Last November Westpac and ASIC agreed to settle a legal dispute that would see the bank pay a $35 million dollar fine for breaching responsible lending laws. However, the Federal Court refused to approve the settlement, stating that the settlement failed to illustrate how Westpac breached lending laws; the case went to trial.
Today, in a big win for Australian banks, the Federal Court dismissed the ASIC’s case finding that Westpac did not breach responsible lending laws.
The case concerned the use of home expenditure measures (HEM) to asses a borrower’s ability to repay a mortgage. ASIC and the Royal Commission were quite critical of the banks’ use of the minimum HEMs to judge how much a borrower spends on living expenses.
The banks have issued a great number of mortgages by assessing that the borrower is living with extremely low living expenses, which may not be an accurate representation of the borrowers cost of living.
Now that the Federal Court has decided in the favour of Westpac, it keeps the door open for the banks to lend maximum amounts to borrowers – increasing loan growth and likely increasing house price growth as well.
ASIC was also ordered by the Federal Court to pay Westpac’s legal fees.
This decision will likely have the banks ecstatic, or at the very least relieved. However, there have been other restrictions placed on lending recently, and today’s decision will not be affecting that.
For example, in July, the minimum spending benchmarks used in HEM were lifted, especially for households in the higher income brackets. Additionally, the banks themselves state that they are starting to tighten their lending criteria.
Whilst today’s decision does not herald a return to the bad old days of ridiculous HEMs, it means the banks will likely feel a bit safer from further regulatory or class actions against their previous lending practices. It also will likely increase the banks’ confidence in writing new loans at the limits of what lending standards will allow – potentially increasing the amount of credit that is offered.
Ultimately, today’s decision is a win for Australian banks.
Sam Green is the Portfolio Manager at Emerald Financial, whilst also being an Equities and Derivatives expert for his clients at TradersCircle.
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