living expenses are not one of those circumstances).
What financial circumstances do credit providers need to consider?
Justice Perram gives the example of superannuation. The amount of superannuation a person has is not relevant to their ability to pay a loan, even though it is part of their financial situation. Therefore, credit providers do not need to consider an applicant’s superannuation balance when deciding whether their application for a loan should be approved.
According to Justice Perram, living expenses fall in a similar boat to superannuation in this regard.
Justice Perram found that a person can forego some of their living expenses in order to pay off a loan without ending up with substantial hardship. For example, giving up a gym membership or an annual holiday will not result in hardship. He made it clear that the minimum amount a person must spend on food to survive is “an entirely different concept” to what the consumer actually spends on food. Therefore, just because an applicant says their weekly expenditure on food is $200, for example, this does not mean $200 is necessarily the minimum amount they can spend to survive without hardship. “The fact that a consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship” – Justice Perram.
What does this case mean for me?
The decision of the ASIC v Westpac case sets a precedent of how the Act should be interpreted. The interpretation reached by Justice Perram appears to be quite different from that of former High Court Justice, Kenneth Hayne – the Commissioner for the Banking Royal Commission. Hayne adopted the approach that banks should have regard for consumers’ actual spending.
At this stage, ASIC has not decided whether it will appeal the decision or not. However, if the interpretation adopted by Justice Perram stands, it will mean that consumers need to take more personal responsibility for any loans they apply for. This is because if credit providers do not need to consider your actual living expenses, they may approve a loan for you that you are unable to pay off if you continue with your current expenses.
The decision in ASIC v Westpac by Justice Perram is a decision of the Federal Court of Australia. If ASIC appeal the decision it will be determined by the Full Court of the Federal Court of Australia. If that decision is then appealed it will be determined by the High Court of Australia. We are hopeful that will occur as this may then create a binding interpretation of what in Australia will be considered as responsible lending when determining a borrower’s ability to repay a loan.
If you have any concerns or questions about this decision and what it could mean for you, please do not hesitate to contact Lynn & Brown Lawyers for expert advice on commercial law and dispute resolution.
About the authors:
This article has been co-authored by Chelsea McNeill and Steven Brown at Lynn & Brown Lawyers. Chelsea is in her fourth year of studying Law at Murdoch University. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.