The Federal Court of Australia has found that Westpac was entitled to rely on HEM rather than actual expenses in assessing whether a loan was unsuitable for a borrower.

Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 (13 August 2019)

ASIC issued legal proceedings against Westpac arguing that by relying on HEM and not looking at a borrower’s actual expenses, Westpac had failed to make responsible lending decisions in relation to 262,000 loans between 2011 and 2015. 

HEM is the Household Expenditure Measure which is a measure of the median expenditure in Australia on absolute basic expenditures and a lower level of discretionary basic expenditure.  HEM is designed to measure a reasonable level of expenditure that captures expenses of a modest level that would permit individuals to participate in society.

The Court found that Westpac did consider actual expenditure in assessing the affordability of the loan.

However, the Court also found that Westpac was entitled to rely on HEM in assessing whether the proposed loan was unsuitable for the borrower.  Unsuitable means, in simple terms that the borrower was unlikely to be able to afford the required payments or could only do so with financial hardship.

The Court explicitly recognised that borrowers are able to reduce some expenditures (the examples given included shiraz and caviar!) in the interests of affording a home.

Whilst I appreciate that this is a dry and technical decision, I think it is noteworthy for at least two reasons:

  • It should signify, once digested by lending institutions, that lenders can adopt a less intrusive approach to assessing borrower’s expenses; and
  • After significant tightening of credit over the past few years, it is another small step to loosening credit criteria for mortgages.

Coupled with some of the other positive news in the system (interest rate decreases, lowered lending assessment rates, increased auction clearance rates (on low volumes)) this should maek loans slightly easier to obtain and help to support property prices.

(Please note – the above represents a simplified summary of the decision)