The judgement in the landmark case between ASIC and Westpac was handed down earlier this week (read more here). ASIC had taken Westpac to court for breaching responsible lending laws more than 250,000 times by using the household expenditure measure (HEM) when the declared household expenses were higher than the HEM.
In September last year, Westpac had agreed to pay a $35 million settlement to ASIC and admit that they breached responsible lending laws. In November 2018, Justice Nye Perram rejected the settlement finding that it was ambiguous and that the parties did not actually agree on what the responsible lending laws required and, therefore, how many loans were in breach and what the penalty should be.
In handing down his decision earlier this week, Justice Perram said a customer's declared living expenses would only be "necessarily relevant" to whether they could make loan repayments if one could identify "some living expenses which simply cannot be foregone or reduced beyond a certain point".
This decision potentially opens a can of worms for both the regulators and lenders. Over recent years, lending policies, at the request of ASIC and APRA, have become much tighter, with lenders focussing more on individual borrower spending behaviour, sometimes in forensic detail, and less on utilising household expenditure averages such as the Household Expenditure Measure (HEM). One of the complexities of approving a loan based on a borrowers ‘pre-loan’ spending habits is that their ‘post-loan’ behaviour might be radically different as they adjust their lifestyle to a new regime of debt repayment.. Justice Perram describes this much better than I possibly can.
"I may eat Waygu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare."
"Knowing the amount I actually expend on food tells one nothing about what the conceptual minimum is. But it is this conceptual minimum which drives the question of whether I can afford to make the payments on the loan."
"Without additional information, I do not consider that it is possible to accept that the consumer's declared living expenses tell one anything about their capacity to meet the repayments under the loan."
The way mortgage lending has shifted over recent years has been substantial. The way in which I describe it is that in the past borrowers had to show they had the capacity to repay a mortgage; nowadays borrowers need to demonstrate a track record of ‘post-loan’ spending before being offered a mortgage.
The repercussions of this case for the broader mortgage-lending sector will be interesting. We have already over recent months seen two cuts to official interest rates and APRA relaxing serviceability limits on mortgages which, along with a post-election boost to confidence, has led to an improvement in housing market conditions. This judgement may result in some further loosening of borrower serviceability assessments as lenders become less conservative around examining the ‘pre-loan’ spending habits of prospective borrowers, and focus more on non-discretionary expense commitments.
The truth of the matter is someone can be worthy of a mortgage one day and then completely unworthy the next. Someone’s spending habits prior to a mortgage doesn’t really guide what those spending habits will be once they have a mortgage. Factors like their employment situation, health factors, number of dependants and income are much more likely to drive their ability to repay debt. We can never know when someone is going to fall sick or lose their job, but those factors are much more likely to have an impact on someone’s ability to repay their mortgage than whether they enjoy a few drinks or have expensive food tastes prior to taking out a mortgage.