• 03/07/2022

Banks to have more flexibility in assessing loan applications

Banks to have more flexibility in assessing loan applications

Westpac Banking Corp has won a significant victory in the Federal Court on its interpretation of responsible lending duties.

The court backed Westpac’s arguments that the national credit act provides banks with discretion on how to use information when assessing whether loans are suitable for customers, and that customers can be expected to reduce historical levels of spending to meet repayment obligations.

The case is being watched by all banks because it examined Westpac’s automated loan assessment system. Big lenders all use computer algorithms to assess suitability for loans, so they can create “scaled” processes to serve millions of customers.

ASIC argued Westpac’s system was based on improper inputs, including an index of household spending. ASIC described the household expenditure measure (HEM) benchmark used by Westpac as “frugal”, arguing it underestimated the true level of borrowers’ expenses and hence allowed the bank to lend more than was appropriate.

By relying on the benchmark, ASIC argued Westpac could not reliably assess whether its customers could service their loans, and so it was basing approvals on “an imaginary capacity” to repay them. But Westpac argued it was entitled to use the HEM as part of a formula that created a “serviceability rule” for the automated system.

The bank said the law did not prescribe that banks use a simplistic formula of income minus expenses to determine eligibility and argued it was applying a “21st-century system” that was “complex, multifactorial [and] sophisticated”.

“The case concerned a large data set in which Westpac’s algorithm did not demonstrably fail to achieve the result for which it was said to have been designed,” said Justice Jacqueline Gleeson, who decided in favour of Westpac along with Justice Michael Lee.

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  • Good victory for the banks, it is not up to ASIC to determine suitability or otherwise on loans, the compact is between the mortgagor and the mortgagee, one deciding if they feel that the loan amount and conditions are appropriate and the other deciding if they wish to take the calculated risk on lending. Let the market decide.

  • Unfortuately, due to poor education on monetary matters and how to achieve long term goals such as house buying, the majority of people will willingly bight off more than they can chew when it comes to mortgages. They see their dream and naively think that they will just make it work! This is not a reality, not without education and solid choices made by the individuals. You only have to take a closer the banks mortgage arrears/ repossession files to see this is true.

    I would like to see banks be responsible for providing this education and advice, then they would really start to become responsible lenders and maybe this system would work more often !

    ASIC may not have all the answers but they are aware of pitfalls. “Letting the market decide” will result in many broken lives, the stress is so damaging to individuals and families.

    Who is going to step up to the mark and be responsible? Will it be the banks, perhaps Westpac? Will it be ASIC? Or someone else?

    • Individuals need to take responsibility for their own education. The nanny state, banks and brokers cannot be held responsible for the ignorance of those who bite off more than they can chew.

      It would be interesting also, to see some analysis of those who are currently in arrears or default. Is it because they were not educated as you suggest, or is it because of a significant change to their circumstances that could not have been foreseen, such as job loss or Covid or….

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